The cell phone carriers are playing a life-or-death game of musical chairs, and the only question is which ones will be left out when the music stops. Sprint Nextel Inc. (S) reported earnings this morning that were short of expectations and poor overall.

Sprint lost $980 million (EPS -$0.34) in the fourth quarter of 2009, which was better than the year-ago quarter when the company lost $1.6 billion (EPS -$0.57). Excluding a noncash charge, Sprint lost $674 million (EPS -$0.23), while analysts were expecting an EPS loss of -$0.19.

The company’s operating revenues also dropped year-over-year, from $8.43 billion to $7.87 billion, compared with consensus estimates of $8.03 billion. Sprint also lost 69,000 retail subscribers in the quarter. Churn rates for the quarter were slightly better both year-over-year and sequentially, both among the company’s post-paid and pre-paid subscribers.

Competitors Verizon (VZ) and AT&T (T) each have about 90 million U.S. customers. Sprint has about 48 million, and T-Mobile, owned by Deutsche Telekom AG (DT), has about 34 million as of the end of the third quarter. That’s 262 million cell phones in a country with 300 million people. Unless the cell phone carriers can figure out a way to sell phones to children under 5 years old, the U.S. market is essentially saturated.

The competition for customers among the carriers is fierce. Verizon and AT&T are fighting it out for the high-end, smart phone users, while Sprint and T-Mobile fight for share in the low end.

And the competition is price-based, which erodes revenues. Growth in the customer base for post-paid subscribers, who take annual contracts and are considered more valuable to the carriers, is projected to be just 3% in 2010.

For the fourth quarter, Sprint’s average revenue per user (ARPU) for wireless service fell a bit to $55. That’s better than Verizon’s reported ARPU of just under $51, but Sprint does not offer the same bundled services as Verizon or AT&T, and that’s where the money is now.

To compound Sprint’s difficulties, Deutsche Telekom is considering an IPO for T-Mobile. The German company could also make an offer to buy Sprint, but U.S. regulators are unlikely to approve such a deal citing anti-competitive reasons.

Overall, Sprint is not in a strong position. The company is trying to grab market share by slashing prices. So far, though, they’re making an offer that can easily be refused.

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