Sprint CFO: Ditching handset subsidies needs to make economic sense

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Sprint Nextel (NYSE:S) is open to the idea of dropping subsidies on its phones as T-Mobile USA plans to do, but is taking a cautious approach as it looks at the impact on the market and the economics of such a move, according to senior executives.

"We have thought about it and we are going to take a kind of a wait-and-see approach," Sprint CEO Dan Hesse said during the company's fourth-quarter earnings conference call, according to a Seeking Alpha transcript. "We are going to watch what happens in the market, how customers respond to it and we evaluate options and alternatives going forward." Hesse said right now most customers seem comfortable with buying a subsidized device in exchange for a two-year contract. But he said that "as the industry evolves, we'll evolve with it."

Speaking to FierceWireless, Sprint CFO Joe Euteneuer said that Sprint will assess how T-Mobile's new plans perform in the market as well the economics of such a switch. He said Sprint needs to look at what impact moving away from subsides would have on customer lifetime value, churn and other key financial metrics. Both Hesse and Euteneuer said Sprint could quickly put in place a handset financing system where subsidies would be removed--if the carrier decided to do so. 

Under T-Mobile's Value postpaid plans, customers can pay the full cost of a device upfront in exchange for a lower monthly rate. Alternatively, customers can pay off the cost of their device in monthly installments over the course of 20 months. Within the next few months T-Mobile plans to move exclusively to this handset financing model and discontinue handset subsidies.

T-Mobile's move is a striking strategy for the industry, as all Tier 1 operators for many years have subsidized the cost of devices in exchange for customers agreeing to two-year contracts. Many handset makers have expressed support for T-Mobile's decision, which essentially uncouples the cost of devices from the cost of a rate plan.

Executives at other wireless carriers have been cautious in their comments on T-Mobile's plan. AT&T (NYSE:T) CEO Randall Stephenson said last month he liked the approach T-Mobile USA is taking, and said he would watch the development with interest. Verizon Communications (NYSE:VZ) CEO Lowell McAdam said in January he liked the idea but, in the words of the Wall Street Journal, "questioned whether U.S. customers are ready for that type of shift because they have been conditioned to getting lower-cost phones for so long."

Interestingly, Sprint prepaid brand Virgin Mobile is conducting a small handset financing test in one market with startup BillFloat. The test will end later in the first quarter and the carrier said that any decision about whether or how to expand the program will be made at a later date.

In the interview, Euteneuer also touched on several other hot topics for Sprint. He said Sprint decided reduce its year-end LTE deployment target from 250 million to 200 million people because it remains a quarter behind schedule on its Network Vision deployment. However, he said Sprint accelerated that project coming out of the fourth quarter of last year and into the first quarter, and the carrier is building "a more robust network." He noted that Sprint will start deploying LTE on its 800 MHz iDEN spectrum in late 2013, earlier than it had expected. Euteneuer said he viewed Verizon Wireless as the company's chief competitor in terms of LTE because of Verizon's sizable lead in coverage (Verizon now covers 273.5 million POPs with LTE, or roughly 89 percent of the U.S. population, and expects to finish its initial LTE deployment by mid-year.) 

Euteneuer also talked about an ongoing Sprint promotion in which the carrier will give a $400 credit to families who switch to Sprint from another carrier and sign up for its Simply Everything Family or Everything Data Family plans. He said while the sticker price of the $400 credit may seem high, family plans are "stickier" than individual plans and produce lower churn. He said that one surprising phenomenon Sprint has observed is that when new customers switch to Sprint to buy an Apple (NASDAQ:AAPL) iPhone they often want to have their whole family switch with them. "The offer is not that expensive when you take into consideration the [lower] churn rate," he said.

For more:
- see this Seeking Alpha transcript

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