Sprint (NYSE:S), which competes with Verizon (NYSE:VZ) and AT&T (NYSE:T) primarily in the wireless business, is increasingly pushing for smartphones in its prepaid segment. The latest move comes from Sprint’s subsidiary, Boost Mobile which has introduced the BlackBerry Curve 8530, as well as from Virgin Mobile having recently introduced the Android-based Samsung Intercept. For Sprint, this provides an opportunity to increase the average revenue per user (ARPU) that Sprint earns in its prepaid business.
Below we discuss more details around why the introduction of new smartphones in the pre-paid arena is necessary and how it can benefit Sprint’s stock price.
Growing Demand for Prepaid Smartphones
Wireless service providers have traditionally promoted the use of smartphones amongst the postpaid subscribers. Smartphones tend to be expensive and thus, wireless service providers such as AT&T, Verizon and Sprint have provided subsidies to pave the way for easier adoption. As postpaid plans tend to be contractual and more expensive than prepaid plans, the postpaid subscriber base presents a perfect opportunity for wireless service providers to get a return back on their investment.
However, the popularity of prepaid services has grown in recent times as a result of which wireless services providers are willing to expand the smartphone portfolio to prepaid subscribers as well. Verizon recently opened up its smartphone portfolio to its prepaid customers. Thus it makes it necessary for other players such as Sprint to take similar steps. For Sprint, it is more critical considering that prepaid subscribers account for nearly 25% of the total subscriber base [1].
Potentially Higher Prepaid Revenues
Service plans for smartphones tend to be priced higher than those for feature phones due to the higher data consumption associated with smarpthones. In the past, Sprint has not offered smartphones for its prepaid customers, but recently introduced BlackBerry and Samsung smartphones along with a $60 unlimited service plan. [2]
Although prepaid subscribers tend to be price sensitive, the availability of smartphones with no contractual obligations could potentially lure them to higher priced prepaid plans for these phones, which in turn can boost Sprint’s prepaid revenues.
5% Upside to Sprint If 20% of Prepaid Subscribers Upgrade to Smartphones
According to a research update on the US wireless market, about one-third of Sprint’s wireless ARPU can be attributed to data and the rest to voice [3]. This suggests that in the $60 unlimited prepaid plan for recently introduced smartphones, approximately $40 can be attributed to voice and $20 to data. Both of these figures are higher than our current estimates for Sprint’s prepaid voice ARPU and overall average data ARPU. Moreover we estimate that Sprint will have close to 11.5 million prepaid subscribers by the end of 2010.
Based on the figures above, we estimate that if about 20% of Sprint’s prepaid subscriber base upgrades to high-end smartphones, it can potentially add close to $550 million [4] in incremental revenues for Sprint. This translates to an increase in prepaid voice ARPU for 2011 by $2.30 over what we currently expect and an increase in overall average data ARPU by $0.50 over what we currently forecast. This can lead to a potential upside of 5% to our Trefis forecast price estimate for Sprint’s stock.
You can see the complete $4.97 Trefis price estimate for Sprint’s stock here.
- Calculated based on total subscriber count and pre-paid subscriber count available from Sprint’s SEC filings [↩]
- Blackberry Curve Plan on Boost Mobile [↩]
- US Mobile Data Market Update Q2 2010 – Chetan Sharma [↩]
- Calculated using $40 – $20 breakup for prepaid smartphone voice and data respectively as mentioned in the article as well as our estimates for current voice and data ARPUs for Sprint’s prepaid subscribers. We estimate that Sprint’s prepaid subscribers pay around $26 to $27 for voice. This figure implies $13 prepaid data ARPU for Sprint subscribers based on one-third of total ARPU attribution to data as we mention in the article (although this could be much less). Thus up-gradation to smartphone implies that prepaid subscribers will pay about $13 per month extra for voice and about $7-$8 per month extra for data. This incremental fee is then multiplied by 20% of Sprint’s prepaid subscriber base to get incremental revenues. [↩]
