by Jonathan Berr | August 24, 2011 1:34 pm
Sprint Nextel (NYSE:S[1]) still is the underdog of the telecom world.
The beleaguered carrier reportedly will begin selling the iPhone 5[2] starting in October. Wall Street’s response to the news first reported by The Wall Street Journal was a quick jump (about 10%), followed by a gigantic yawn. In fact, shares of the Overland, Kan.-based company were trading down slightly at $3.57 on Wednesday afternoon. Sprint has slumped nearly 16% during the past year, underperforming rivals Verizon (NYSE:VZ[3]) and AT&T (NYSE:T[4]), both of which are little changed.
About 6 million iPhones are expected to be sold through Sprint, boosting sales of the smartphone by 5%[5]. This will help increase traffic to Sprint stores and might help the carrier retain customers who might otherwise have defected to rivals. But it is far from a certainty.
Even though Sprint has improved customer service and reduced its churn rate, it cannot ignore the fact the smartphone market is getting more crowded by the day. Moreover, the vast majority of the new customers Sprint added in recent quarters are from its less-lucrative prepaid wireless business — thus, they might not even be able to afford the iPhone. In fact, the company lost 101,000 contract customers[6] during the past quarter.
Besides, Sprint is late to the iPhone party. It is entering the iPhone business just as many consumers are turning their noses up at the device.
Google (NASDAQ:GOOG[7]) Android-powered phones have been surging in popularity, gaining market share at Apple’s (NASDAQ:AAPL[8]) expense. Data from comScore shows that Android’s market share rose 5.1% to 38.1%[9] during the three-month period ending in May. Meanwhile, Apple rose 1.4 percentage points to 26.6%.
The more intriguing question, however, is why Apple is bothering with the No. 3 telecom company.
Perhaps Apple CEO Steve Jobs wanted to lend AT&T a hand to counter Sprint’s claims that the $39 billion T-Mobile acquisition should be blocked because it will harm consumers. After all, how could Sprint continue to make that argument if Apple is allowing it to sell its latest and greatest smartphone?
Sprint CEO Dan Hesse, who is one of the leading voices against the T-Mobile merger, will find that doing business with Apple isn’t easy. A few years ago, Media reports said AT&T paid Apple a $325 subsidy on each new iPhone 3G it sold.[10] A Wall Street analyst says Sprint will have a steep price to pay, as well. “Using a $350 subsidy, we estimate that every 500k incremental subs upgrading equates to 250 bps (basis points) of margin pressure,” WSJ quotes investment firm Piper Jaffray as saying[11] in an otherwise positive note.
That means Sprint also will have to offer attractive inducements to get consumers to buy iPhones from it instead of rivals AT&T and Verizon, which will further crimp profits.
Selling the iPhone does not change the fact Sprint is a small fish (52 million customers) competing against much larger rivals (AT&T has 99 million customers, and Verizon has 106 million).
Hesse repeatedly has said Sprint is finished as an independent company if the AT&T/T-Mobile deal goes through. It’s hard to see how the iPhone will change that scenario.
Jonathan Berr does not own shares of the companies that are listed. Follow him on Twitter at @jdberr.
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