Sprint’s (NYSE:S) stock could be impacted by increasing price competition in its prepaid mobile business from rivals like AT&T (NYSE:T), Verizon (NYSE:VZ), Metro PCS and T-Mobile. We believe that the prepaid mobile business is a key growth area for Sprint as it will help the company offset the consistent declines in its monthly (postpaid) subscriber base.
Sprint makes money primarily through mobile phone subscription plans for consumers and businesses. Below we explain why Sprint’s prepaid plans are important for the company’s stock, how competition will impact the prepaid business and how it could impact Sprint’s stock.
Prepaid Mobile Plans Important for Sprint’s Stock
The Mobile Plans and Phones business, which constitutes 47% of the $4.31 Trefis price estimate for Sprint’s stock, is the most crucial division for Sprint. Although Sprint made most of its revenues from monthly mobile subscription plans in the past, the declining monthly subscriber base has led the company to shift its focus to its prepaid mobile business. Sprint’s new prepaid plan called Boost added more than 2.5 million net subscribers in 2009, helping to drive a 39% increase in prepaid revenues.
Prepaid Competition is Increasing
Sprint’s prepaid revenues grew significantly for the first three quarters of 2009; however, pricing competition increased during the fourth quarter. Sprint’s rivals, AT&T and Verizon, have introduced competitive prices for their respective prepaid plans making Boost’s price proposition less of an advantage in many US regions.
Impact of Competition on Market Share
Price competition could exacerbate declines in Sprint’s mobile market share. Sprint acquired Virgin Mobile in the fourth quarter of 2009 to strengthen its subscriber base, primarily in the prepaid segment, and this has resulted in inorganic growth for 2009. Sprint’s overall prepaid subscribers grew by 191% in 2009, taking the total count to 10.7 million subscribers (4.5 million attributed to Virgin Mobile).
We estimate that Sprint will have about 15% market share within the US mobile subscriber market in 2010, implying about 44 million mobile subscribers. We estimate that about 25% of subscribers (fewer than 11 million) will be prepaid subscribers but that this percentage contribution will increase over the Trefis forecast period to about 34% or 15 million prepaid subscribers. This shift is attributable to declines in Sprint’s monthly subscriber base which we estimate will be around 33 million in 2010 and will decline to about 30 million by the end of the Trefis forecast period.
You can modify the Sprint market share forecast below to see how Sprint’s stock price could be impacted if greater price competition led to declines in prepaid subscribers and resulted in lower Sprint market share over the forecast period.
Impact of Competition on Pricing
Sprint will try to control price declines through branding. The company will market its different prepaid brands (Boost, Virgin Mobile, Assurance) to specific customer segments at different price points. This will help Sprint to avoid cutting prepaid prices across all markets.
Sprint’s brand has suffered in recent years from poor customer satisfaction; however, there are signs that things are beginning to change. The company indicated that it has been able to reduce customer care calls per subscriber by 12% in 2009, signifying a reduction in customer complaints. With segment specific branding and improved customer satisfaction, Sprint will be in a better position to price its prepaid service competitively.
We expect Sprint’s Fee per Prepaid Subscriber to reach $19.9 by the end of Trefis forecast period. You can modify our forecast below to see how an increase in fee per prepaid subscriber will impact Sprint’s stock if the company is able to improve its brand image without having to compromise on pricing.
