Why Sprint Needs to Drop Unlimited Data to Survive
Unlimited Plans and the iPhone Strategy
Sprint (NYSE:S) plans to continue its unlimited plan with the release of the next iPhone, but its long-term success lies in its ability to cash in on data services to expand its network.
Strong iPhone Sales and Revenue Growth
The Overland Park, Kan.-based carrier posted a smaller-than-expected January-March loss, boosted by selling over 1.5 million iPhones and rising revenue from those smartphone data services. In fact, much of the success comes from a $100-a-month unlimited plan that rivals Verizon and AT&T aren’t offering.
Challenges of a Flawed Data Strategy
But ultimately, Sprint is playing a flawed strategy by giving away data. The wireless market is saturating, and carriers are seeing the bulk of their earnings transition to data services from calling and texting plans.
4G Network Investment and Competitive Disadvantage
CEO Dan Hesse plans to spend heavily to build out a faster 4G network, similar to what AT&T and Verizon are doing. But unlike those rivals, Sprint will reap lower earnings per customer due to the flat-rate of unlimited data. In contrast, AT&T and Verizon moved to tiered plans over a year ago, and stand to see the most gains from higher data use.
Strained Networks and Financial Commitments
In the push to keep up with AT&T and Verizon, Sprint effectively capped its growth. The company is seeing rising costs associated with increasingly strained networks, and over the next two years, it must spend $10 billion to beef up its 4G network to keep pace.
Funding the 4G Expansion
To finance the expansion, Sprint sold $2 billion in bonds in February, on top of an extra $4 billion raised in November.
The Data Dilemma
The problem is simple. As subscribers increasingly use smartphones to go online — to watch videos, listen to music and connect with friends — data use, and revenue, will continue to rise. But so will expenses. And giving away the product that will make you money, data, may lure customers in the short run, but doesn’t make a lot of sense for the future.
Hardware Sales and Market Parity
Sprint is being squeezed, and will continue unless it finds a way out of its dilemma. In addition, the company has little to gain on hardware sales, after signing a four-year $15.5 billion deal to sell the iPhone. Exclusive devices aren’t the lure they once were, and AT&T, Verizon and Sprint now sell the same Apple products, as well as similar variants of Google’s Android products.
LTE Competition and Future Risks
Right now, the dangers aren’t imminent. But much like AT&T, Sprint will be at a disadvantage when Apple releases an LTE version of the iPhone. The current iPhone tops out on 3G speeds, so Sprint’s device runs at essentially the same speeds as AT&T and Verizon’s variants. But Verizon stands to gain the most once a faster iPhone comes out — since it offers the widest LTE network in the country.
The Need for a Sustainable Model
The competition will come down to the best-quality network — meaning faster data rates at the most reasonable price. But that comes at a cost of upgrading.
Conclusion: Change is Necessary
Sprint needs to finance its upgrade from data plans. The business model of unlimited data won’t be sustainable until expenses plummet. Sprint offered a great deal to lure customers, but it is now suffering the costs. For consumers, that means Sprint may be forced to switch to tiered plans or charge by the megabyte. So unless Sprint begins to charge for data use, it will run out of resources to keep up with the 4G arms race that AT&T and Verizon are pushing.