Editor’s note: Sprint drives growth with its combined strategy for postpaid and prepaid services, reports Technology Business Research Analyst Steve Vachon.
HAMPTON, N.H. – Sprint (NYSE: S) reported its highest retail phone net additions in over two years in 3Q17. Simultaneously building its postpaid and prepaid bases was previously a greater challenge for Sprint due to lack of differentiation between brands and high cannibalization from customers switching between segments to take advantage of the latest promotions and incentives.
Sprint altered its go-to-market strategy over the past year to more effectively target specific price points through its postpaid and prepaid offerings. Sprint targets postpaid offerings toward customers willing to pay extra for unlimited data plans and the conveniences of its leasing programs, while focusing its prepaid brands toward price-sensitive and low-credit customers.
Though Sprint continues to take steps to ensure it is undercutting postpaid competitors, TBR expects the carrier will be slightly more conservative in its strategies in 2018 as its pricing advantage is now firmly established in the postpaid market and rivals have become less inclined to counter the carrier’s recent deals such as a free iPhone 8 offer and aggressive multi-line unlimited data promotions. Additionally, Sprint has established a clearer pricing distinction within its prepaid brands and will reserve its most aggressive pricing promotions in 2018 for Boost Mobile and Virgin Mobile.
Sprint’s higher retail net additions were also driven by deeper integration of digital sales channels, which experienced a 30% year-to-year increase in postpaid phone gross additions in 3Q17. Sprint is pursuing deeper integration to reduce SG&A costs and provide customers greater convenience. Sprint is also targeting BYOD subscribers to reduce equipment costs, exemplified by recent postpaid promotions offering free wireless services for a limited time to BYOD customers to test new go-to-market models. Though these tactics help Sprint reduce the high costs of offering smartphone promotions to attract subscribers, they are risky, as they will likely contribute to elevated churn in 2018 once free services expire.
The anticipated T-Mobile merger proposal will help alleviate Sprint’s long-term financial challenges
Despite Sprint’s growing subscriber base, Sprint’s consolidated revenue declined 3.9% due to lower wireless service and wireline revenue and the negative impact of recent natural disasters such as hurricane-related credits. Postpaid phone ARPU declined 9.8% year-to-year due to Sprint’s pricing promotions and customers migrating to discounted non-subsidized service plans. Sprint’s service revenue is also negatively impacted by recent accounting changes made to the carrier’s device insurance programs, which are accretive to EBITDA.
Sprint benefited from nearly $400 million in combined year-to-year reductions in operating costs in 3Q17, which contributed to consolidated EBITDA margin rising 570 basis points year-to-year to 35.5%. Despite its improved cost efficiency, Sprint remains challenged by its long-standing financial struggles such as its high debt load and consistent net losses. The anticipated T-Mobile merger proposal will help remedy those challenges while providing the subscribers and network resources that would enable the joint company to compete on the scale of Verizon and AT&T. Furthermore, Sprint will become better positioned to capitalize on the upcoming 5G era by combining its vast 2.5GHz licenses with T-Mobile’s 600MHz spectrum.
(C) TBR
