Will Sprint Bite The Bullet And Increase Prices?

by Trefis Team
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Sprint (NYSE:S), the smallest of the four U.S. nationwide carriers, marginally increased pricing on some plans over the last several weeks – for instance, prices for its single line unlimited plan rose from $50 to $60 in October – while indicating that further price hikes could be in the offing. The carrier’s promotions on devices such as the latest iPhones have also been more subdued compared to last year. In this note, we take a look at what rethinking Sprint’s pricing policy could mean for its financials and the broader wireless industry.

We have a $6 price estimate for Sprint, which is about 10% ahead of the current market price.

Price Increases May Be The Only Way Forward For Sustained Profitability

Sprint remains in a relatively precarious financial position. The company’s debt load stands at roughly $38 billion, with close to half the amount coming due over the next four years, and with interest costs standing at about $600 million each quarter. While Sprint has been resorting to mortgaging assets to raise liquidity and lower interest costs, the best way for the company to pare down debt over the long run is to return to sustained profitability. Although Sprint has been cutting costs – it is targeting $1.3 billion to $1.5 billion in year-over-year net reductions in its SG&A and cost of services expenses in fiscal 2017 – price increases will also be crucial as Sprint’s aggressive promotions have been taking a toll on its revenue metrics. The company’s monthly billings per postpaid phone customer (service and equipment-related payments) declined from $71.70 in Q2 FY’16 to about $69 in Q2 FY’17 in its most recent reported quarter.

Moreover, the company’s network CapEx requirements could be substantial over the medium-term, given that its coverage is generally perceived as the weakest among the four nationwide carriers. Although Sprint already holds a sizable high-band spectrum position, the company still needs to invest in a relatively dense network infrastructure that can leverage this spectrum position. This could force the company to charge its subscribers to recoup its investments.

Larger Carriers Might Benefit More In The Interim 

Although a price increase could hurt Sprint in the near term, it could be vital for the company’s longer-term prospects. That said, the biggest winners of a price increase from Sprint would likely be its larger rivals. Players such as Verizon and AT&T have been forced to offer plans such as unlimited data to match offers from Sprint and T-Mobile, and this has been putting pressure on ARPUs across the industry. For instance, per the BLS, the average price of wireless services in the U.S. in November declined by about 9% on a year-over-year basis (see chart below). However, if Sprint engages in price hikes, the need for the larger nationwide carriers to offer attractive promotions could diminish, and it’s possible that we could see price hikes from them as well.

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