Can Cutting Subscriber Bills In Half Solve Sprint’s Problems?

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Sprint (NYSE:S) recently introduced a new plan to attract customers and give a boost to its declining postpaid subscriber base. As part of its “Cut Your Bill in Half Event”, Verizon (NYSE:VZ) and AT&T (NYSE:T) users will be able to cut their monthly bills in half if they switch over to Sprint’s network. Per the plan, existing Verizon or AT&T customers who switch over to Sprint will get unlimited text and calls across the U.S. and a matching data allowance as their earlier plan, at half the monthly rate they paid earlier. The scheme follows other promotions introduced by the carrier’s new CEO, Marcelo Claure, to get back to positive postpaid subscriber growth. [1]

In this article, we discuss whether the plan is worth the switch for customers, and focus on Sprint’s strategy and whether it is sustainable for the carrier.

Our price estimate for Sprint is about $6.50, which is significantly ahead of the current market price.

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See our complete analysis for Sprint

Sprint’s Current Situation

Sprint is facing intense competition for new subscribers, with T-Mobile stepping up its “Uncarrier” promotions, AT&T responding aggressively with its “Next” plans and market leader Verizon banking on its superior network quality and “More Everything” offerings. The carrier has also been lagging rivals Verizon and AT&T in LTE coverage and quality, which is proving key to retaining and adding new subscribers in a saturated market. However, the company claims that most of the company’s network upgrade has been completed and its 4G LTE network now covers about 540 cities and 260 million people across the country. Its Spark upgrade program is also underway and currently covers 92 million people, with a target of covering 100 million people by the end of the calender year.

In the quarter ending September 2014, Sprint lost 272,000 net postpaid subscribers, compared to a loss of 181,000 postpaid subscribers in the previous quarter, though it was better than its loss of 360,000 posted in the same period last year. The 272,000 figure includes tablet net adds of 261,000, which means that Sprint’s loss of the more lucrative handset subscribers was even worse. With overall subscribers totaling 53.9 million at the end of Q3, Sprint is very close to being overtaken by T-Mobile as the third largest carrier in the U.S. With a gain of close to 1.4 million postpaid users in the third quarter, T-Mobile’s total wireless user base currently stands at 52.9 million.


How Good Is The “Cut Your Bill In Half” Event?

As part of the new offer, Sprint will offer a 50% discount on the existing rates paid by a Verizon/AT&T customer, including voice, text, data and line charges. In addition, Sprint has waived activation fees for new connections and is also offering up to $350 (as a prepaid Visa card) to pay off early termination fees per line for all lines on the customer’s account. This means that customers on Verizon’s or AT&T’s two-year contracts can use this $350 credit to buy their way out of the contracts, and those on Next/Edge plans can pay off their device costs early to switch to Sprint.

While customers will definitely save money with this plan, their savings will likely be a little less than the 50% that Sprint promises, considering that they will still need to pay for the new handsets they buy from Sprint, plus taxes, surcharges and other add-on services they opt for. Interestingly, new subscribers will end up saving almost the same amount of money per month using “Cut Your Bill In Half” compared to buying a new Sprint connection through the carrier’s Easy Pay promotion. The message that Sprint seems to be trying to send the public is that it is a lot cheaper than the bigger carriers, and customers can save a lot of money however they choose to switch.

The Brightstar Connection

An important condition as part of the latest “Cut Your Bill In Half Event” is that customers will need to hand over one handset per line to Sprint within 30 days of applying for this plan or pay $200 for each handset they can’t hand over. This essentially means that Sprint is valuing the resale value of each phone to be at least $200, which it can sell to a refurbisher or reseller – such as Brightstar – and offset some of its spending on the Visa prepaid cards. This is similar to the strategy it used in its “iPhone for Life” offer in September, whereby customers could lease an iPhone 6 at a cost of $20 per month for two years, with the plan charges remaining the same at $50 per month. After two years, the customer could upgrade to the latest version of the iPhone and return the iPhone 6 to Sprint, which the carrier would then likely resell to Brightstar and recover a considerable part of the handset’s cost.

Brightstar is the world’s largest wireless distribution company dealing in logistics and distribution of mobile phones and its services also include handset resale and trade-in programs. It was founded in 1997 by Marcelo Claure, the current CEO of Sprint, and acquired by Sprint’s majority owner Softbank in October 2013.

Sprint’s Strategy

By now we understand that customers can save money if they switch to Sprint under the new offer. Whether they will enjoy the same quality of network and service across the country is another question, with the carrier and subscribers having contrasting opinions. Nonetheless, the important question from an investor’s perspective is this – how can a company with $26 billion in net debt, negative free cash flows and negative operating margins afford to engage in aggressive price wars?

The fact is that the carrier is burning cash to improve its market share, and gaining postpaid subscribers is perhaps the only sure way to remain competitive. The company is willing to compromise on margins and average revenue per user (ARPU) in the process, because these won’t matter if subscribers continue to leave. The more important question is – how long can it sustain such aggressive pricing? The company’s balance sheet and cash flow situation does not present a positive picture, and it will definitely need to raise capital to fund its turnaround plans. Therefore, the company does not have a lot of time to turn around its ailing fortunes. The company needs rapid gains in postpaid user adds and an overhaul in customer perception of its network. If subscribers regain trust in its network, it will be a lot easier for them to seriously consider its innovative offers. So, in the near term, the company can opt for aggressive price cuts to gain subscribers, but it will need to bank on network quality and strong ARPU for sustainable growth going forward.

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Notes:
  1. Sprint’s Announcement []