Sprint Woos iPhone 5 Buyers With Unlimited Plans Despite LTE Disadvantage

by Trefis Team
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With the iPhone 5 is likely to be launched this fall, the carriers are getting ready to market their services. One key factor that we believe will differentiate this generation of the iPhone from the previous ones, apart from a possible change in form-factor and better processor, is the availability of an LTE-compatible chipset.

While carriers such as Verizon (NYSE:VZ) and AT&T (NYSE:T) getting ready to tout their respective LTE networks, late-entrant Sprint (NYSE:S) is just starting to roll out its first LTE markets on July 15. Its marketing strategy will most likely remain unchanged from the last year when it aggressively  promoted its unlimited plans. But is it going to be a big deterrent for Sprint to move more iPhones out of the door in order to meet its huge commitment to Apple? We don’t think so and here’s why.

See our complete analysis of Sprint here

Unlimited plans remain highly valuable

One of the major reasons why we think Sprint’s strategy will work is because unlimited plans are as important today as they were a year ago. Possibly, even more when you consider that Verizon and AT&T are distancing themselves from unlimited plans further. Both stopped offering unlimited plans to new subscribers a year back, and now Verizon has stopped its grandfathered unlimited users from availing handset subsidies if they choose to keep their plans. (see Verizon’s Share Everything Plans Could Kill The Last Unlimited Plans)

It is likely that AT&T, having made its displeasure with unlimited plans clear on many occasions, will also come up with similar ways of discouraging usage of unlimited plans as it looks to follow in Verizon’s footsteps and promote tiered data plans that can be shared across devices soon. (see AT&T Looks To Reduce Subsidy Pressures While Boosting Revenues Through Shared Data Plans)

Also, unlimited plans will be more valuable for LTE than they were for 3G since LTE is a higher-speed technology and will easily cause subscribers to overshoot their monthly quota for tiered plans. In such a scenario, Sprint will remain the only national carrier to offer truly unlimited plans (T-Mobile throttles 3G speeds after a certain limit), which it can still use as a very effective ploy to lure subscribers away from the two larger carriers.

The effectiveness of this strategy is evidenced by the two consecutive quarters of strong postpaid net adds that the carrier has been able to post to its core Sprint network, thanks to its unlimited plans. Sprint added net 263,000 subscribers to the Sprint platform last quarter, below the previous quarter’s 539,000 but a tad more than the net adds posted a year ago. This came even as an increasingly saturated wireless market caused Verizon and AT&T to add fewer postpaid subscribers this quarter. Further, it was also the least impacted by the seasonal slowdown in the U.S. iPhone sales last quarter as it activated about 1.5 million iPhones during the quarter, about 16% lower than the previous quarter. AT&T and Verizon meanwhile saw sequential declines of 43% and 24%, respectively, in iPhone sales. (see Sprint’s iPhone Bet Is Starting To Pay Off, $3.75 Fair Value)

The iPhone has also brought in many new subscribers to Sprint. The iPhone’s debut quarter at Sprint saw 40% of its iPhone sales go to new subscribers. In the next quarter, the iPhone accounted for 660,000 new subscribers to Sprint, which is an improved 44% of its total sales. Sprint’s postpaid ARPU also jumped $3.70 as a result, or 6.6% versus the same period last year, as users of the iPhone are heavy data users as well.

LTE disadvantage is only near-term

The lack of LTE network with good coverage may, however, deter a few customers from choosing Sprint if the smartphone comes with minimal upgrades other than LTE. Sprint will launch its first LTE markets on July 15 while Verizon’s and AT&T’s LTE networks already cover almost 200 million and 75 million Americans, respectively.

However, LTE adoption rates have been slow so far; so Sprint may not miss out by a lot as long as it continues to deliver on its aggressive roll-out plans. As of last quarter, Verizon converted only 9% of its subscriber base to LTE despite having such a wide lead in terms of LTE coverage over others.

We do not also foresee the iPhone 5 launch causing mass defections from Sprint as that would entail forking over huge penalty fees for breaking the two-year contract. Sprint started offering its first iPhone only late last year when the iPhone 4S was released.

On the other hand, we expect many to see the long-term benefits of choosing a carrier that has promised to keep its plans unlimited for LTE as well. Sprint expects to have most of its LTE network ready by the end of 2013. As LTE adoption rates rise and the iPhone brings in the highly lucrative postpaid subscribers, we expect Sprint to see its data ARPU levels rise in concert. Sprint’s unlimited LTE plans will meanwhile help it maintain its niche and differentiate from rivals at a time when wireless subscriber growth has nearly saturated. We have a price estimate of $3.75 for Sprint, about 15% ahead of the current market price.

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