Sprint Losing Wholesale Luster

But the Nextel merger should fix some of the issues emerging in second-quarter numbers.
Author:
Publish date:

Sprint's

(FON)

wireless niche took a few knocks in the latest quarter.

The Overland Park, Kan., telco posted a solid financial report Wednesday. But below the surface, some of the shine on Sprint's all-important wireless segment has started to dull.

Though Sprint's wireless sales grew nearly 12% from a year ago, and average revenue per user, or ARPU, was $62, about on par with the prior quarter, subscriber growth slowed.

During the quarter ended in June, Sprint added 400,000 net new subscribers through direct sales, which was well below the 450,000 or so analysts were seeking. Even worse, total subscribers added by Sprint resellers were a paltry 87,000, down from the 671,000 level in the first quarter.

As the distant No. 3 player behind

Verizon Wireless

and

Cingular

in a highly competitive wireless game, Sprint has a slight disadvantage. With the wireless market reaching saturation, new growth segments like the youth market become more difficult to tap.

Telcos have had a troubled history trying to win the kid market. It's an unpredictable group, say analysts. Students move around, while teens typically haven't established good credit track records and many don't have regular paychecks. Loading up on young subscribers usually leaves the carrier holding a lot of deadbeat accounts.

A safer way to address this market has been through family plans, say analysts. No. 1 Cingular -- co-owned by

SBC Communications

(SBC)

and

BellSouth

(BLS)

-- and runner-up Verizon Wireless, a joint venture of

Verizon

(VZ) - Get Report

and

Vodafone

(VOD) - Get Report

, have managed to keep the growth engine humming largely by letting multiple users share monthly minutes. These contracts are a good way to get kids on mom and dad's calling plan, bumping up usage and monthly fees.

With Sprint just half as big as its rivals, the family plan strategy is a little harder to pursue. Instead, Sprint has offered to sell network access at wholesale to resellers like

Qwest Communications

(Q)

and

Virgin Mobile

.

This approach allows Sprint to gain from markets it would not otherwise be in. For example, Virgin Mobile has had huge success in selling phone service to students. But the downside of that business emerged in the second quarter for Sprint. Come graduation, students move back home or on to new markets and end up dropping the no-contract Virgin service.

Analysts say those dropouts and the beginning of the summer break were a big reason for Sprint's meager wholesale subscriber growth numbers in the second quarter. Of course, the pending merger between Sprint and

Nextel Communications

(NXTL)

promises to broaden the combined company's offerings and make seasonally weak quarters from Virgin less influential.

Sprint shares rose $1.12, or 4%, to $26.09 in afternoon trading Wednesday.