Analysts: Sprint unlikely to change unlimited plans until network improves

Sprint (NYSE: S) CEO Marcelo Claure said last week the carrier might raise the pricing of its unlimited smartphone data plans later this year and could eventually get rid of the option altogether. Financial and industry analysts say Sprint is unlikely to remove the unlimited option until it significantly improves its network quality, though analysts are split on how such a move would impact Sprint's subscriber base.    

"There will be a time when it might not be economically viable to offer unlimited," Claure said last week in an interview with Kansas City, Mo.-based TV station KSHB. "But for now, we're OK. For the next few months unlimited continues. We might increase the prices toward the latter part of the year and then we might eliminate it in the future."

Notably, Claure did not say Sprint definitely would raise unlimited pricing this year and also did not give a timeline for when Sprint might stop offering unlimited data plans. Unlimited plans have been a key feature at Sprint for years, yet the idea of Sprint dropping unlimited has been in the air for years--as far back as 2010 under former CEO Dan Hesse. Yet while Sprint executives over the years have said they are constantly monitoring the impact of Sprint's unlimited plans on its network and bottom line, the carrier has never moved away from it.

T-Mobile US (NYSE:TMUS) still offers an unlimited smartphone data plan for $80 per month, $20 more expensive than Sprint's plans for non-iPhone 6 and 6 Plus devices. (Sprint's unlimited plan for iPhone 6 and 6 Plus customers costs $50 per month). In March 2014 T-Mobile increased the price of its unlimited plan by $10 per month, which T-Mobile CFO Braxton Carter said at the time the carrier needed to do to monetize increasing data traffic and get back a return on improving its network.

Analysts say that Sprint's unlimited plans remain one of its most compelling selling points. "The reason that unlimited is important at Sprint, and really it comes down to value, is because its network is not as strong as its peers," Credit Suisse analyst Joseph Mastrogiovanni said, adding that it might make more sense to change unlimited pricing next year when the network is expected to be in better shape.

Mastrogiovanni said that if Sprint were to improve its network quality to get it at parity with its rivals it would have more flexibility to increase the pricing of its unlimited plans or eventually eliminate the unlimited option. He also said Sprint could take other steps to rejigger its pricing so it still was the value-leader in the market. That would mitigate any negative effects that might occur if Sprint eliminated unlimited plans. Moreover, Sprint would likely grandfather in customers who already have unlimited plans.

"If you're still the best value in the market you're probably not going to have that much of an impact," he said. Customers might ask, "Where can I get the best value? If the answer is still Sprint, they're still likely to stay."
However, if a rival like T-Mobile offered a superior network experience for marginally more per month, the impact might be larger, he said. 

New Street Research analyst Jonathan Chaplin said that Sprint's "most compelling selling proposition is unlimited. They still have the worst network in the country and they are not much cheaper than TMUS."

Chaplin said Sprint has not "given consumers a good reason to join Sprint and that is reflected in" its subscriber trends and share of gross additions in the industry.  

During the first quarter Sprint added 1.2 million total customers, including 211,000 postpaid customers (though Sprint lost 201,000 postpaid phone customers). The carrier's postpaid churn fell sharply to 1.84 percent, down from 2.11 percent in the year-ago period and 2.3 percent in the fourth quarter. Claure said in May that Sprint aims to get back to positive postpaid phone additions in the next two quarters.

"Sprint would have to be offering a very different service to get away with dropping unlimited and not lose a ton of customers in the process," Chaplin said. "They would have to have a significantly better network than they do today or price usage based data at a much lower rate than they do today...or both." 

"Marcelo is claiming they will have a top two network; if he can deliver on that promise then, in time, he can get away with eliminating unlimited, but he is a long way from being able to get away with it today," Chaplin added.

BTIG analyst Walter Piecyk said he did not think Sprint would change unlimited pricing while it is trying to get back to postpaid subscriber growth. "Unlimited may not be resonating with customers because of the inferior speeds of the network," he said. However, he did not think Sprint would be altering unlimited any time soon, and that Sprint's 2.5 GHz spectrum could provide it with enough cushion to sustain the offering.

"Given their depth of spectrum, I suspect they can offer unlimited for a while," Piecyk said. "The question is whether they even need to discount the product if they build out the spectrum in a way that delivers differentiated speeds in the market."

556 Ventures analyst (and FierceWireless contributor) William Ho said that even if Sprint were to drop unlimited plans, Sprint is "not going to alienate their existing base by pulling it from them" and that it would grandfather existing customers in, just as AT&T Mobility (NYSE: T) and Verizon Wireless (NYSE: VZ) did.  

If Sprint does do away with unlimited plans, then the carrier would be trying to prevent new subscribers from getting such plans, Ho said. "Perhaps that will be when they go three-carrier aggregation and provide consistent equal or better speeds than fixed line broadband providers," he said.

Ho noted that "Sprint's warning that unlimited data is unsustainable has been echoed by all competitors and even back in the Hesse days. Perhaps the sustained unlimited data thinking was a function of the depth of their 2.5 spectrum. That is, the more they had, they can throw more spectrum resources at capacity. However, at the end of the day, it's business case  modeling--at what point in the combination of usage, capex and opex expended overwhelm the revenue coming in the door (along with an expected margin)."

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