Sprint’s Offer To DirecTV Customers Is Bold, But Will It Work?

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Sprint (NYSE:S) recently announced that it would offer a full year of free wireless service to DirecTV customers who open a new line on its network. The move is a direct attack on AT&T (NYSE:T), which recently closed its $49 billion acquisition of the satellite TV provider, and is presently offering discounts to customers if they bundle their TV services with AT&T’s telecom services. Sprint’s offer – which is valued at at least $600 (see details below) – might seem somewhat reckless for a carrier that is contending with negative cash flows and a sizable debt load. However, the downside risks are actually relatively limited, although it still remains to be seen whether the offer will prove to be an effective customer acquisition exercise for Sprint.

We have a price estimate of around $5 for Sprint, which is slightly below the current market price.

See our complete analysis for  AT&TVerizonSprint

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What Is The Offer And How Does It Compare With AT&T’s? 

Sprint will offer DirecTV customers who sign up for its service unlimited voice and text and up to 2 GB of data per month for a full year, while also providing customers an option to trade in their existing phones for cash or have their early termination fees paid for by Sprint. After a year, customers will pay a monthly fee of $50 for the plan. Customers must buy or lease a new phone through Sprint and will also have to pay a one-time $36 activation fee, in addition to the usual monthly taxes and surcharges. The offer is well timed, running through September 30, likely targeting customers who are looking to upgrade to Apple’s latest iPhones, which are due in mid-September. In comparison, AT&T is offering $300 in bill credits to DirecTV customers for each wireless line they port to the carrier, as well as a $10 per month recurring discount, in addition to trade-in benefits for smartphones. This effectively values Sprint’s offer at $600 and AT&T’s offer at about $420 for the first year, excluding trade-in benefits.

What Does Sprint Expect To Achieve With The Offer? 

The offer fits well with Sprint’s quest to stabilize and grow its postpaid customer base with quality customers – a key component of its turnaround strategy. The carrier posted a net loss of just 12,000 postpaid subscribers in the most recent quarter, compared to 620,000 in the year-ago quarter, and it could be looking to improve its postpaid base further with this offer. While targeting DirecTV customers in particular may seem curious, there could be a few reasons for this. Firstly, the offer is likely to create a good deal of marketing buzz for Sprint, since AT&T just closed the DirecTV deal and bundled wireless and satellite TV services were a key part of the rationale. Secondly, the carrier is targeting a base of customers that are being increasingly cross-sold wireless services, and this could make them more likely to jump wireless carriers at the moment. Finally, by selling to DirecTV users, Sprint could gain customers who have already undergone credit checks and are likely to have decent credit histories. ((Sprint, Taking Aim at AT&T, Offers DirecTV Subscribers Free Year of Cell Service, WSJ, August 2015))

Will It Have An Adverse Near-Term Impact On Sprint’s Financials?

Wireless is a high fixed cost business, and the incremental costs of servicing a new customer aren’t particularly high, so we don’t think that Sprint’s cash burn rate will increase meaningfully as a result of this offer. There are also some avenues for monetization in the first year itself, since the carrier would earn money from subscribers who pay $15 per GB when they exceed the 2 GB monthly data limit. The carrier, for its part, has also noted that this offer wouldn’t be any more or less expensive than its other promotions. [1] Since customers must buy or lease a new phone through Sprint, this should help to mitigate the risks of defections after the free year of service.

Bottom Line: Will It Work? 

While Sprint’s offer might seem more attractive on its face, AT&T does provide customers some compelling reasons to go for its bundled services. Firstly, on the wireless side, AT&T still offers better coverage and network quality compared to Sprint. Secondly, AT&T’s deal could offer customers better savings over the long-run, since its $10-a-month discount doesn’t expire after a year. Moreover, the unified offering of AT&T services – wireless, satellite TV as well as landlines and broadband (where available) – could prove appealing for customers who don’t want to manage multiple service providers and bills. So overall, it’s not clear whether Sprint’s strategy will really work – but if it does, it could prove positive for the carrier’s customer base and earnings growth. If it doesn’t, there probably isn’t too much to lose.

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