Monday, November 21, 2011

Sprint's Terminal Problem

Four years ago Sprint was in serious trouble. Their stock was plummeting, subscribers were running to other carriers, and the acquisition of Nextel was being referred to as "the merger from hell." During this time mumblings began of Sprint's final days. Fortunately for Sprint they would put a man in charge who would be known as one of the best turnaround CEOs of all time.

Sprint is a completely different company today thanks to the efforts of Dan Hesse. Finding their footing in the wireless world as a value driven Tier 1 company, Sprint has not only survived the past four years but has had a bit of resurgence. However while Hesse has plenty to celebrate, Sprint's time is still running out.

Part of the turnaround strategy included a focus on prepaid. Boost Mobile has become one of the most profitable segments at Sprint after igniting a price war with its $50 monthly unlimited plan. Betting more on prepaid, Sprint acquired Virgin Mobile USA and further segmented the market by introducing Assurance Wireless for low-income families. Prepaid remains one of the largest growth engines for Sprint.

October 14th, 2011 Sprint announced a seemingly great triumph, they would be getting the iPhone. The red flags were raised almost immediately when it was revealed that Sprint agreed to purchase 30.5 million iPhones in the next four years at a cost of $20 billion. Currently Sprint has just over 27 million postpaid subscribers so the number of iPhones purchased was surprisingly high and the $20 billion price tag is going to effect Sprint's financials for a while. One other concern however is how will Sprint's network handle the load of 30 million iPhones?

Network capacity is more of concern today with the amount of data being used over wireless towers. AT&T was on the receiving end of many articles complaining of poor network performance. As data usage increases from iPhones and Android devices the race to keep up with demand will speed up.

This is where the final nail-in-coffin will happen, the network. Sprint has been partnered with Clearwire who provides for most of Sprint's smartphone traffic. Clearwire has been slow in the rollout of 4G services which has become glaringly obvious as Verizon Wireless is in the midst of it's aggressive LTE deployment. This isn't the only cause for concern as Sprint and Clearwire are currently engaged in brutal negotiations that puts Sprint's network at risk.

Hesse revealed that he believes that Sprint would do just fine if Clearwire was pushed towards bankruptcy. It may not be however as Sprint's license to spectrum was transferred to Clearwire as part of a previous deal. Wireless spectrum is becoming more valuable amongst wireless carriers as the amount of traffic grows. Clearwire has $240 million in interest obligations due and payable on December 1st, 2011. The threat of default on the interest payment makes a point to Sprint stopping short of interrupting service to smartphone users.

While losing data services is a huge threat to Sprint there's even more at stake. Just as Sprint found profitability through it's prepaid services it looks to increase revenues through other areas. Most carriers sell services at wholesale to Mobile Virtual Network Operators (MVNO). Sprint recently said that it plans on putting a greater emphasis on MVNO partners but this was just after Cox Communications announced that it would be abandoning it's wireless services.

Cox leaving the wireless business isn't too surprising as the cable company launched in very limited markets and found it difficult competing with entrenched wireless carriers. One notable reason for the failure mentioned was the acceleration of competitive 4G networks. Cox recognized that 4G is going to a huge factor in the competitive landscape of the wireless industry.

For Sprint, network innovation is no longer just about luring subscribers from Verizon and AT&T. Sprint has positioned itself as a discount carrier through it's prepaid offerings and has had tremendous success. That success could be multiplied through it's offerings towards MVNO partners but that hope seems to be dwindling as current partners are leaving partly because of the network.

The problems with Clearwire put a lot at risk for Sprint. Even if a deal is reached, innovation at Clearwire will be stifled from their own financial issues. The possibility of Sprint building out their own network to where it needs to be is almost impossible now as $20 billion is tied up in iPhone orders. The Sprint network has gone from a competitive disadvantage to writing on the wall.

2 comments:

  1. Don't think I'm rooting for Sprint's demise! On the contrary, the wireless industry is already anti-competitive. Between the AT&T/ T-Mobile merger and Sprint's troubles we are well on our way to a duopoly. But we need more than just Sprint surviving, we need to find a way to create more competition in wireless or rates will continue to rise.

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