Apple (NASDAQ:AAPL) has sold some 130 million iPhones worldwide, making it easily the world’s single most popular smartphone of its kind. Yet the iPhone, which has brought fortune to AT&T and Verizon Wireless in the United States, could be the device that makes or breaks their rival Sprint (NYSE:S).
The No. 3 U.S. wireless carrier began selling the iPhone 4S Oct. 14 for $199.99 on contract. Sprint CEO Dan Hesse said on the company’s Q3 earnings call that Sprint sales of the handset brought in the most new subscribers ever for a new smartphone launch after two weeks, topping even that of the Android-based HTC Evo 4G.
Did Sprint mortgage its future to get the device? It’s beginning to feel that way.
Sprint Oct. 26 posted a net loss of $301 million, or 10 cents a share, on sales of $8.33 billion in the third quarter. The good news is it added 1.3 million new subscribers for Q3, doubling its additions from a year ago. Moreover, iPhone 4S, coupled with several solid Android handset launches, should help Sprint pad its additions even more for the holiday quarter.
“We expect iPhone customers to be among our most profitable as the higher upfront acquisition costs are expected to be offset by longer customer tenure and lower support costs, including data efficiency,” said Sprint CFO Joseph J. Euteneuer on the company’s Q3 earnings call.
And yet Sprint’s position feels precarious. The company has roughly half the number of subscribers of both AT&T and Verizon. It is promising its iPhone customers unlimited data, which means potentially bigger strains on its network.
Sprint revealed it has promised to pay Apple $15.5 billion over the next four years for the iPhone. However, the company also needs $7 billion in new financing over the next few years, thanks to its massive iPhone 4S investment and 4G LTE (Long Term Evolution) network upgrade plans.
Now consider what Sprint CFO Joseph Euteneuer reported during the Q3 call: “Initially, we expect the cost per gross addition for an iPhone customer to be nearly 40 percent higher than the average non-iPhone customer, roughly $200 driven entirely by the cost of the device.”
Over the cost of the four-year deal, Sprint expects iPhone customers to bring the company between $7 billion and $8 billion, but Sprint doesn’t expect to enjoy any operating income from iPhone 4S sales until 2015. That’s only three-plus years away; does the company have time to make up the ground? Who is to say it won’t go broke selling the device?
Technology Business Research analyst Kate Price said Sprint’s LTE rollout, slated to begin in mid-2012, will help the operator bring some of its existing 4G WiMax subscribers into the company’s postpaid segment. However, she also cautioned that Sprint’s margins will be negatively impacted by the iPhone 4S sales in the near term.
“The high equipment subsidies associated with the iPhone have a dramatic impact on margins in the short-term, an impact Verizon and AT&T are more able to adjust to, as those companies have high margins,” Price wrote in a research note Oct. 26.
“Second, iPhone users consume a much higher level of data than other subscribers, which will increase traffic on the network, and subsequently, CAPEX (capital expenditure) spending to support the heightened traffic. “
If Sprint makes it through the margin minefield, Price said the iPhone will help Sprint attract and retain subscribers, and grow average revenue per user from data consumption.
But that seems like a big if. On the Q3 call, Sprint’s Hesse likened Sprint to the Oakland A’s Major League Baseball team in the movie “Moneyball,” and extended the analogy to compare the iPhone to New York Yankees third baseman Alex Rodriguez.
But Rodriguez never played for the A’s and the A’s never won the World Series. It’s hard to convince the market the iPhone 4S is the phone/player to put such a mighty underdog as Sprint over the top versus Yankees and Red Sox of the U.S. smartphone market — AT&T and Verizon.