With the deadline for its impending iDEN shutdown nearing, Sprint (NYSE:S) is getting aggressive with plans to migrate the remaining iDEN subscribers off the network as soon as possible. The third largest wireless carrier in the U.S. has started notifying its iDEN push-to-talk (PTT) subscribers that, beginning January 1st, they will incur an additional fee of $10 for every month that they use the iDEN network before the eventual shutdown by June 30th next year. As a more than viable alternative, the carrier is promoting its CDMA Direct Connect PTT service which offers comparable speeds at similar prices with thrice the coverage. It risks losing many of these subscribers to rivals such as Verizon (NYSE:VZ) and AT&T (NYSE:T) but the long-term advantages of shutting down iDEN and using the spectrum for the high-speed and much more efficient 4G LTE network should help more than compensate for the near-term market share loss.
We maintain our price estimate for Sprint to about $5.30, which is slightly behind the current market price.
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LTE plans to be boosted by iDEN shutdown
The iDEN shutdown is part of an overarching Network Vision strategy that will help Sprint upgrade its 3G network as well as make up for its late entry into the LTE space. 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 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 its Network Vision plans 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. Shutting down iDEN will help free up valuable 800MHz spectrum which can then be re-purposed to bolster 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 deepen the market share loss in the short term if Sprint is unable to transfer enough of them to its CDMA network. The carrier has in recent quarters managed to recapture almost 60% of the leaving Nextel customers. The recapture rate may however fall in the coming quarters as iDEN shutdown ramps up and competitors such as Verizon and AT&T increase efforts to promote their own PTT services. 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.
Margin Improvement and ARPU increase
A successful implementation of the Network Vision strategy will reduce the operating expenses substantially by eliminating the duplicate fixed costs of maintaining different networks. Further, 3G upgrades will improve voice quality as Sprint deploys CDMA 1X Advanced services on its 800 MHz spectrum. It will also allow for better 3G/4G coverage and reduce roaming costs as the spectrum previously used for iDEN would now be available for the CDMA/LTE network.
As LTE adoption rates rise and iPhone brings in the highly lucrative postpaid subscribers, Sprint will also see its data ARPU levels rise in concert. Sprint’s unlimited LTE plans will help it maintain its niche and differentiate itself from rivals’ tiered data plans. Unlimited plans will likely be more valuable for LTE than they were for 3G since LTE is a higher-speed technology and will cause subscribers to easily overshoot their monthly quota for tiered plans. (seeSprint Promotes Unlimited Plans As Verizon, AT&T Move To Shared-Data Plans) The iPhone, for its part, will bring in the high data users and continue to have a positive impact on ARPU levels. Sprint’s postpaid ARPU for its core CDMA platform in the most recent quarter jumped $3.70, or 6.6% versus the same period last year, as the iPhone accounted for a huge number of new subscribers to Sprint.