Friday, August 8, 2014

How Much Revenue Can Sprint Afford to Lose in New Pricing War?

How much revenue can Sprint afford to lose if and when it launches a new price war in the U.S. mobile business? That is going to be a huge question.

Perhaps the harder question is how much free cash flow Sprint can afford to lose, as it already has negative free cash flow of perhaps $340 million a year. A new pricing attack might improve cash flow, but could also damage cash flow further. It just is not possible to say, yet, what will happen.

In the near term, Sprint has to hope it will add enough new accounts to compensate for the lower revenue per account it will see once a price war is launched.

T-Mobile US already has done so, and, so far, T-Mobile US is adding enough new accounts to compensate for lower average revenues per user.

And, no question, the strategy can work, so long as each attacker keeps adding new accounts in sufficient quantities to compensate for declining average revenue per account.

But it will not be easy, long term. As AT&T, and even Verizon, which likes to stay above the pricing fray, start to respond, it will become harder for T-Mobile US and Sprint to take share. It will be equally hard to keep a pricing advantage.

And that is the strategic danger. Larger contestants with stronger balance sheets can weather a price war better than smaller firms without such resources.

There are other issues as well. When service providers add more customers, and make offers more attractive, those new customers will use the network. That, in turn, means network resources can be tested, requiring more capital investment.

That is a balancing act both Sprint and T-Mobile US will have to contend with, at some point.

Though both networks arguably are, at present, able to support significant growth, neither could handle wildly-successful rates of growth. The simple reason is that network loads would climb.

And that eventually would require investment to enhance coverage and capacity, requiring access to capital that might prove troublesome.

source: Jacksaw Research
Up to this point, T-Mobile US has managed to finesse a price attack by adding robust numbers of new customers. Sprint will face the same challenge.

Almost paradoxically, the more successful the attackers are, the more likely they are to provoke a significant response from the dominant providers that in turn makes the attack more difficult.

And that would eventually create enormous financial strain, but most of all on the attackers.

To be sure, Sprint has no choice but to attack. It is in danger of falling to fourth place among U.S. providers, as measured by subscribers,  and its historic strength in prepaid appears already lost to T-Mobile US.

Sprint will have to show a degree of nimbleness it has not exhibited in the past, to pull off a successful attack.

LIke T-Mobile US, Sprint now seems to have a leader with competitive service provider instincts. Whether Sprint’s culture can respond nimbly is the issue.

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