These days it is difficult for wireless carriers to stay competitive without offering Apple’s (NASDAQ:AAPL) iPhone. So last fall, when Sprint (NYSE:S) began selling the iOS device, investors hoped it would give mobile phone subscribers another reason to consider the struggling carrier.
It has. Sprint activated 1.8 million iPhones last quarter with 720,000 of those sales going to new subscribers. Although the number iPhone activations through Sprint was considerably lower than the 7.6 million iPhone activations by AT&T (NYSE:T) and the 4.2 million by Verizon (NYSE:VZ) during the same period, the iPhone helped keep Sprint in the game during the industry’s lucrative holiday shopping season.
It’s not clear, though, that the iPhone is a solid win for Sprint. Like every carrier that sells it, Sprint pays a higher subsidy for the iPhone than it does for other smartphones. And like other carriers who sell the device, Sprint lost money on sales of the phone. Sprint has in fact been losing money since 2007 and its iPhone sales pushed the company’s earnings gap to its widest in three years. What’s more, Sprint has committed to a four-year deal with Apple to sell the iPhone, even as it invests in upgrades to its 4G network.
Still, Sprint is counting on the iPhone to help it coax customers into purchasing higher-profit subscriber contracts at prices that will help lure clients from Verizon and AT&T. Sprint also will have to somehow convince its existing customers to spend more. The expectation is that the iPhone coupled with Sprint’s Simply Everything all-inclusive plan will appeal to many customers. The question how many and for how long?
Managing the costs of expensive network upgrades
Sprint was unable to capitalize on being the first U.S. carrier to offer 4G coverage, opting initially for a high-speed wireless standard called WiMAX instead of the now widely used LTE (Long Term Evolution) standard, which offers faster data speeds. Sprint is transitioning to 4G LTE coverage, but its first rollout of 4G LTE service won’t be available until mid-2012 and so far in only in six markets. Verizon has the most 4G LTE-capable markets and AT&T, which benefitted from being the first carrier to sell the iPhone, also will offer more LTE service by mid-2012.
T-Mobile–whose proposed sale to AT&T was opposed by the federal government and Sprint, and fell apart last year–says it is committed to its sizeable 4G CDMA-HSPA network.
Sprint may want to forge a network-sharing deal with T-Mobile, but the costs of iPhone subsidies and upgrades to its own network are already weighing heavily on its budget. And if Sprint does reach a deal with T-Mobile, it could incur significant costs to make the alliance work.
For the iPhone to prove its worth to Sprint investors, the company needs to make more impressive and profitable subscriber gains soon, and narrow its losses. If it doesn’t, it could look more like an acquisition target than a rebounding U.S. carrier.