Editor’s Note: Welcome to our weekly Reality Check column. We’ve gathered a group of visionaries and veterans in the mobile industry to give their insights into the marketplace.
Sprint Nextel Corp. reported earnings last week, and it looks like the four year winter of subscriber and revenue losses might have started to abate. While all of the figures reported exclude the effect of the Verizon Wireless/Apple Inc. iPhone and 4G introduction (which Sprint Nextel, on their earnings call, acknowledged impact the trajectory of net additions in Q1), they provide a snapshot of the difficulty of operating as the No. 3 player in what has effectively become a duopoly.
First, the good news: Post-paid growth has returned to the business. We saw lower churn and better gross adds coming, but Sprint Nextel’s 58,000 post-paid subscriber gain (at a $55 average revenue per user) provided more than an emotional lift – there’s $10 million more in sequential quarterly revenues to celebrate (compare this to Verizon Wireless’ $25 million and AT&T Mobility’s $124 million increase in service revenues from Q3 to Q4). Sprint Nextel also reported that their post-paid business was “net port positive” which means that in aggregate, more customers came to Sprint Nextel than left Sprint Nextel for other carriers. Across the entire Sprint Nextel brand (pre and post-paid), the carrier was net port positive against Verizon Wireless, AT&T Mobility, T-Mobile USA Inc., Leap Wireless International Inc., and MetroPCS Communications Inc.
This is an achievement for several reasons. First, it’s not the second quarter. Sprint Nextel has historically enjoyed its best churn and net adds in Q2, and some analysts discounted the positive net add performance in 2007 as a temporary fix, which it was. To do this in the fourth quarter is significant. It shows that Sprint Nextel still has retail muscle, and can use that strength to differentiate its device lineup in the marketplace.
Second, while growth is coming at the expense of near-term profitability, it’s not coming at the expense of long-term ARPU. Sprint Nextel is wisely implementing a $10 price increase on smart phone service plans. Sprint Nextel CEO Dan Hesse revealed on the conference call that 50% of the CDMA customer base is now on smart phone plans – this equates to 13.5 million opportunities to raise rates over the next 24 months. Assuming that even five million customers are upgraded to the new plan in 2011, the full year impact to 2012 is $600 million, with most of this falling to the bottom line. It justifies at least $240 million in additional capital expenditures for either the current or the new network. Price increases are tough, and, as we examined Verizon Wireless’ decision to implement a mandatory minimum level for new smart phones in 2010, they require fulfilling a promise. Sprint Nextel needs a lot more money to keep its promises.
Finally, prepaid churn was below 5% for the first time in a while (Sprint Nextel is still churning over 60% of its base each year, however, compared to 22% in post-paid). Many wrote off Sprint Nextel’s growth in pre-paid as a fad, and several criticized the “brand of brands” strategy laid out by Sprint Nextel’s former Prepaid president, Dan Schulman, at the beginning of 2010. Assurance Wireless was regarded as a low-ARPU/low-income gimmick to make the subscribers numbers more positive. Boost Mobile was largely ignored as a teens/urban-only brand: not business, not family, therefore not profitable and not important. While many arguments can be made about the sustainability of any pre-paid revenue stream, Sprint Nextel derived at least $80 million in quarterly service and $20 million in equipment revenue growth from retail prepaid services. $100 million in sequential revenue growth is nothing to sneeze at.
So Sprint Nextel’s back in the black as least as far as subscribers go. That thaw is well underway. Is this freeze temporary? What could cause it to refreeze? Four things:
1. Clearwire Corp.: Post-paid turned positive because of the HTC Corp. Evo 4G. The Evo experience is worth the extra money in most markets because of 4G speeds. Battery and occasional application integration issues aside, it may be the best combination of processor/bandwidth/applications in the market. But a 3G only Evo? Nope. Sprint Nextel cannot sustain positive post-paid net adds in 2011 without Clearwire. And a weaker 4G experience, driven by a starved partner, reflects poorly on the Sprint Nextel brand that took billions of dollars to restore. It’s a real pickle, and every month that goes by it gets worse. Clearwire finally seemed to show signs of backing off its retail ambitions with comments made by their CEO Bill Morrow last week.
