With the iPhone 5 launched and the holiday season upon us, Sprint (NYSE:S) seems to be rolling out LTE at a breakneck speed in order to catch up with AT&T (NYSE:T) and Verizon (NYSE:VZ) as soon as possible. Just two weeks after it announced the addition of nine additional U.S. markets to its LTE coverage, the carrier said that it is expanding its high-speed 4G network to another 11 cities and counties in the coming weeks. Although late to the LTE race with Verizon and AT&T sporting a much wider LTE coverage, the third largest wireless carrier plans to aggressively make up for lost time with its Network Vision strategy that has already brought LTE to 43 U.S. markets and will add another 115 cities to its rapidly expanding LTE footprint in the coming months.
The rapid LTE expansion as well as 3G upgrades is causing Sprint to increase its capital spending as a means to sustain future data growth. While Sprint’s balance sheet is highly leveraged, its recent deal with Softbank to sell a majority stake in return for cash gives it all the ammunition it needs to build out a robust nation-wide LTE network as well as bolster its spectrum position through strategic acquisitions such as the recent US Cellular deal. The Softbank deal will most certainly help improve Sprint’s fundamentals as a competent third national carrier, but is yet to receive regulatory approval. We maintain our price estimate for Sprint to about $5.30, which is slightly behind the current market price.
Network Vision will help Sprint catch up
While Sprint’s LTE network is only four months old, early mover Verizon is close to completing two years since its LTE debut. The largest wireless carrier in the U.S. now has an LTE network that currently covers more than 250 million Americans in close to 420 markets across the U.S. AT&T’s lead over Sprint is not as wide, but it still offers LTE to as many as 150 million Americans and plans to complete its LTE rollout by the end of next year.
In order to bridge the gap, Sprint is aggressively executing on what it calls its Network Vision strategy to get most of its LTE network ready by the end of 2013. The carrier is trying to phase out iDen gradually and consolidate its network holdings into one 2G/3G/4G network using a combination of CDMA and EV-DO. In order to free up spectrum and increase operational efficiency, Sprint is shutting down the older iDEN network completely by next summer. The freed up iDEN spectrum will then be used to boost its LTE network in 2014. (see Sprint To Build LTE Over iDEN’s Grave)
The announcement of iDEN’s impending shutdown in about a year’s time will however cause the remaining iDEN subscribers to jump ship, and may deepen the market share loss in the short term if Sprint is unable to transfer enough of them to its CDMA network. However, the iPhone’s addition has helped the company report a full year of strong postpaid net adds on its core Sprint CDMA network since the 4S launch last year. (see Sprint’s Earnings Show Strong iPhone-Led Turnaround But Risks Remain) We expect CDMA’s strong showing to continue and help Sprint stem the overall postpaid losses in due course of time as iDEN is gradually phased out.
LTE disadvantage is only near term
Overall, we believe Sprint’s LTE disadvantage will most likely be only a near-term one as the company has been able to execute on its Network Vision plans well so far. Moreover, LTE adoption has been sluggish as the technology is yet to be widely adopted. Verizon, despite its huge lead over the rest, has managed to convert only about 16.5% of its postpaid subscriber base to LTE so far. We expect LTE adoption to pick up with the recent launch of the iPhone 5, and strengthen in 2013. So, longer term, Sprint may not miss out by a lot as long as it continues to deliver on its current roll-out plans.
There is also a case to be made in favor of Sprint’s unlimited plans, which it has marketed well to differentiate itself from the two larger carriers. What has worked in Sprint’s favor is that while it has steadfastly stood behind its unlimited plans for LTE, rivals Verizon and AT&T have only distanced themselves from unlimited plans further. Both stopped offering unlimited plans to new subscribers a year ago, 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 clear its displeasure with unlimited plans 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)
As more people use LTE, we expect many to find unlimited plans more valuable for LTE than they were for 3G since LTE is a higher-speed technology and can easily make subscribers overshoot their monthly quota for tiered plans. In such a scenario, customers might find sticking with Sprint more beneficial in the long term, especially as the carrier ramps its LTE rollout to catch up with rivals by the end of next year. As LTE adoption rates rise and the iPhone brings in the highly lucrative postpaid subscribers, Sprint will also see its data ARPU levels rise in concert. Sprint’s postpaid ARPU in the third quarter jumped $4, or 7% versus the same period last year, as the iPhone accounted for a huge number of new subscribers to Sprint.