On July 23rd, Jim Cramer on Mad Money declared that Sprint (S) is a buy in the long term but might see a drop due to earnings in the short term, which will create buying opportunities. He made some compelling arguments, a few of which caught my eye:
This is fantastic news for Sprint, but we need to dig deeper into this claim to see if it holds weight.
Not all Spectrum is Equal
If owning the 2.5 GHz band of spectrum was worth a lot, Clearwire would not have been just barely surviving on payments from Sprint these past few years. Investors need to know that spectrum acquired from Clearwire (2500 MHz) does not propagate far and cannot penetrate buildings as well as lower frequencies used by other carriers. A short range of 2.5 GHz makes it necessary to use more towers than would normally be needed for lower frequency, which makes it limited to use in certain geographic areas with a dense population; for example, New York City. That was the reason why Clearwire's original Wimax was available in only select markets. This leads to the next claim by Cramer:
As the company finishes shutting down Nextel, their EBITDA margin could easily rise from 17.2% this year, to nearly 30% by 2016.
Because of the Nextel shutdown, Sprint will save money on maintenance and lease of Nextel tower sites. Sprint is cutting down from 68k towers to 38k towers. While this is all good news for the margins, Sprint will also lose some Nextel customers to other carriers, since not all will opt for Sprint while leaving. One major gain from the Nextel shutdown that Cramer did not mention is some spectrum that Sprint will be able to use at 800 MHz, which until recently was restricted to SMR. However, following an appeal from Sprint, the FCC has allowed it being repurposed to LTE. 800 MHz unlike 2500 MHz can propagate far and has similar characteristics to the frequencies used by other major carriers in 700-850 MHz band.
Summarizing Sprint's Network
- 800 MHz ESMR (LTE Band 26)
Pros: Good propagation
Cons: Limited Bandwidth (5 MHz-by-5 MHz)
- 1900 MHz PCS A-G (LTE Band 25)
Pros: Decent propagation
Cons: Limited Bandwidth (5 MHz-by-5 MHz)
- 2500-2700 MHz BRS-EBS TD-LTE (LTE Band 41)
Pros: Mother lode of bandwidth capacity (Initially starting with 10 MHz-by-10 MHz)
Cons: Bad Propagation
In 2010, Clearwire had demonstrated high speeds up to 100 Mbps over TD-LTE which will give Sprint the advantage over its competitors in dense urban markets. A Gigaom article mentions that theoretical download speeds of 168 Mbps can be achieved by using just 40 MHz of the 2500 MHz spectrum and further by going ahead with carrier aggregation through LTE advanced, which can deliver speeds up to 1 Gbps per second. On the flip side, in addition to poor propagation, there were issues in the underlying technology used by Clearwire in the current Wimax offering which led to a bad user experience:
- It does not work when the user is on the move (i.e. subscriber has to be pretty much stationary to be able to use Wimax).
- High latency on Wimax meant it was not suited to play video games, which was an issue with subscribers using hot spots.
If these restrictions will still be present on TD-LTE as well remains to be seen. Hopefully, handshake between 2.5 GHz TD-LTE and FD-LTE on 800 MHz and 1900 MHz will be smooth. An article from Bloomberg mentions that the Government of Japan has awarded rights to use the 2500 MHz spectrum to KDDI, which competes with Softbank (SFTBF.PK) in Japan. This is a serious development for Softbank which owns 70% of Sprint, as it throws a monkey wrench to their plan on roaming between Sprint and Softbank subscribers on the 2500 MHz band.
Currently, Sprint uses 1900 MHz for 3G and is also using a portion of 1900 to deploy 4G LTE. In the future, it will deploy 4G LTE over 800 MHz and 2500 MHz. In order to exceed the quality of competing 4G carriers, it is vital that Sprint finishes LTE deployment on 1900 MHz, 800 MHz, and 2500 MHz. According to S4GRU, Sprint has already activated TD-LTE in 8 markets and launched 3 new hotspot devices equipped with radio for the 800 Mhz, 1900 MHz and 2500 MHz bands. It is important to note that current LTE phones cannot take advantage of Sprint's LTE over 800 MHz and 2500 MHz as they lack the radios of those bands. Sprint's Internal Memo on S4GRU mentions new phone releases by the year-end.
The FCC has made some rulings which help Sprint to compete since it appears the government wants a viable competitor to challenge the present duopoly of Verizon and AT&T in the best interests of customers. Allowing 800 MHz SMR to be used for LTE and not forcing Sprint to sell some of Clearwire's spectrum as a condition for acquisition will go a long way in helping Sprint build the best network in the country and continue unlimited data plans.
This Time it's for Real?
Cramer makes a turnaround sound easy for Sprint and excitedly calls it a buy. In my opinion, a lot depends on Sprint's execution of the critical end phase of Network Vision. It is absolutely crucial to the company that it completes the installation of LTE over at least 1900 MHz and 800 MHz first and later at some point on 2500 MHz band. Hordes of subscribers on Sprint are frustrated with broken promises since the Wimax era. They never received 4G signal back then and still do not now on LTE. People who bought EVO LTE devices in June 2012 and received poor service will be looking to other carriers before they renew their contracts again with Sprint since they can most likely already receive a 4G signal from other carriers in places they live. Unlimited data does not mean much when user receives speeds lower than dial up modems of the 1990s. Personally, I have never received a 4G signal at my home and barely receive 3G, with my phone roaming most of the time. Hence, it is critical for Sprint to install 4G over 800 MHz in areas similar to that in which I reside so they can match the service of other carriers. Through my work phones, which are on another carrier's network, I can see that 4G is already available. Sprint needs to figure out a way to retain subscribers while it finishes Network Vision. Offering early upgrades to phone models equipped with the 800 MHz, 2500 MHz and 1900 MHz bands to subscribers who bought phones equipped with only 1900 LTE might be a lucrative incentive to retain customers and have them renew contracts. Advertising service differentiators like deep Google Voice (GOOG) integration more aggressively can help them stand out from competitors.
One should be of the same opinion as Cramer, albeit with reservations. Investors need to closely follow whether Sprint's Network Vision rollout is completed in a timely manner, as well as if Sprint can avoid mass defection of subscribers to other carriers with currently superior 4G offerings while Network Vision is still a work in progress.