It remains to be seen whether consumers will actually take the offer Sprint (S) put on the table today, but if the double-digit surge in the price of Sprint stock is any indication, investors are expecting big things from the company’s iPhone upgrade offer.
Never mind the fact that there might be cheaper ways (in the long run) for consumers to ensure they always have the newest iteration of the popular smartphone from Apple (AAPL).
And therein lies the rub, of course.
What seems on the surface like a brilliant way of driving increasing and recurring revenue (and profits) might not actually fly. In fact, the effort may well push a struggling Sprint even further behind more potent competitors.
Introducing the Perpetual iPhone Upgrade Plan
Giving credit where it’s due, it’s a bold and creative move. Rather than asking customers to pay $199 up front and sign a two-year contract to own the latest version of an iPhone, Sprint will now allow customers to enter a long-term contract with the carrier to add a $22-per-month charge to their existing monthly cost to always have access to the most recent version of the iPhone.
The marketability of the scheme is clear: This is a feasible way for current and potential Sprint customers to ensure they never have to feel inadequate or embarrassed by owning a previous-generation iPhone.
Owners of Sprint stock are just hoping these iPhone fans either don’t do the math, or don’t care about the math, since the offer doesn’t make a great deal of financial sense.
At $22 per month for the perpetual iPhone upgrade service, it takes roughly nine months for the cost of participating in the turn-in-and-trade-up plan to reach the same $199 cost of outright buying the latest iPhone from Sprint … a subsidized upgrade that under the current pricing model can only happen once every two years, and requires a new two-year contract to facilitate.
Is it worth it? That depends.
Financially speaking, participating in the revolving Sprint iPhones door is effectively a bet that Apple will unveil a new iPhone every nine months, give or take — a pace Apple hasn’t quite kept.
It’s also an offer, however, that will only matter to those Apple die-hards who absolutely have to have the latest and greatest from the consumer technology company.
They’re out there, to be sure, but the crowd of willing customers may be smaller than the company and holders of Sprint stock care to admit. Assuming the average upgrade cycle is aligned with a typical two-year contract, most iPhone fans who were willing to shell out $199 every two years to own a fairly new device will be paying $528 every two years just to own each iteration of the iPhone as soon as it’s out.
Many might balk.
Not Necessarily a Winner
Again, kudos for creativity, even if T-Mobile US (TMUS) technically thought of it first. Regardless, this isn’t an offer that will jerk the company back into viability.
Indeed, the Sprint iPhones scheme may end up only widening Sprint’s habitual losses.
Most consumers understand smartphone purchases are largely subsidized by wireless carriers to induce the purchase of long-term contracts. The carrier can offset its steep subsidy costs — well more than $400 per phone for the iPhone 6 — by collecting monthly subscription costs from customers over the next two years.
Under its new plan, however, Sprint will still be subsidizing phones … just at a faster pace. The math may make even less sense for the company than its willingness to buy out contracts has thus far.
Assuming one new iPhone is unveiled every year from here on out, and assuming each one costs the same $649 the iPhone 6 did, Sprint will be spending (subsidizing) $1,300 to collect $528 from customers every two years, and will need to make up the $772 difference every two years via monthly subscription billing. With its core monthly plan priced at $60 per month, it’s going to be tough for Sprint to actually make any money in this thin-margin industry. Competitors AT&T (T) and Verizon (VZ) aren’t starting out in the same hole, hence their continued profitability.
The numbers are just estimates, may change over time, but the scope won’t. Sprint is sacrificing profits in the name of growth — a reality made even more concerning by the fact that despite its sacrificial price war efforts, it’s still been recently pushed back to fourth place among the nation’s biggest wireless carriers.
Bottom Line
The X-factor is the salvage value of the turned-in phones. They’ll be newer, and therefore presumably worth a decent amount of money to a recycler or a refurbisher. Smartphones are a lot like new cars, however. That is, the bulk of the depreciation is seen in just the first few months of its useful life (though to its credit, the iPhone holds its value slightly better than other phones, though even then the value of older models dip when the new one becomes available).
In other words, Sprint isn’t even going to be able to look at turned-in iPhones as a profit-center in and of themselves.
In fact, as compelling as a few fans may think the new iPhone upgrade option is, owners of Sprint stock have more to be concerned about than be excited about. The company can’t afford any more gimmicks.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
