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Inside wireless battle: Sprint holding its own in a competitive market

The Broadband Report

May, 8 2017, 6:00 AM

Editor's note: Rival unlimited data plans were unable to stall Sprint’s momentum in the postpaid phone market, says Technology Business Research Analyst Steve Vachon.

HAMPTON, N.H. - Sprint’s postpaid strategy focuses on maintaining its position as the price leader among its Tier 1 competitors, its earnings report last week showed.

As the industry converges around unlimited data plans, Sprint will be proactive in ensuring its Unlimited Freedom plans undercut competitors on price. Sprint’s strategy paid dividends in 1Q17, as the company continued to outperform AT&T and Verizon in postpaid phone net additions despite the launch of its competitors’ new unlimited data programs in February, highlighting customers prefer discounted pricing over paying a premium for network quality.

Despite stronger postpaid and prepaid phone performance, Sprint’s total net additions dropped to 187,000 in 1Q17, compared to 447,000 in 1Q16, due to tablet losses and weakening wholesale connected device additions. Though these segments are lower-ARPU compared to phones, the carrier has the opportunity to boost connections by greater emphasizing its Unlimited Freedom tablet plans and targeting industry-specific machine-to-machine (M2M) solutions. Sprint will struggle to gain significant traction in the industrial IoT space against AT&T and Verizon, however, due to its competitors’ scale and entrenched relationships with enterprises.

Sprint’s total wireless revenue rose 6.7% year-to-year in 1Q17 due to higher equipment revenue generated by resold leased devices to third parties. Though total device sales decelerated from 1Q16, Sprint was the only carrier to increase upgrade rates year-to-year in 1Q17 due to its emphasis on leasing programs, which are attracting customers seeking a more cost-effective means to upgrade to the latest flagship smartphones, such as the Samsung Galaxy. Service revenue declined 6.7% year-to-year, however, and will remain a struggle throughout 2017 as the carrier remains reliant on aggressive pricing promotions to grow its subscriber base.

In April Sprint discontinued its 50% off promotion and Better Choice tiered data plans to offer Unlimited Freedom exclusively. Though these moves may deter some potential customers, TBR believes the aggressive pricing structure of Unlimited Freedom, which starts at $50 per month for a single-line plan, will enable Sprint to continue to outperform AT&T and Verizon in postpaid phone net additions in 2017 as more customers gravitate to unlimited data for its value and convenience.

Discontinuing postpaid data tiers will help Sprint better differentiate its prepaid brands to more effectively target price-sensitive customers who do not need unlimited data. Boost Mobile is becoming more aggressive in its pricing strategies as competition in the prepaid industry intensifies; its rates are on par with market leader MetroPCS, which enabled Sprint to gain prepaid customers for the first quarter since 1Q15.

Sprint also has the opportunity to recover its prepaid subscriber base through Virgin Mobile, which will be relaunched in 2017 to be a “disruptive brand” within the prepaid industry. Sprint can distinguish Virgin Mobile from its other prepaid brands by providing exclusive service offerings and incentives and targeting specific demographics, such as millennials.

Sprint’s financial situation remains in a precarious state as the company faces over $11 billion of debt maturities through 2020 and the company continues to operate at a net loss. With cash flow remaining weak, Sprint has significantly cut network capex since 4Q15 out of necessity, and higher interest rates will challenge the company to manage its debt obligations. After mortgaging assets such as network infrastructure and 2.5GHz spectrum through several special-purpose entities created with SoftBank to raise capital, Sprint has few levers left to pull should its cash levels be depleted. This could put more pressure on the company to pursue strategic alternatives, such as M&A.

To improve Sprint’s financial position Softbank is also considering selling off some of Sprint’s 2.5GHz spectrum licenses as part of a separate, publicly traded company. Though Sprint’s spectrum licenses are attractive to companies including cable operators that will be entering into the mobility market, such as Comcast and Charter Communications, creating a new company to sell Sprint’s spectrum would be complex, as some of the licenses are being used as collateral for the carrier’s debt.

(C) TBR





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