Sprint’s 50% Off Plans Look Aggressive, But Might Be Necessary

-72.68%
Downside
23.31
Market
6.37
Trefis
S: SentinelOne logo
S
SentinelOne

Relevant Articles
  1. Sprint’s Stock Looks Expensive Compared To AT&T After Rising 93% In 2 Months!
  2. Sprint’s Stock Price Doubled In 15 Days; Is Market Overvaluing Sprint Just Before Its Merger With T-Mobile?
  3. Where Is Sprint Corp Spending Most Of Its Money?
  4. Machine Learning Answers: Sprint Stock Is Down 15% Over The Last Quarter, What Are The Chances It’ll Rebound?
  5. Sprint Valuation: Fairly Priced
  6. How Does Sprint Make Money?

Sprint (NYSE:S) is looking to double down on its postpaid subscriber growth this holiday season, offering customers who switch to its network 50% off their current rate plans from their existing carriers, while also covering switching costs of up to $650. [1]  The bill savings will last through January 2018. The promotion is somewhat similar to the “Cut Your Bill in Half” event that the carrier offered to customers of AT&T (NYSE:T)  and Verizon (NYSE:VZ) last year, although it also includes T-Mobile this time around. Investors didn’t take too kindly to the news, sending Sprint’s stock down by close to 9% in Wednesday’s trading. The concerns are valid, given Sprint’s $30+ billion in debt, high capital expenditures and persistent subscriber losses, but the carrier may need to continue resorting to such promotions in the near term. Below, we take a look at why these promotions are still so important to Sprint, and how the carrier intends to pull it off.

We have a $5 price estimate for Sprint, which is 20% ahead of the current market price.

See our complete analysis for Sprint

Postpaid Adds Still Needed

Sprint has no choice but to spend generously on customer acquisitions, as getting postpaid subscribers to switch from rival networks is perhaps the only sure way to remain competitive in a saturated U.S. wireless market. The carrier recently posted its first set of postpaid phone net subscriber additions in more than two years during fiscal Q2, and the current promotion reflects the urgency the carrier is feeling to grow its postpaid base further. Sprint will likely have to make some trade-offs in terms of margins and average revenue per user (ARPU) in the process. Given that the company needs to turn around its fortunes quickly, these near-term concessions are acceptable as its focus at this juncture is on growing subscribers and aggregate revenues rather than per-user metrics. Promotional programs present a quick and effective means of adding postpaid subscribers; for instance, Sprint noted that traffic in retail stores rose by 10% last December after it launched the “Cut Your Bill in Half” offer.

How Sprint Intends To Make The Offer Work

Wireless is a high fixed cost business, and the marginal costs associated with servicing an additional subscriber aren’t particularly high, so Sprint’s cash burn rate shouldn’t increase significantly as a result of this offer. Sprint CEO Marcelo Claure has noted that the benefit from adding new customers will outweigh the costs related to the promotion. New subscribers must still must pay full price for their new devices, and they would have to turn in their current phones in order to be reimbursed for any switching costs, implying that net cash outflows will be minimized. Additionally, many customers are likely to select plans with higher data caps rather than the cheapest plans, since they would effectively be getting much lower per gigabyte rates with Sprint. This could help to soften the ARPU impact of the promotion.

Separately, Sprint will also charge $36 per line in activation fees, adding an incremental upside to revenues. Sprint is also looking to address the potential sales and billing complexities of such a plan. Last year’s event was fairly cumbersome to execute, as the carrier had to analyze every customer’s bill to come up with an offer while also managing thousands of different billing combinations. The new deal will be more standardized, since it will not actually take into account what customers are currently paying, but just offer 50% off a list of selected current plans that their respective carriers are offering. [2] 

Network Is Improving, But Perception Issues May Linger

Network quality remains the biggest differentiating factor in the wireless business, and having a stronger network allows a carrier to bolster its brand image and charge premium pricing. Now, by undercutting rivals on pricing by such a large margin, Sprint might be running the risk of hurting its brand and sending wrong signals about its quality of service, which has actually improved over the past year (see Our Take On Sprint’s Q2 Performance And Network Updates). Sprint will need to continue overhauling the customer perception of its network if it wants subscribers to seriously consider its innovative offers. The carrier has been promoting the faster “LTE Plus” 4G network that it recently activated in 77 U.S. markets earlier this week. The new network doubles peak connection speeds to 100 megabits per second or greater in some cases, leveraging technologies such as beam forming and carrier aggregation while deploying all three bands of Sprint’s spectrum (1.9 GHz and 800 MHz for better coverage and 2.5 GHz for better data throughput).

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

Notes:
  1. Sprint Press Release []
  2. Sprint to Offer Wireless at Half Price of Rivals, WSJ, November 2015 []