2. iPhone: Despite the reports this week that the iPhone was a ho-hum event for Verizon Wireless (it wasn’t), not having the iPhone hurts Sprint Nextel and T-Mobile USA. As the iPhone line broadens, with cheaper varieties on the way, Sprint Nextel needs the iPhone in their lineup. To everything there is a season, and this is the season for drafting on the “we’re not AT&T Mobility” momentum. Sprint Nextel also has a head start in its approach to open applications, which will be terrific for an integrated Face Time/Qik/Fring network. Note: If Sprint Nextel does not embrace the iPhone, they need more marketing heft from Google Inc. – exclusive applications, marketing/Adword preference, etc.
Even with the terrific performance of Q3 and Q4, Sprint Nextel still lost 855,000 post-paid customers in 2010. That’s still an annualized run rate of $560 million of revenue to make up just to get back to a “no growth” level. Assuming 6% of the current CDMA smart phone base leaves for the Verizon Wireless iPhone (a very conservative assumption), that still leaves more than 1.6 million net adds just to get back to 2009 post-paid customer levels (855,000 from 2010 + 6% of 13.5 million CDMA smart phone users = 810,000 equals 1.665 million gap).
3. A combined Leap/MetroPCS: It’s a question of when, not if, for Leap and MetroPCS to resolve their differences and combine. They both have advantages when it comes to local network coverage, and together could bring a sizeable change to smart phone lineups for the prepaid market (Sprint Nextel clearly got out to an early lead here with Boost Mobile, but with 60% annual churn, things can change quickly). When they combine, look for changes in Sprint Nextel’s prepaid performance. The cold wind turns frigid when Tracfone Wireless Inc. (America Movil) is added to the Leap/MetroPCS mix with additional distribution help from Wal-Mart Stores Inc. Sprint Nextel has invested heavily in prepaid distribution (it’s a terrific asset) and Wal-Mart is one of the few companies (maybe the only one) that can deflate the value of that asset – quickly.
4. Network Vision spending and focus blinds extending the customer experience improvements: To go with the sports analogy used by Dan Hesse on the earnings call, Sprint Nextel has put together a terrific drive. They started inside the 10-yard line, and have put together some impressive third- and fourth- down conversions to keep the drive alive. The problem: It’s only the start of the second half, and Sprint Nextel’s trailing by four touchdowns. Sprint Nextel has a “wildcat” offense (that’s Network Vision, the network upgrade project), and it’s execution is critical. However, only a few plays use the wildcat, and the opposition will quickly learn how to defend against the formation.
The customer experience consists of solving today’s issues, which Sprint Nextel has remedied through simplifying plans, as well as tomorrow’s. Unfortunately, tomorrow’s issues consist of questions like “How do I get Qik to work on my Evo?” or “Why do I receive so many forced resets fo
r applications on my Epic?” or &
#8220;How do I transfer my (iPhone, Palm or even my current Android) apps to my newly purchased Android phone?” These customer experience improvements also require investment – different rep skills, both in-store and on the phone; an accelerated embrace of applications as Sprint Nextel’s differentiator; owning the Vo4G (Voice over 4G) space.
It’s been a four-year long winter. Compared to the end of 2007, Sprint Nextel has nearly 10 million fewer post-paid subscribers driving $6.5 billion-plus in lower service revenues, $5 billion-plus in lower annualized operating interest before depreciation and amortization, 40% fewer assets (as measured by net PP&E) and wireless margins that resemble those of a wholesale operator using Sprint Nextel’s network. However, they have reestablished trust in their base, have a terrific flagship product with the Evo/Shift/Epic/Overdrive 4G lineup, greater financial flexibility thanks to 25% less net debt, and have the pole position in prepaid. Is this Sprint Nextel’s spring?
Jim Patterson is CEO and co-founder of Mobile Symmetry, a start-up created for carriers to solve the problems of an increasingly mobile-only society. Patterson was most recently President – Wholesale Services for Sprint and has a career that spans over eighteen years in telecom and technology. Patterson welcomes your [email protected].
