So That's Where the Palm Pre Marketing Budget Went

The consolidation of the prepaid cellphone market has begun in earnest.

This morning, Sprint Nextel said it will acquire Virgin Mobile USA in a $483 million stock deal that will give the company a clear lead in the prepaid arena, where low prices are becoming ever more popular with consumers beaten into submission by the continuing recession.

For Sprint (S), which already owns 13.1 percent of Virgin Mobile and which allows the mobile virtual network operator to use its network, this is a wise move. It brings to the company some five million customers who are already using its network, and more than doubles the size of its prepaid business, Boost, which has recently had quite a bit of success.

“The acquisition of Virgin Mobile USA positions Sprint for even greater success in the prepaid wireless segment,” Sprint CEO Dan Hesse said in a statement. “Prepaid is growing at an unprecedented rate with consumers keenly focused on value. Virgin Mobile is an iconic brand in the marketplace that will complement our Boost Mobile brand.”

That said, the deal is not without its difficulties, as Bernstein analyst Craig Moffet explained in a research note this morning.

“The acquisition nudges Sprint further along in its metamorphosis into a prepaid and wholesale operator,” he wrote. “However, this deal, and the strategy shift in general, does nothing to address the key issue that Sprint faces, namely the continuing meltdown of its much higher value postpaid business. Closing the deal and integrating Virgin may consume management’s time and distract them from what should be their primary focus.”