Sprint's 50% off promotion divides financial and industry analysts

Financial and industry analysts are divided over how large of an impact Sprint's (NYSE: S) new promotion to cut the rate plans of its competitors in half if customers switch will have on Sprint's financials and subscriber performance. Some think it is too little to move the needle while others see it as an opportunity to highlight consumer awareness of its improving network.    

After days of hyping the announcement, Sprint said yesterday it will cut the rate plans in half of customers who switch to Sprint from Verizon (NYSE: VZ), AT&T Mobility (NYSE: T) and T-Mobile US (NYSE:TMUS), and the savings will last through 2018. The new Sprint offer takes effect Nov. 20 and will run through Jan 7, 2016. The savings will last through Jan 8, 2018. Sprint said switching customers would need to port their number over. Customers do not need to trade in their phones under the offer, but they do in order to take advantage of Sprint's offer to pay up to $650 per line via a reward card to cover Early Termination Fees and remaining phone payment balances. Customers who do buy a new phone from Sprint must do so through the Sprint Easy Pay equipment installment plan or lease a new phone through Sprint Lease. 

Sprint is essentially expanding upon on its "Cut Your Bill in Half" offer, which it launched a little more than a year ago and aimed at just Verizon and AT&T customers. 

Evercore ISI analysts Jonathan Schildkraut and Justin Ages said in a research note that "while this may drive some uptick in subscriber attraction, we note: (1) we believe the most cost sensitive subscribers likely took advantage of this offer the first time around, (2) we do not agree with S's contention that transitioning subscribers are likely to opt for higher data plans vs. the discounted offerings, and (3) the offer comes at a time when S should be more focused on improving profitability and [free cash flow] generation (and is somewhat contradictory to other recent initiatives such as increasing unlimited pricing by $10 and attempting to cut $2.5B in annual costs from its budget). It is this last point -- on the impact to profitability -- that appears to have upset investors the most, sending S shares down 9.3% yesterday."

Sprint CEO Marcelo Claure said on a conference call with reporters yesterday that the carrier has "done a lot of financial analysis and basically we've seen that we expect to have a growth in the amount of subscribers we attract, so this will be accretive in terms of the overall financial performance."

"We have done a lot of research," he added. "What customers tell us, we love your offers, but we want to give it a try. And that is why we decided to basically extend this and provide a free trial. There's a lot of skepticism about our network, as you're well aware, and the only way that we're going to convince customers to come is if we give them a try and if we give them a great offer." Customers have 28 days to experience Sprint service. If they are not satisfied, Claure said, customers can return their device with no restocking fee and for full credit, "no questions asked."  

The analysts noted that Claure also said Sprint believes subscribers, when they switch, are likely to opt for the same nominal value plans, but with twice the data on a Sprint plan. "We do not agree," they said. "If S's intention was to see customers double their data, the pitch should have been 'double your data,' not 'take 50% off.'"

Wells Fargo analyst Jennifer Fritzsche said in a research note that she has "mixed feelings as S has been adamant about providing the best value in wireless, but not at the expense of profitability. We had expected some level of promotional pricing entering the holiday quarter but admit this was more extreme than even we were looking for, as well as the market (S stock is trading off -8% vs. S&P 500 +0.73% intraday on the heels of the announcement)."

That said, she added, "we do believe the offer is attractive for customers and solves a customer pain point of shared data limits, as switchers will have the option of adding more data to their monthly allotment for roughly the same price (i.e.: VZ customers on 12 GB /80 monthly plan switches to Sprint and receives 25 GB for $88/month). Whether the take rate of higher data buckets outweighs those seeking monthly cost savings remains to be seen."

Claure also noted on the call that Sprint is "going to replicate the rate plans of our competitors in our discount. For example, T-Mobile believes that customers don't like to share data. They believe that each customer needs to have their data. So if that is the case, if a T-Mobile customer comes, data is not going to be shareable. AT&T and Verizon customers love the concept of sharing data. So therefore, shared data, when you choose an AT&T or Verizon rate plan, is going to be shared."

Mark Lowenstein, analyst and managing director of Mobile Ecosystem and a FierceWireless contributor, said "Sprint is making an important move to try to attract customers during the critical holiday season. The pricing is attractive and worth a look. The question is whether the network is 'ready' enough. They claim 77 markets for LTE Plus, but it will be interesting to see what the coverage depth is like. It's one thing to say 77 markets, but how good is the coverage?"

Sprint will also offer existing customers one year of free service for an Alcatel OneTouch PIXI 7 tablet with a two-year contract, while supplies last. Once the year is up customers will pay $10 per month for the tablet if it is part of a Family Share Pack shared data plan or will be put on a $15/1 GB plan. 

"I don't think a mediocre tablet is a good reward for loyalty," Lowenstein said. "They should have done more for existing customers. If this offer is successful, you'll have new Sprint customers who have switched from another carrier, likely on a swanky new phone at a pretty attractive price plan...while legacy customers could be paying a lot more. Sort of like being on an airplane with people having paid all sorts of different airfares depending on when they booked. I am anticipating a bit of a backlash."

Meanwhile, Macquarie Capital analysts Kevin Smithen and Will Clayton were more positive. "We have been saying for over a year now that we expected Sprint to be aggressive on pricing to attract new customers away from T-Mo and the incumbents once it felt its network performance and quality was ready," they said in a research note. "With the turn-up of several markets with tri-band carrier aggregation and support for that service on the current iPhone, we believe the network performance has improved dramatically in recent months."

They see Sprint's promotion as an opportunity for the carrier "to try and improve the consumer brand awareness of its network, which has driven lower postpaid churn among its installed base, but is still not yet recognized by the media and the average consumer, in our view. We are encouraged that today's offer is unlikely to affect ARPA on the current postpaid base as 12 months of free service for tablets is incremental, and we believe that S will see ~$10 of incremental revenue per account in Year 2 with the additional tablet data usage. Additionally, we feel that adding a tablet to each account could lower overall postpaid churn by another [0.1 percent] per month."

The Macquarie analysts think Sprint is targeting T-Mobile's "huge EIP base coming off of 2013 EIP plans and T-Mo's recent $15 price hike on unlimited. The addition of T-Mo to the cut your bill in half promo was intentional in our view on the back of recent T-Mo price hikes and throttling actions. In our view, Sprint sees T-Mo as vulnerable given the latter's >5GB per month in average LTE usage and potential capacity issues in 2016."

For more:
- see this Fortune article

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