When talking about the ongoing price wars in the U.S. wireless market, reporters and analysts have often been quick to place Sprint Corp (S) - Get Report and T-Mobile US Inc (TMUS) - Get Report in the same basket. And at first glance, they do have much in common: They're both smaller than rivals Verizon Communications (VZ) - Get Report and AT&T Inc (T) - Get Report , with subscriber bases that skew more towards low-end users and a penchant for undercutting their bigger peers on price.
But at this point, saying that Sprint and T-Mobile are alike is a bit like saying that a 1979 Ford Pinto is similar to a brand-new Chevy Cruze since they're both cheaper than a new Mercedes or Lexus sedan. T-Mobile is profitably taking share while spending enough on its network and spectrum to avoid compromising its future. And Sprint is losing money, underinvesting in its network and spectrum and desperately cutting prices to merely maintain share.
Sprint's latest promotion, targeted at Verizon users but available to those signed up with other carriers as well, provides consumers bringing over their own phones a full year of unlimited voice, text and data services, as well as 10GB of monthly 4G hotspot data and HD video streaming, for free. If you did a double-take upon seeing that, you're probably not alone.
As it is, Sprint's standard unlimited pricing is quite aggressive: The company promises to charge just $50 per month for one line until June 30, 2018, and a mere $90 per month for up to five lines. Even T-Mobile isn't in the same ballpark: It charges $70 per month for one line and $140 per month for four, albeit while baking in all taxes and fees.
The tradeoff for enlisting with Sprint, of course, is that one has to use Sprint's network, which frequently ranks last among the Big Four carriers in tests measuring things such as availability, reliability and download speeds. And with Sprint having spent just $1.95 billion on cash capital expenditures in fiscal 2016 (ended in March 2017), things are unlikely to get better in the short-term. The company has promised to spend $3.5 billion to $4 billion on cash capex in fiscal 2017, but that still trails T-Mobile's 2016 cash capex of $4.5 billion and 2017 budget of $4.8 billion to $5.1 billion.
Moreover, whereas T-Mobile spent $8 billion in April in an FCC low-band spectrum auction to improve its rural and in-building network coverage, Sprint chose to sit the auction out. Both T-Mobile and Sprint's networks have suffered from a dearth of low-band spectrum relative to Verizon and AT&T's, but only one is spending what it takes to do something about it.
The fact that Sprint had a $32.6 billion net debt load as of March likely had something to do with its decision. As might the fact that it produced just $521 million in free cash flow (FCF) in fiscal 2016 in spite of massive capex cuts. T-Mobile, for comparison, had $22.7 billion in net debt as of March, produced $1.4 billion in FCF last year in spite of spending far more on capex and has guided for FCF to grow at a 45% to 48% compound annual rate over the next three years.
To date, Sprint's discount pricing has only achieved so much. The company reported 187,000 wireless subscriber net adds for the March quarter, down from 447,000 a year earlier and missing a consensus analyst estimate of 501,000. Moreover, 118,000 postpaid subs were lost -- this was offset by prepaid and wholesale/affiliate gains -- and Sprint platform postpaid average revenue per user (ARPU) fell 8% annually to $47.34. The ARPU decline drove a 7% drop in Sprint platform wireless service revenue to $5.7 billion.
Needless to say, T-Mobile did a little better. John Legere's company reported 1.14 million net adds, including 798,000 branded postpaid phone net adds, and saw a 2.9% increase in branded postpaid phone ARPU to $47.53. Service revenue grew 11% to $7.3 billion, and full-year branded postpaid net add guidance was hiked to a range of 2.8 million to 3.5 million from one of 2.4 million to 3.4 million.
Verizon, for comparison, reported it lost 307,000 retail postpaid wireless subs in Q1, including 289,000 phone subs. AT&T reported 191,000 postpaid net losses, but this was offset by 2.57 million connected device adds.
The fact that Sprint's new promo arrives just a couple weeks before its June quarter ends has fueled speculation that this quarter's numbers have been soft to date. T-Mobile continues applying pressure and Verizon and AT&T, each of which re-introduced unlimited data plans a few months ago, have been pricing more aggressively. On average, analysts polled by FactSet expect 348,000 net adds for the June quarter. That's better than the March quarter's 187,000, but down from the year-ago quarter's 377,000 and well below the 1.01 million net adds T-Mobile is expected to post.
Another possibility is that with T-Mobile and Sprint apparently holding merger talks again on the hope that regulators will look more favorably on a deal this time around, Sprint may feel that it has more leverage if it's showing meaningful subscriber growth (even if it's at the expense of ARPU) and applying significant price pressure that could potentially dissipate following a merger.
But such a tactic assumes that Sprint can maintain its current pricing while keeping cash flow positive and spending enough on its network that many subscribers at rival carriers will decide that the compromises that come with leaving for Sprint aren't too high.
That's hardly a given, and T-Mobile, which at this point seems to have a lot negotiating power in any M&A talks with Sprint, could respond to such a tactic by calling Sprint's bluff. Until its financials start showing otherwise, Sprint's promotional activity seems more desperate than logical.
Sprint shares fell 1% to $8.06 at Thursday's close.
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