Sprint Discounts iPhone 4S To Goose Sales Ahead Of iPhone 5 Launch

by Trefis Team
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As the launch of Apple’s fifth-generation iPhone nears and rumors about the phone’s specifications and launch date gain strength, it seems like more and more buyers are holding off on purchasing an iPhone in anticipation of the event. In order to clear out iPhone 4S inventory ahead of the imminent launch, Sprint (NYSE:S) has decided to offer an additional $50 discount on the current model. [1] This may take a toll on near-term profitability but having made a big bet on the iPhone last year, Sprint needs to meet its four-year $15.5 billion minimum commitment to Apple else it may have to add on more debt to its already highly leveraged balance sheet.

This may also be an attempt by Sprint to hedge the risk that the next-gen iPhone 5, which is likely to support high-speed 4G LTE, may not sell well at the carrier due to its limited LTE coverage in the U.S. While Verizon’s (NYSE:VZ) and AT&T’s (NYSE:T) LTE networks cover around 230 million and 80 million Americans respectively, Sprint launched its first LTE markets only last month. Sprint’s first three months with the iPhone have however shown the value that customers attach to unlimited plans and we see that supporting Sprint’s iPhone 5 sales going forward despite its near-term LTE disadvantage.

See our complete analysis of Sprint here

Unlimited plans remain highly valuable

Sprint’s strategy with unlimited plans seems to have worked out pretty well so far as Verizon and AT&T distanced themselves from the same through throttling and other policies. Verizon recently even went ahead and stopped its grandfathered unlimited users from availing handset subsidies if they chose to keep their plans for future phone purchases. (see Verizon’s Share Everything Plans Could Kill The Last Unlimited Plans)

Going forward, we see unlimited plans proving to 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 three 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. Last quarter, Sprint added a net 442,000 subscribers to the Sprint platform, almost double as many as it did in the year-ago quarter and 70% higher sequentially. While this figure was boosted by the number of iDen subscribers Sprint was able to migrate to its core CDMA network, it also came in a highly saturated market that has caused behemoths Verizon and AT&T to add fewer postpaid subscribers this year.

The iPhone’s role in the impressive postpaid net adds that Sprint is posting every quarter becomes more evident in the number of new subscribers it is bringing to Sprint. The iPhone accounted for about 600,000 new subscribers to Sprint last quarter, 40% of its total iPhone sales. Sprint also managed to increase its market share of iPhone sales, keeping its iPhone sales flat in a quarter both Verizon and AT&T saw sequential declines of 14% and 16% respectively.

LTE disadvantage is only near-term

The lack of an LTE network with good coverage may, however, deter a few customers from choosing Sprint if the iPhone 5 comes with minimal upgrades other than LTE. 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 had converted less than 10% of its retail postpaid subscriber base to LTE despite having such a wide lead in terms of LTE coverage over others.

We also do not 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.

Meanwhile, the risks from its highly leveraged balance sheet and an ever-growing capital spend due to the ongoing implementation of its Network Vision strategy still persist. So far, it has spent only about $2 billion of the $6 billion it plans to spend on LTE infrastructure, 3G upgrades and iDEN shutdown this year. The remaining $4 billion spend could negatively impact free cash flow generation in the coming quarters. Sprint is highly sensitive to capital expenditures, as can be checked by moving the trend line in the forecast chart below and following the corresponding impact on its price estimate. Taking into account the above risks as well as the profitability concerns that the launch of the iPhone 5 will bring to the stock, we have a $4 price estimate for Sprint, about 15% below the current market price.

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  1. Sprint Home Page []
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