Sprint's (NYSE: S) recently announced promotion for its Boost Mobile prepaid brand to cut the bill in half of customers who switch from T-Mobile US' (NYSE:TMUS) MetroPCS and AT&T Mobility's (NYSE: T) Cricket prepaid brands represents a "race to the bottom" in wireless pricing, according to MoffettNathanson analyst Craig Moffett.
From now through July 20, customers bringing their phone number over from Cricket or MetroPCS can save between $20 to $30 per month for a full year, Sprint said. Under the "Slash Your Payment in Half" promotion, Sprint noted that a MetroPCS customer paying $40 per month for a plan with 2 GB of data can switch to Boost and get 2.5 GB of data for $20 per month, while a Cricket customer paying $50 per month for a plan with 5 GB of data can get a Boost plan with 5 GB of data for $25 per month.
In a blog post, Moffett noted that Sprint has been offering a similar program for Verizon Wireless (NYSE: VZ) and AT&T customers, but that when taking into account monthly device payments, the discount often amounts to 20 percent off, and that many customers who switch just choose cheaper Sprint plans.
"With Sprint's pre-paid announcement on Friday, however, the same logic breaks down. There are no device subsidies to speak of. All prepaid devices are purchased upfront," Moffett wrote. "As a result, the discounts here are much, much larger. Even if the 'true' discount is not quite 50% after including 'amortized' device installment payments over a theoretical two-year customer tenure, and even if there are lots and lots of caveats that we will discuss in a moment, this is still a dramatic price cut. A $40 pre-paid wireless plan with a competitor (say, T-Mobile's MetroPCS), with an implied $20 device payment for a $480 device distributed over 24 months, would end up paying just $40 a month total at Sprint ($20 wireless plan plus $20 device payment), resulting in a net 33% effective discount."
Moffett wrote that "the starting point [Sprint is] cutting in half is already much lower. Post-paid ARPUs still hover in the mid $50s. Prepaid ARPUs are in the $40s. Sprint has just introduced a radically lower price point."
As Moffett noted, there are several caveats. The promotion will last for a month, and after the introductory rate ends, customers who signed up for the Slash Your Payment in Half promotion will automatically be moved to a Boost Mobile plan that offers them a comparable amount of monthly data, meaning the prices will likely increase. Further, the promotion is only available at participating Boost dealers, and not online or at national retailers.
Moffett also noted that the offer is only available to the 15 million or so MetroPCS and Cricket subscribers, "which is a relatively small pool of potential subscribers," that there are only a limited number of devices available to switch to, and that porting is mandatory.
"Still, one can't simply dismiss the availability in the market of a price point of just $20 per month (for a significant amount of data) even if there are a laundry list of limitations," he wrote. "Price points this low tend to attract a lot of attention."
"And there's a bigger theme here," Moffett added. "One can argue that the calculation for the monthly amortized device cost under prepaid isn't directly analogous, given the much higher levels of churn in pre-paid. This appears to be the crux of Sprint's pricing strategy: focus on equipment revenues, and give data away."
Moffett notes that over time, even as mobile data traffic has increased, on average revenue per user has fallen. He also wondered whether Sprint could afford such promotions.
"On paper, at least, their EBITDA is also improving. But their free cash flows certainly are not," he wrote. "And as it happens, even the improvement in EBITDA is a mirage, a function of accounting changes rather than any underlying improvement in the business itself. The accounting distortions arising from leasing handsets (rather than selling or subsidizing them) have effectively moved handset costs out of EBITDA, artificially 'inflating' today's EBITDA levels relative to that of subsidy accounting in 2013 and earlier. We model over a $4B accounting benefit to EBITDA from the sum of leasing and EIP adjustments for calendar 2015, a total even higher than the $2.5B realized in 2014. Adjusted for these distortions (adding the handset costs back onto COGS, net of device subsidies into a higher service revenue) for an apples-to-apples view, Sprint's wireless EBITDA would have fallen by a spectacular 40.4% in the first quarter."
Moffett issued a dire warning on Sprint, and thinks the company will run out of money by the beginning of early 2016, and to look to parent SoftBank or the public equity markets for an equity infusion.
Moffett thinks Sprint's latest promotion could push other carriers to be aggressive. "Sprint's own woes notwithstanding, it is clear that Friday's promotion could lead to another prisoner's dilemma for wireless operators, this time in prepaid," he wrote. "T-Mobile already re-jiggered its branded prepaid strategy earlier this year, on the heels of Sprint's pre-paid strength from calendar Q4. T-Mobile's compulsion to respond, for an operator that is excelling in high-value, post-paid phone gross add share capture, could suggest perhaps an even more aggressive response from the likes of AT&T and Verizon."
- see this MoffettNathanson blog post (sub. req.)
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