Sprint's Turnaround Should Eventually Convert Customers And Investors Too

Oct. 4.13 | About: Sprint Corporation (S)

Softbank Corp's (OTCPK:SFTBF) founder, Masayoshi Son, made his foray into the U.S. wireless business last year when SoftBank bid to take control of Sprint Corp (NYSE:S). After a protracted battle with Dish Network (NASDAQ:DISH), Son eventually won his desired majority position in Sprint. Now that he has control, Son hopes to do with Sprint what he did with Vodafone Japan, which will be good for both investors and customers.

Masayoshi Son's intentions are no mystery. His goal is to become the world's highest revenue earning mobile data provider. The combination of Softbank and Sprint would surpass AT&T's (NYSE:T) mobile services revenue, and only trail Verizon (NYSE:VZ) and China Mobile (NYSE:CHL) in sales. The company is also a rather young competitor in the business, after first entering the mobile service carrier business when it acquired Vodafone Japan from Vodafone (NASDAQ:VOD) in 2006.

Since 2007, Softbank has been Japan's leading seller of smartphones. Much of Softbank's success came from luring Japan's customers from its larger, older and entrenched competitors, NTT DoCoMo and KDDI, and it did so by offering more data options for smartphones, tablets, laptops and vehicles. Similarly, Sprint had pushed its unlimited data plans here in the United States, while Verizon and AT&T discontinued their prior unlimited offerings. In a way, even before Son targeted Sprint, it appeared the companies shared a similar strategy.

Beyond data plans, another major driving force behind how Softbank managed to take so much market share in Japan was its early acquisition and offering of Apple's (NASDAQ:AAPL) iPhone. Softbank had iPhone exclusivity in Japan for the first few years, much like AT&T had in the United States. Sprint obtained the iPhone after both of its mammoth competitors, but the company often offers new technology before Verizon and AT&T, including being the first to offer a 4G Google (NASDAQ:GOOG) Android smartphone, and has a history of trying to distinguish itself through offering newer technology and superior data plans. It will also likely try to offer new technology first in the future.

Softbank is not shying away from its gambit, and since it acquired its majority stake in Sprint in July for $21.6 billion, the company increased its position in both August and September. Son has indicated it could take as long as two years to turn around Sprint, noting that "It took around a year after Softbank bought Vodafone [until] we reached the No. 1 position of net gains in subscribers. It takes time to get devices ready and prepare services and the network," and adding "for anything substantial you need one or two years."

This time frame may spook some investors, as so many have come to consider two years a virtual eternity to hold a security, but it is not. Also, large ships turn slowly, and hastily instituting significant changes is usually not a prudent idea. The company just recently shed itself of baggage related to the problematic Nextel acquisition, which it made near the peak of telecom pricing, and it is just beginning to absorb Clearwire, which it also had to fight Dish Network for, as the competitors both saw value in Clearwire's spectrum.

Son's transformation of Sprint already includes the company already announcing a continuation of its unlimited plans, and changes to Sprint's compensation policy so that executive bonuses are based on subscriber growth rather than revenue growth. Sprint also initiated a $15 per month service discount for customers who opt for a new smartphone installment purchase plan. Doubling down on the unlimited option should grow as a differentiating factor that Sprint will tout for years to come.

In the near term, investors and analysts may be concerned that Sprint is pursuing market share at the expense of revenue and earnings, but these market share endeavors will eventually result in a broader subscriber base that should provide the company with enhanced cashflow and revenue metrics. Softbank's backing and the cash that comes with it also allow Sprint to move forward with its aggressive network upgrade plans and simultaneously achieve superior financing terms due to its parent's superior credit rating.

As mobile data usage increases, which appears an inevitability, Sprint's competitive advantages should slowly emerge. Current data usage may make traditional data plans more cost effective for the average subscriber, but growth in mobile video streaming and other high data usage through smartphones should make unlimited plans a more cost effective and desirable option.

Over the next two years, investors and consumers should expect more efforts by Sprint to woo subscribers away from the entrenched leaders, and establish itself as a higher tech and user-friendly alternative. Similarly, the combined U.S. and Japanese businesses may allow Softbank to negotiate better terms from hardware suppliers, such as volume discounts, earlier offerings and exclusivity arrangements. Nonetheless, some of the best differentiators may not come from network providers, but through expanding use of smartphones by consumers in a manner that make Sprint's already existing offerings of greater value.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.