Why The iPhone Won't Save Sprint

| About: Sprint Corporation (S)

Sprint (NYSE:S) is up 2%, and speculation is that the launch of the iPhone 4S (NASDAQ:AAPL) will save the company from a fate worse than its current lingering death.

It won't, and here's why:

  • Bits are a commodity. There is no real different between the bits delivered on a Sprint phone and those on one you bought for AT&T (NYSE:T) or Verizon (NYSE:VZ). What matters is network coverage, and Sprint doesn't have it.
  • Infrastructure is expensive. Maintaining multiple mobile infrastructures means you have four antennas on every tower. It's like having four freeways competing on the same route, each taking just one kind of car, and with a prohibition against using surface streets. There's four times the cost, but not four times the traffic, thus more cost for every car.
  • Tech firms don't want these assets. If a company like Apple (AAPL) or Microsoft (NASDAQ:MSFT) saw any benefit to owning Sprint's infrastructure they would have bought it years ago. Fact is, it provides no real benefit and sucks capital.

Americans pay more for less broadband than people in other countries because we persist in this illusion that having four incompatible freeways running next to one another creates competition and lower prices. It doesn't. Compatibility is the only route to real competition.

But the benefits of even this competition don't flow to the competitors. If they did, Level 3 (NASDAQ:LVLT) would be worth far more than it is. The benefits of competition for Internet bits flows to customers, not to providers.

Profit comes from using bits in some differentiated way. This is why AT&T and Verizon have always been eager to define bits as “services,” and to claim those services as unique or proprietary. Yet a bit used for SMS is the same as a bit used for digitized voice is the same as one used in a mapping application. Bits are bits.

What the smartphone era did was dramatically increase the demand for bits, while degrading the value of bits by making them commodities. That doesn't change with Sprint getting the iPhone. In fact, it just adds costs in demand for bits without adding to their value so they can become profitable.

The market needs more bits, and the present regulatory regime for spectrum will fail to deliver them. There is no spectrum shortage. It's artificial. If Sprint didn't own spectrum – if its spectrum were in the public domain like Wi-Fi – consumers would be getting much more value for it. Competition would be defined by devices, by manufacturers of access points, and there would be a lot more bits available for a lot less money.

The bottom line here is Sprint stock is not going to make you money.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.