Why Sprint Is Offering To Pay Customers To Switch To Its Network

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Sprint (NYSE:S) is not slowing down in its price war with its steady stream of attractive plans to lure customers. The third largest carrier in the U.S. recently introduced a plan to make it easy for potential customers to switch from their existing service provider. Sprint is offering to reimburse all costs, including early termination fees and pending payments on handset installment plans, for customers who switch to its network.

Potential subscribers will need to turn in their existing phones from rival carriers (on which payments are pending) and purchase/activate a device on Sprint’s network. They will have the option to pay full retail price of the new connection upfront or pay using Sprint’s “Easy Pay” payment plan, in addition to choosing from the carrier’s recent offers of “iPhone for Life” or “Sprint Lease”. [1]

Sprint will most likely be able to recover a major part of the cost it incurs for reimbursing new customers by leveraging its connection with mobile refurbisher and reseller Brightstar, which was founded in 1997 by Marcelo Claure, the current CEO of Sprint, and acquired by Sprint’s majority owner Softbank in October 2013.

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Our price estimate for Sprint is about $6.20, which is significantly ahead of the current market price.

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 (NYSE:T) responding aggressively with its “Next” plans and market leader Verizon (NYSE:VZ) 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, after three quarters of consistent declines, Sprint finally reported positive postpaid subscriber adds in the three month period ending December 2014. (Read Earnings Report here)

Sprint must be looking to improve its subscriber adds dramatically this year considering that it is perhaps the only sure way to remain competitive. The carrier is burning cash to improve its market share and its balance sheet and cash flow situation suggest that it may not be able to sustain such aggressive pricing for long. 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 continue with its aggressive price cuts to gain subscribers, but it will need to bank on network quality and strong ARPU for sustainable growth going forward. In the latest Rootmetrics report, Sprint reported a significant improvement in the quality of its network and leaped ahead of T-Mobile to take third place overall. (Read Verizon Best In Wireless Network Quality, Sprint Leads In Improvement)

Network Coverage

Sprint’s LTE coverage – an important consideration for subscribers and a concern over the last few years – reached 270 million PoPs (points of presence) in December 2014 and is ahead of rival T-Mobile, which reached 250 PoPs around the same time. There is usually a lag associated with churn figures improving after network upgrades, and as a result the subscriber recovery should be gradual. Now that the Network Vision upgrade is complete, we expect Sprint’s Spark plans to pick up speed and help the carrier become more competitive in the near to medium term. Its Spark upgrade program currently covers 125 million people, against a target of covering 100 million people by the end of 2014. We expect this to help the carrier reduce its high churn levels and improve net monthly additions going forward. ((Press Release, Sprint, Feb 5 2015))

Sprint’s Spark strategy will help it make use of Clearwire’s 2.5GHz spectrum to add data capacity and potentially push 4G speeds to more than five times what is currently prevalent in the industry. However, the implementation of Spark will require significant capital expenses. T-Mobile recently announced its ambitious target of increasing its LTE coverage to 300 million people in the country by the end of 2015 compared to its current coverage of about 264 million. For perspective, market leader Verizon’s LTE network presently covers about 303 million people in the U.S. Sprint is likely to provide guidance for fiscal year 2015 on the next earnings call.

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Notes:
  1. Press Release, Sprint, March 13 2015 []