Wednesday, December 3, 2014

Sprint Gambles on Price Attack

T-Mobile US has proven one thing: an aggressive price attack can grow market share, add subscribers, gross revenue and cash flow. What has not yet happened is a longer term shift to actual operating profits.

Sprint seems to be gearing up for a similar strategy test, attempting to wrest price leadership away from T-Mobile US as it gambles on a pricing attack. Whether the strategy "works" in the short term is the issue, to say nothing of the longer-term merits.

Sprint reported a quarterly loss in the third quarter of 2014 of $765 million, compared to net income of $23 million in the second quarter of 2014 and net income of $383 million in the third quarter of 2013.

Now the issue what happens as Sprint has launched an aggressive price attack, offering new customers a permanent discount of half the monthly rates they now pay to Verizon Wireless or AT&T Mobility customers who switch to Sprint beginning Dec. 5, 2014.

The “Cut Your Bill in Half” offer provides unlimited talk and text to anywhere in the United States while customers are on the Sprint network, and the same mobile data allowance new customers now have at AT&T or Verizon, while permanently charging 50 percent of what new customers now are paying to AT&T or Verizon for mobile data service.

At this point, it seems impossible to figure out whether Sprint’s operating cash flow get worse, stabilizes or even improves, in the near term as a result of the new promotion, and other actions Sprint is taking, or might take.

Sprint obviously is banking on something similar to T-Mobile US experience after it launched its price attack. After bleeding customers for years, T-Mobile US began growing fast after it began its “Uncarrier” price war.

In its own third quarter 2014 earnings report, T-Mobile US reported a net gain of 1.2 million branded postpaid phone accounts, and mobile broadband net additions of 200,000. T-Mobile US also added wholesale and prepaid customers, for a total 2.3 million net adds for the quarter.

So gross revenue grew.  Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA, or cash flow), declined to $1.35 billion, down 7.2 percent sequentially and flat, year over year. And there lies the potential problem for both T-Mobile US  and Sprint: revenue, cash flow and subscriber gains at the expense of profit.

If Sprint can, over the next quarter, start to replicate that performance, it is conceivable revenue and cash flow grows, although profit margins could worsen, and Sprint could lose money.

Some might call that a race to the bottom. We will find out soon enough whether Sprint can emulate T-Mobile US and start adding customers, instead of losing them. The longer term issue--whether either firm can eventually shift to profitability--remains the bigger issue.

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