Global Insight Perspective | |
Significance | While Sprint focuses on acquiring affiliates and rolling out advanced services, the core profit-generating base of post-pay subscribers is showing dissatisfaction with basic services. |
Implications | Although four affiliates remain, Sprint may decide that it is time to re-focus on improving margins by reducing churn. The hook-up with cable companies in the SpectrumCo alliance will, however, mean that most gains over the next year are likely to come from the assumed MVNO relationships that will emerge. |
Outlook | As Sprint integrates with Nextel, which has had some negative affect on company image, it may do well to focus on basic services and customer service. Multi-play services arising from the SepctrumCo alliance may, however, help to mitigate churn and improve profitability. |
Sprint has reported results for the third quarter of 2006, worsening year-on-year losses (see United States: 4 August 2006: Sprint Nextel Q2 Net Income Down 38%). This is in line with expectations of poor performance from the company as it struggles to integrate the iDEN network and operations acquired from Nextel while losing the revenue generation of the wireline arm spun off as Embarq. Turmoil was evident in the rate of churn, which rose from 2.1% to 2.4% for post-pay customers, comparing poorly with Cingular's historic low of 1.5% (see United States: 20 October 2006: Cingular Q3 Profits Up 280% Y/Y, Voice Stabilising).
Outlook and Implications
- Subscribers: Churn was a key factor in the reported loss of 188,000 subscribers in the high-value post-pay subscriber base. The subscriber figures were re-balanced by a gain of 216,000 "Boost" pre-pay subscribers, plus 177,000 wholesale and 28,000 affiliate subscriptions to give a total of 233,000 net additions. In line with Sprint's policy of acquiring affiliates, Sprint also gained 458,000 direct customers through the acquisition of UbiquiTel (see United States: 21 April 2006: Sprint Nextel Agrees to Acquire Wireless Affiliate UbiquiTel for US$1.3 bil.). Sprint appears to be using acquisition, a multitude of MVNO deals, and overall reducing average revenue per user (ARPU) to keep up headline subscriber figures (now standing at 51.4 million).
- ARPU: Post-pay subscribers generated ARPU of US$61, down by 5.5% year-on-year (y/y). This is exacerbated by the Nextel effect, which when stripped out indicated ARPU at 4% lower y/y. In line with Sprint's focus on developing and marketing next-generation data services, data contributed a greater proportion of ARPU, rising US$0.50 or 6.8% quarter-on-quarter to US$7.75. Again, the differences between the core Sprint subscribers and those of the low-margin MVNOs, affiliates, and pre-pay brands whom Sprint has been more successful in gathering is visible with CDMA post-pay ARPU at over US$10.
- Revenues Not Profit: Because of the continuing run of acquisitions (see United States: 31 August 2005: Sprint Nextel Acquires Two Wireless Affiliates in US; 22 November 2005: Sprint Nextel to Acquire Affiliate Almosa Holdings; 19 December 2005: Sprint Nextel Acquires Another Affiliate; and 21 December 2005: Sprint Nextel Acquires Nextel Partners), Sprint has been able to keep raising revenues while the core basis of profit generation is eroded. Pre-pay subscribers generate lower ARPU than post-pay and suffer from high churn. Sprint's pre-pay brand Boost reported ARPU of US$32.50 and churn of 6.8% (up from 6.0%). With customer acquisition costs one of the most significant factors in reducing profit from a service, this significantly erodes the margins available from pre-pay. Selling and general administration charges rose by 6% y/y. The SpectrumCo alliance with major cable operators (see United States: 6 October 2006: SpectrumCo Consortium Releases Details on Component Companies' Shares in AWS Auction) may provide some relief by reducing churn and lowering acquisition costs through multi-play offerings.
- Capital Expenditure: The current focus of Sprint on developing next-generation services in the future is notable with the 44% increase y/y in capital expenditure, to US$5.2 billion from US$3.6 billion for the year to date (see United States: 25 October 2006: Sprint Launches EV-DO Rev. A in First Market and United States: 17 October 2006: Sprint to Launch Push-to-Talk over CDMA). With moves such as this, Sprint is developing a high-spec network and will be well-placed as subscribers look to get more from their phones. However, while data use is growing and represents a larger share of ARPU, the requirement for high-speed data is still a niche market.
- Long distance: Away from the core wireless sector which Sprint now focuses on, long-distance services retained by Sprint also saw falls with revenues declining by 6% on the back of voice revenues, down 9%, while IP transport revenues grew by 26% on the back of demand for MPLS services.