Apple's (AAPL) upcoming iPhone 5 launch could mark the biggest opportunity for Sprint (S) in a decade. Starting with its disastrous acquisition of Nextel, Sprint lost subscribers quarter after quarter and year after year. Sprint was dead last in customer service when Dan Hesse took the helm as CEO, and he implemented a long and painful turnaround plan. Since then, Sprint went from worst to first in customer service, and now ranks highest in customer satisfaction among major carriers. Despite all the operational improvements Hesse made, Sprint still had a gaping hole in its product line because it couldn't sell the iPhone. That changed last fall.
Sprint first announced its agreement with Apple on Oct 7, 2011, the same day the iPhone 4S became available for pre-order, and it went on sale just one week later. After watching from the sidelines during every previous iPhone launch, Sprint had to scramble to quickly get up to speed on the iPhone. Management has to train retail sales associates and customer service reps on the iPhone, stock inventory of phones and accessories, and push the new product and training out through the entire organization.
While Sprint was just starting to move up the iPhone learning curve, AT&T (T) was on its 5th iPhone launch and Verizon (VZ) on its 2nd. As such, even though Sprint finally had the iPhone, it was far from a level playing field during the iPhone 4S launch. Despite its late start, Sprint turned very strong iPhone results in subsequent quarters, largely on the strength of its unlimited data plans.
When Sprint announced its iPhone deal, its stock jumped. When terms of the agreement got out, particularly the minimum purchase agreement of $15.5 billion worth of iPhones over four years, investors promptly bailed and Sprint's stock tanked. Like most other observers, I was skeptical and thought Sprint management made a lousy deal. Since then, Sprint has surprised naysayers like me by producing very strong sales results. Now it looks like Sprint will easily meet the minimum iPhone sales objectives, so the penalty applied to the stock price is effectively removed.
Even though it was the last of the big three carriers to get the iPhone, Sprint now appears best positioned among major carriers to capitalize on the iPhone 5 launch for several reasons:
- Sprint's unlimited data plans are a hit with consumers, particularly in a tough economy, because they offer a better value. Conversely, AT&T and Verizon both ended their unlimited data plans, and both actively penalize high data users. Sprint lost customers for years because it couldn't offer iPhones. As their contracts ended, Sprint customers rolled over to AT&T and later to Verizon. Now Sprint is in a position to reverse this flow. As AT&T and Verizon customers see their contracts expire, Apple fans who want to upgrade to the iPhone 5 can roll over to Sprint and save a chunk of money on their data fees. Even customers who haven't reached the end of their contracts may discover they can save more money by switching to Sprint than their early termination fee would cost them.
- AT&T plans to introduce shared data plans on August 23rd, following a similar move be Verizon. Shared data plans let family members share their data, which provides a better value for households with several phones. Nonetheless, these shared data plans still cap the amount of data customers can use and charge a penalty for data over the limit. Even with apps to track data usage, most customers have no idea how much data they actually use in a given month. What parent has any clue how much data their teenager will burn through in any month? In the best case metered data charges add uncertainty, and in the worst case it can add a stiff surcharge when the bill arrives. Therefore, Sprint's unlimited data plans still have a competitive advantage.
- Verizon and AT&T are following T-Mobile's lead in scaling back handset subsidies. While lower subsidies produce higher margins, Sprint's problem for the past several years has been loss of subscribers. Competitors lowering handset subsidies should be a net positive for Sprint selling the iPhone 5.
- Word on the street is that AT&T is actively discouraging employees in its retail stores from selling iPhones, perhaps because it no longer has exclusivity and no longer sees it as a competitive advantage. Among other things, AT&T isn't reimbursing retail sales employees if they buy an iPhone. Or perhaps because iPhone customers use more data, which AT&T is also trying to discourage. In any case, AT&T is moving away from the iPhone just as Sprint is picking up steam.
- The iPhone 5 (and the next iPad) will sport a new smaller dock connector, which means customers upgrading from older versions will buy more accessories, helping to offset the subsidies carriers pay up front. This may seem like a minor issue, but accessories have very high profit margin.
If Sprint adds an iPad or iPad Mini into the mix as well, that could provide another revenue bump. Even though iPad will produce lower overall margins, it will also take another chunk out of Sprint's minimum purchase commitment to Apple.
With the iPhone 5 release, Sprint is suddenly in the position to capitalize on its unlimited data plan to create a significant competitive advantage. I believe the iPhone 5 launch will be a game changer for Sprint, officially marking the turning point for the company and moving it back into the big leagues. Even after its recent run, Sprint is still a strong buy ahead of the iPhone 5 launch in September.
Disclosure: I am long S.