Sprint ( S ) has withdrawn its bid for rival wireless operator T-Mobile owing to unresolved regulatory concerns. Masayoshi Son, CEO of Sprint's parent company Softbank Corp, was leading the company's campaign for a merger and had been lobbying for months with the authorities and spent millions of dollars trying to get regulators to approve the potential $32 billion deal. However, it seems the FCC did not agree with his argument for consolidation in the wireless space and was more interested in keeping anti-competitive practices at bay.
At present, Verizon ( VZ ) and AT&T ( T ) lead the U.S. wireless market with about a 30% share each, followed by Sprint and T-Mobile which have shares of 14-16% each. Although it lagged behind the major players until last year, T-Mobile made great strides in the last six to nine months in adding subscribers with its "Uncarrier" initiatives and is poised to overtake Sprint as the third largest carrier in the U.S. by the end of this year.
A Sprint-T-Mobile merger would have created an entity as big as Verizon or AT&T (based on number of subscribers) and was being seen as an important move for Sprint to turn around its declining fortunes. Now that the deal is off, Sprint will have to come up with a plan B to compete against strong competitors in a largely saturated market. Shareholders echoed these concerns as the company's stock dropped about 20% on Wednesday, likely reflective of the sentiment that a turnaround was going to be difficult. As a first step towards a new strategy, the carrier announced a new chief executive to lead the company. Marcelo Claure, founder/CEO of wireless distribution company Brightstar, will replace Dan Hesse as the CEO of Sprint, starting Monday, August 11.
Our price estimate for Sprint is about $8.50 , which is now about 40% above the current market price.
Sprint's Difficult Situation
With the wireless market becoming increasingly saturated, carriers have become aggressive with their pricing strategies in order to gain market share. T-Mobile started the trend with its "Uncarrier" initiatives, stealing market share from rivals in the process. AT&T's aggressive response to T-Mobile, when it pushed its "Next" installment plans and discounted the service prices of its Mobile Share plans, further intensified the competition. Although reluctant to get into a price war initially, Verizon raised it up a notch with its recent "More Everything" and "Edge" plan offerings. The promotional activities and discount offerings seem to have worked well for AT&T and Verizon, with the carriers reporting postpaid subscriber gains of 1.07 and 1.45 million, respectively, in the three month period ending June 30 this year.
On account of service disruptions because of its ongoing network overhaul ("Network Vision") as well as rising competition, Sprint reported a net loss of 181,000 postpaid and 542,000 prepaid subscribers in its fiscal first quarter this year. The adverse impact of growing competition can also be gauged from the fact that T-Mobile is not only inching closer to Sprint in terms of postpaid market share, it has already overtaken Sprint in the prepaid market and become the biggest prepaid carrier in the U.S. with 15.6 million subscribers, ahead of Sprint by 550,000 users.
The carrier's LTE coverage and network quality have been a concern over the last couple of years and was one of the primary reasons for its high churn rate and low ARPU (average revenue per user) in the last few quarters. In order to get back in the game, Sprint will have to get aggressive with its promotional offers and ensure that its upgraded LTE network provides disruption-free service to users. This means that it will have to cut tariffs and introduce innovative plans, in addition to increasing spending on advertising and marketing to lure subscribers. Considering that the U.S. wireless market is largely saturated, Sprint will only be able to gain subscribers if it can encourage people to switch to its network from their existing service provider. Thus, it will need to be more innovative and cost-effective than its peers to be able to get back to positive net user additions.
The carrier reported in its recent earnings call that its LTE coverage had reached 254 million PoPs (points of presence) by the end of June, meeting its target of 250 million PoPs. With the carrier's "Spark" plans expected to pick up speed after the LTE rollout, we expect Sprint to become a lot more competitive in the latter half of 2014 and beyond. The Spark strategy will help it make use of Clearwire's 2.5 GHz spectrum to add data capacity and potentially push 4G speeds to more than five times what is currently prevalent in the industry. If the carrier is able to offer such speeds on its network without disruption at competitive prices, we believe this plan B could turn things around.
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