Sprint Corporation (NYSE:S) is the third largest telecommunication company in the U.S. It provides both wireline and wireless services to consumers, businesses and government organizations. The company controls the largest spectrum in the industry, but still failed to deliver strong results. S has been continuously losing its subscribers, and in the past four quarters, it lost 1.2 million postpaid subscribers. However, the company has opted for a new strategy and decided to cut down its prices to aggressively compete with its peers.
Completive Industry Environment
The competition has become more intense in the Telecommunication Industry. S has also jumped into the price war, which was successfully initiated by T-Mobile (NASDAQ:TMUS) a year ago. In the last four quarters, TMUS has added about 3.8 million postpaid subscribers, whereas in the same time period S lost about 1.2 million postpaid subscribers. Most of the TMUS growth came at the expense of AT&T (NYSE:T) as they both share same the network. So, earlier this year, T also started to compete on lower prices as mentioned in my previous article. Lowering the prices has also proved to be successful for T as it added over a million postpaid subscribers in the last quarter.
I believe there are two prime reasons that forced S to enter into a price competition. Firstly, strategies implemented by S in the past have not yielded any benefit to the company given its consistent loss of subscribers. So, the new CEO, Marcelo Claure, has opted for a new strategy that has proved to be successful for its peers. He said Americans would think twice before signing with a competitor. Secondly, S was also looking to acquire TMUS, but it backed down from its claim because it failed to convince regulatory authorities. So, now the company needs to grow organically and add new subscribers.
Last week, the company unveiled its new pricing strategies to attract families and individuals. The company's strategy is to leverage its huge spectrum holdings to attract customers with large and unlimited data buckets. The company has replaced its "Framily Plan" with the "Family Value Plan", as it failed to produce the desired result. The Family Value Plan offers 4 line packages with unlimited voice and texts and 20GB data bucket at $160. At the same price, Verizon Communication (NYSE:VZ) and T offer data buckets of 10GB. TMUS offers the 10GB 4 line package at $100.
In addition to the abovementioned plan, S has also decided to pay early termination fees of $350 per line for subscribers who switched from competitors. Moreover, S has also waived access charges of $15 per line through 2015 for customers who opt for data buckets of 20 GB or more. So the plan will eventually cost $100 instead of $160.
Similarly, S has also launched new $60 per month unlimited data, text and voice services for individual customers. This package is also cheaper than its peers, as TMUS offers the same package at $80 per month. This package is available for both existing and old customers. Furthermore, an Equipment Installment Plan (Easy Pay) option is also available for new customers.
It is clear that S is entering the market strong with its low prices. But I believe there are three important points that investors should consider before deciding to buy S. Firstly, price is not the only thing subscribers consider before opting for a carrier. The network remains key and S has significantly improved its network quality. The company is successfully deploying its 8T8R technology and is expected to cover 100M POPs by the end of the current year. Furthermore, the deployment of the 800MHz spectrum to enhance the LTE framework is also on its way and it has been successfully deployed to one-third of the improvement. This low bandwidth spectrum will not only improve the network experience for customers but also increase coverage and hence reduce roaming costs. Moreover, LTE coverage had reached 254 million POPs by the end of the second quarter.
Secondly, the cost-cutting initiatives will dilute the company's ARPU and margins. Early termination fees of $350 per line and the reduction of $15 per line of access charges will also pressurize revenues. So, the company is heavily dependent on the take-up rate of these plans. Lastly, other telecommunications incumbents will also respond to the offers made by the company, which will reduce the attractiveness of these offers. TMUS has already responded through its new offer, in which if an existing TMUS customer brings in a new customer then both get an unlimited LTE data for a year. So, I believe there is no limit to the price cuts. Therefore, subscribers are the actual beneficiaries. It also reinforces the FCC's decision that the current four player structure is beneficial for the industry.
Although the company is a late entrant in the price war, I believe it will significantly change the dynamics of the industry. Overall, I believe it is the right approach because subscriber growth is an essential for future growth prospects. However, it is also important for S to continue its investments in the network. Price reduction can only act as a short-term catalyst. For the long term, a better network experience is the only solution. The company has the largest spectrum in the industry and it needs to utilize all of it to improve its network experience.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.