Virgin Mobile forced to shed 1.6M Lifeline subs due to FCC overhaul

Sprint Nextel's (NYSE:S) Virgin Mobile reduced the number of its Lifeline subscribers by almost half, according to the results of a Wall Street Journal investigation into changes in the FCC's Lifeline program. Although Virgin shed the largest number of subscribers, the carrier wasn't alone: According to the Jorunal, AT&T Mobility (NYSE:T), Verizon Wireless (NYSE:VZ) and others also reduced the number of subscribers eligible for Lifeline money.

"The program rules we inherited were designed for the age of the rotary phone and failed to protect the program from abuse," FCC Chairman Julius Genachowski told the WSJ in explaining the situation.

The government's Lifeline program was created in order to help low-income Americans obtain telecommunications services--those who qualify can get around $10 per month for cell phone service. During the past few years, companies like Sprint and TracFone Wireless tapped into the program with the goal of obtaining new subscribers they could sell additional services to.

However, until last year the FCC did not require carriers to check whether Lifeline subscribers were eligible for the program. The situation opened the door for subscribers--and some carriers, including General Communication's Alaska DigiTel--to abuse the program.

Last year the FCC required carriers that received Lifeline funds certify that their Lifeline subscribers were eligible for the program. As a result, according to the WSJ, 41 percent of the roughly six million subscribers in the Lifeline program "either couldn't demonstrate their eligibility or didn't respond to requests for certification."

The WSJ said AT&T, Telrite Corp., Tag Mobile USA, Verizon and Sprint's Virgin Mobile USA unit together accounted for 34 percent of total Lifeline subscribers last May (the article didn't clarify if there was a difference between wireless and wireline funds). The report said the carriers disclosed the number of their Lifeline reductions: AT&T dropped 47 percent of its Lifeline subscribers, or around 600,000 of its 1.3 million subscribers. Telrite dropped 20 percent, Tag Mobile dropped 33 percent and Verizon dropped 44 percent.

Indeed, Sprint noted the situation during its fourth-quarter results, and the company noted that the Lifelife recertification process will result in a one-time net subscriber loss of around 1.3 million to 1.4 million to its prepaid base in the second quarter of 2013.

The carrier reported a loss of 243,000 net wholesale customers in the fourth quarter, the first time it posted losses in that category in three years. Sprint CFO Joe Euteneuer said that this was primarily due to wholesale customers eliminating inactive accounts in fourth quarter and the changes related to the Lifeline program. Euteneuer said wholesale customer losses will likely continue into the first half of 2013 before rebounding in the second half.

"We expect impacts from the same recertification phenomenon that will affect Assurance [Wireless] and inactive account cleanup activity to contribute to wholesale net customer losses in the range of 500,000 to 600,000 in the first half of 2013, but we fully expect to return to positive net adds in the second half of the year," he said, according to a Seeking Alpha transcript.

The WSJ said two of the nation's largest Lifeline providers, TracFone Wireless and Nexus Communications Inc., asked the FCC to keep their counts confidential.

The FCC said its new Lifeline verification efforts saved nearly $214 million last year, and the changes are expected to save a total of $2 billion in the next three years. 

For more:
- see this WSJ article (sub. req.)
- see this Seeking Alpha transcript

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