Sprint's turnaround plan complicated by iPhone, economy

Subscribers, especially those highly profitable prepaid customers, continue to defect at an alarming rate from Sprint Nextel. Last week, the company reported a loss of 1.3 million net subscribers in the third quarter and a net loss of $326 million as CEO Dan Hesse embarks on his turnaround plan for the company.

His monumental task is exacerbated by at least two major factors in my mind: Apple's iPhone 3G and the sagging economy.

While it's not clear how many subscribers Sprint lost to AT&T Mobility because of the iPhone 3G, we do know that AT&T Mobility sold 2.4 million iPhone 3G devices and 40 percent of those activations were for customers that were new to AT&T. Verizon said it was impacted a bit by the iPhone, but it now appears that Sprint and T-Mobile were the most likely victims. T-Mobile's churn grew to 2.4 percent in the third quarter from 1.9 percent in the second quarter 2008, coinciding with the launch of the iPhone 3G.

Sprint has to be disappointed with the impact the Samsung Instinct had on its business, which appears to be no impact at all. Sprint worked very closely with Samsung to develop this touch-screen smartphone and spent a bundle on marketing it. Interestingly, we heard testimony from Sprint and Best Buy that demand was extremely high for the device and was breaking sales records in June when it was introduced. Apparently, that was a short-term phenomenon that didn't carry through the third quarter and probably stopped when AT&T launched the iPhone 3G in July.

T-Mobile has now launched the G1 "Google" phone that also has gained a high profile and could poach more customers away from Sprint going forward.

The economy is shaking consumer confidence, and the expectation is that people will spend minimally going forward. Sprint has acknowledged that some customers aren't paying their wireless bills because of the economy. And the expectation is that operators will become more aggressive with their offers to woo customers in a tighter market.

While Americans aren't expected to shut off their devices altogether, there is also the expectation that spending on the extras, such as data services, will drop off on most devices. Of course, that's bad news for all operators as that is the focus of new growth and revenue. And it is especially troublesome for Sprint since part of Hesse's battle plan is spurring customers to use more data services via a lineup of new data-enabled smartphones and applications such as the One Click user interface.

With these factors in play, is Hesse is doing the right thing by focusing on stabilizing the company's subscriber base before expanding gross additions? The operator must certainly work to keep the subscribers it has, but I wonder how much it should sit on the sidelines in an industry where the game has always been a balance between keeping customers and getting new ones. In light of the economy, the holiday season and new "iconic" devices such as the iPhone and G1, competitors are going to work even harder to woo Sprint customers away. Sprint could very well reach a point of no return in 2009 if the business isn't stabilized soon. --Lynnette