Sprint’s spectrum is not its only unique asset
The recent surge in Sprint’s stock price comes courtesy of SoftBank, and the Japanese giant may have good reason to double down on its investment in the last-place nationwide carrier. The way Americans acquire mobile devices is changing, and these shifts may favor Sprint more than its competitors.
“We expect smartphone leasing to continue to replace subsidies and eventually equipment installment plans in the U.S., especially at market share gainers T-Mobile and Sprint,” analyst Kevin Smithen of Macquarie Securities wrote in a research note. “The main advantage of a third-party lease facility over an equipment installment plan is to transfer that [capital expense] cost to the third-party. Sprint has announced plans to utilize an off-balance sheet leasing company partially funded by SoftBank.”
Sprint CEO Marcelo Claure recently told investors that he sees device leasing as a “tremendous competitive advantage” for Sprint. “It’s something that is not easy to replicate because it’s a combination of Brightstar and Sprint, which are both part of the SoftBank Group,” he said. “That allows you to have a higher resale on the price of used devices, that allows you to lower the cost of entry.”
Brightstar says it is the world’s largest vendor of used and refurbished phones and, like Sprint, it is majority-owned by SoftBank. Claure founded Brightstar and sold it to SoftBank for $1.26 billion in 2013, just a few months after SoftBank bought Sprint. Then in 2014, SoftBank Chairman Masayoshi Son asked Claure to become Sprint’s CEO. A leader with a background in device distribution and resale may be just what Sprint needs as the industry moves toward smartphone leasing.
“Leasing is the next iteration that the financial community seems to be advocating that can increase profitability,” said analyst William Ho of 556 Ventures. “For the longest time, that community has been on carriers to get off subsidized devices and we’re seeing the rise of equipment installment plans. Leasing is a natural progression for customer choice. It’s a well-known model in the auto industry and having a purchase and leasing choice is easy for consumers to understand.”
Sprint and T-Mobile US both offer device leasing options. AT&T Mobility and Verizon Wireless count customers’ monthly payments toward an eventual purchase of the device, but they allow customers to trade their devices in before all payments are made. Verizon Communications CFO Fran Shammo has said that the carrier has no current plans to offer device leasing, but Ho noted that Verizon has reversed course before in response to competitive pressure from the smaller carriers. Verizon Wireless, AT&T Mobility and Sprint all followed T-Mobile US into pay-as-you-go device pricing, but Sprint may end up being the carrier that has the most to gain from this model.
“For Sprint, the key to the leasing company arrangement is that SoftBank distributor subsidiary BrightStar is likely to guarantee ‘Sprint LeaseCo’ $200-plus in residual value at the end of a two-year lease, which could be as much as $100 per device more than other carriers receive by selling used phones into the channel,” said Smithen.
Sprint said during its most recent earnings call that it will establish the leasing company with SoftBank and other partners, but it did not name Brightstar specifically. Brightstar’s exact role in Sprint’s leasing operation remains to be seen, but it seems likely the company will be a financial partner as well as an operating partner.
Last month Brightstar named a new CFO, Reza Taleghani, formerly of J.P. Morgan. Brightstar’s former CFO, Vincent Donargo, has been named EVP of financial operations and transformation and will manage “the ongoing transformation of Brightstar’s finance organization.”
Brightstar has thrived under SoftBank’s ownership, almost doubling its headcount from roughly 5,000 to about 9,000 employees worldwide. Revenue rose more than 40% in 2014, from approximately $7 billion in 2013 to more than $10 billion in 2014.
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