Published: 28 March, 2012
Sprint's CEO Dan Hesse gained a 31% pay rise last year, with total compensation of $11.9m, but only by excluding the costs of iPhone subsidies from the company's financials. Now the Apple deal, and other Hesse decisions in a year when Sprint's stock fell by 45%, are coming under intense scrutiny.
Barclays analyst James Ratcliffe spoke for many when he questioned, in a research note, whether Sprint's much vaunted iPhone deal was necessary at all. A filing by the carrier with the Securities and Exchange Commission shows that, despite a recent improvement in Sprint's lamentable record of winning new customers, the Apple device had little to do with it. Most of the new clients would have joined without the iPhone, and only a small percentage of the defectors left Sprint in order to get an Apple smartphone elsewhere.
According to the filing, Sprint believes that 300,000 of the 1.8m iPhones sold directly drove customer growth or directly prevented a customer from leaving. Ratcliffe believes that the Apple product has mainly served to reduce reliance on lower cost Android handsets, and that most of the new subscribers would have joined anyway, but with a cheaper phone - which would have saved subsidy bills, but might also have driven less data revenue. Only 11% of customers who upgraded to the iPhone would have left Sprint for another carrier, Ratcliffe added. It is very early days for the Apple deal, but the document hardly paints a picture of Sprint escaping from its increasing dependence on lower end users.
Sprint became the third US carrier to offer the iconic Apple handset in October, but while having the product on a US cellco's portfolio is seen as a basic essential these days - as seen in troubles at T-Mobile, which does not have it - Sprint was criticized for agreeing to a very expensive deal which harks back to the early iPhone exclusives in its generosity to Apple. But of course, Sprint has none of the benefits of an exclusive, and is likely to get an LTE iPhone well after its two major rivals because of the later progress of its network and its non-standard 4G band.
Hesse has repeatedly justified the agreement by saying the iPhone would attract new subscribers and reduce churn, both important goals for Sprint, while generating higher ARPU. That has been true at AT&T and Verizon, but the data from the SEC filing suggests the effect is more muted at Sprint. "While these results are early in the game, and fourth quarter handset upgrades will generate a churn benefit down the line, the initial results certainly don't increase our confidence that the iPhone will be accretive to Sprint," Ratcliffe wrote in his client note.
In Q4, Sprint narrowed its loss to $980m, but much of the deficit came from subsidies to Apple, which enable Sprint to sell the handset for $200. That is standard practice, but Sprint was reported in October to have made a huge commitment to buy 30.5m iPhones over the next four years, a deal estimated to be worth $20bn and unlikely to be profitable until 2014. The notoriously high costs of iPhone subsidies come at a time when Sprint has major LTE roll-out investments to make plus a large number of debt repayments in the next few years, and may need to invest further in Clearwire now it has lost its LightSquared partnership.