With Apple’s (NASDAQ:AAPL) iPhone 5 available for pre-order starting Friday, U.S. wireless carriers will be getting ready to promote one of the key features that differentiates this new-generation iPhone from the previous ones – LTE support. The new iPhone not only has a faster A6 processor but also sports a LTE compatible baseband that will finally bring the super-fast 4G speeds of LTE to millions of iPhone lovers stateside.
While carriers such as Verizon (NYSE:VZ) and AT&T (NYSE:T) are getting ready to tout their respective LTE networks, late-entrant Sprint (NYSE:S) has only just entered the LTE fray, rolling out its first LTE markets in mid-July. Its marketing strategy will therefore most likely remain unchanged from the last year when it aggressively promoted its unlimited plans. But is that going to be a big deterrent for Sprint in moving more iPhones out of the door in order to meet its huge commitment to Apple? We don’t think so and here’s why.
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Unlimited plans remain highly valuable
One of the major reasons why we think Sprint’s strategy will work is because unlimited plans are as important today as they were a year ago. Possibly, even more when you consider that Verizon and AT&T are distancing themselves from unlimited plans further. Both stopped offering unlimited plans to new subscribers a year back, and now Verizon has stopped its grandfathered unlimited users from availing handset subsidies if they choose to keep their plans. (see Verizon’s Share Everything Plans Could Kill The Last Unlimited Plans)
It is likely that AT&T, having made its displeasure with unlimited plans clear on many occasions, will also come up with similar ways of discouraging usage of unlimited plans as it follows in Verizon’s footsteps and promotes its own tiered data share plans. (see AT&T Looks To Reduce Subsidy Pressures While Boosting Revenues Through Shared Data Plans)
Also, unlimited plans will be more valuable for LTE than they were for 3G since LTE is a higher-speed technology and will easily cause subscribers to overshoot their monthly quota for tiered plans. In such a scenario, Sprint will remain the only national carrier to offer truly unlimited plans (T-Mobile throttles 3G speeds after a certain limit), which it can still use as a very effective ploy to lure subscribers away from the two larger carriers.
The effectiveness of this strategy is also evidenced by the two consecutive quarters of strong postpaid net adds that the carrier has been able to post to its core Sprint network, thanks to its unlimited plans. Sprint added a net 442,000 subscribers to the Sprint platform last quarter, almost double as many as it did in the year-ago quarter and 70% higher sequentially. While this figure was boosted by the number of iDen subscribers Sprint was able to migrate to its core CDMA network, it also came in a highly saturated market that is causing behemoths Verizon and AT&T to add fewer postpaid subscribers this year. Further, it was also the least impacted by the seasonal slowdown in the U.S. iPhone sales last quarter as it managed to keep its iPhone sales flat in a quarter both Verizon and AT&T saw sequential declines of 14% and 16% respectively. (see Sprint’s Earnings Show Strong iPhone-Led Turnaround But Risks Remain)
LTE disadvantage is only near-term
The lack of a LTE network with good coverage may, however, deter a few customers from choosing Sprint seeing as the iPhone 5 has arrived with minimal upgrades other than LTE. Sprint has LTE running in only about five U.S. markets currently while Verizon’s and AT&T’s LTE networks already cover around 235 million and 80 million Americans respectively.
However, LTE adoption rates have been slow so far (Verizon has managed to convert only about 12% of its postpaid base to LTE despite a huge lead in coverage); so Sprint may not miss out by a lot as long as it continues to deliver on its aggressive roll-out plans. Sprint plans to expand its LTE network to 100 more cities in the coming months and expects to cover 123 million POPs by the year-end, just shy of AT&T’s planned coverage of 150 million POPs. Moreover, Sprint plans to catch up with Verizon and AT&T and have most of its nationwide LTE network ready by the end of next year.
We also do not foresee the iPhone 5 launch causing mass defections from Sprint as that would entail forking over huge penalty fees for breaking the two-year contract. Sprint started offering its first iPhone only late last year when the iPhone 4S was released.
On the other hand, we expect many to see the long-term benefits of choosing a carrier that has promised to keep its plans unlimited for LTE as well. As LTE adoption rates rise and the iPhone brings in the highly lucrative postpaid subscribers, we expect Sprint to see its data ARPU levels rise in concert. Sprint’s unlimited LTE plans will meanwhile help it maintain its niche and differentiate from rivals at a time when wireless subscriber growth has nearly saturated. We have a price estimate of $4 for Sprint, about 20% below the current market price.