Sprint PCS Is Running in the Wrong Direction

 

Competition in the wireless carrier business is just brutal. With very little to differentiate carriers from one another, price has become the biggest competitive point. Indeed, other than Nextel's(NXTL) direct-connect capabilities and AT&T Wireless'(AWE) terribly antiquated and problem-riddled TDMA network, most of the wireless carriers in the U.S. are faceless but for their brands.

Sprint PCS(PCS) is no exception, though the company has come up with some creative ways to try to differentiate itself, including its account spending limit (ASL) plan for customers with poor credit. The company is making a move toward the business customer, recognizing what Nextel's higher average revenue per subscriber (ARPU) numbers have driven home -- that business customers make for a better business model than the average Joe.

If PCS were more serious about this business drive, the company would be a more compelling buy. As it is, PCS has dichotomized its focus by going after not just the average Joe, but even the below-average Joe. And therein lies the problem.

PCS's ASL plan enables people with questionable credit histories, who otherwise would fail to qualify for PCS subscribership, to become customers. ASL growth is really the driver behind PCS's record-breaking third quarter. Although the company didn't release an exact breakdown, backing into the numbers from last quarter, when PCS added some 1.2 million plus subscribers, 55% to 75% of all new subscribers were the ASL type. In other words, customers that the other carriers won't sign up made up the majority of new PCS subscribers last quarter.

ASL customers increased PCS's churn rate, which was up almost 20% quarter-over-quarter, from 2.2% of base to 2.6% of base. That number will likely be higher than 3% in the next couple quarters as the ASL base matures. ASL subscribers also have a net present value of less than half a typical subscriber by almost any calculation, so that 1.2 million-plus new subscriber base ain't really worth all it would otherwise be.

In addition, serious questions still linger for the much-ballyhooed (at least by Wall Street and wireless industry insiders) third-generation (3G) network and its impact on the future of PCS. There's very little indication that subscribers are willing to pay for the added capabilities of 3G, because a killer app is needed for 3G to really succeed. Frankly, I'm not holding my breath in anticipation, nor should investors.

Until we see the business-focused side of the PCS model start to show promises of real inroads, I'd be very careful about putting too much faith in PCS's phenomenal growth.

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Cody Willard is president of TelEconomics Consulting, a financial and technology consulting firm. He is also founder of Teleconomist.com, a Web site devoted to news and analysis of telecommunications stocks. Previously, he was senior analyst for a venture development company, and before that was a partner at the Lanyi Research division of CIBC World Markets. At time of publication, Willard owned no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Willard appreciates your feedback and invites you to send it to clwillard@teleconomist.com.

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