Sprint’s Plan to Give Students Free Service Isn’t as Great as It Sounds

Sprint (NYSE: S  ) and Best Buy (NYSE: BBY  ) announced earlier this week that they have teamed up to give students a free year of wireless service. Sprint desperately needs to reverse its steady stream of subscriber losses; getting students to sign up for a free year could mean that they stay on as subscribers. For its part, Best Buy could sell a few more handsets -- perhaps more of Apple's (NASDAQ: AAPL  ) iPhone -- than it otherwise would have.

But I don't expect the deal to be particularly significant for any of the three companies. Although it may appear attractive, that year of free service really isn't as great as it seems.

The fine print
Students who want to take advantage of the deal will face a major stumbling block: They have to pay for the cost of their handsets upfront. That means that, if they want to use Apple's new iPhone 5s on Sprint's network, they'll be paying Best Buy about $700 for the privilege. Those students most enticed by the promise of free service would likely be the ones least likely to afford such a significant upfront payment.

Then, when their free year ends, there's the obvious question of what to do with that Sprint handset. They could pay to continue using it on Sprint's network (which is what Sprint is likely hoping for), but they might not want to -- of the major carriers, Sprint's network is one of the worst. That poor quality has led to mass defections. In July, Sprint reported that it lost 2 million net subscribers; in October, it said it lost 313,000 more.

Alternatively, they could sell the device, but Sprint's phones have a lower resale value. Gazelle, a website that specializes in buying pre-owned handsets, will pay $210 for Apple's 16GB iPhone 5 if it came from AT&T. If you have the Sprint version, you'll get $10 less.

Apple struggles without subsidy support
Of those students who do opt for the deal, they'll likely stay away from Apple's iPhones, instead opting for cheaper handsets like the Kyocera Rise. Best Buy will be charging $300 for the phone as part of the promotion.

As Apple's share of the global smartphone market has fallen in recent quarters, it's become more apparent than ever how dependent Apple is on the carriers. In the U.S., where two-year contracts and generous handset subsidies are common, Apple continues to enjoy market dominance. But in the rest of the world (particularly in emerging markets), where carrier subsidies are uncommon or unheard of, Apple's share of the smartphone market has dwindled, down to about 13%.

In the U.S., T-Mobile did away with carrier subsidies earlier this year, replacing two-year contracts with month-to-month service. Although T-Mobile still sells plenty of iPhones, as a percentage of its total sales, the company is far behind other carriers. I would anticipate similar trends playing out with Sprint's new promotion.

The deal is exclusive to Best Buy
As for Best Buy, the deal is exclusive -- students who want it will have to go through Best Buy to get it. Best Buy is charging $50 more than other retailers for the eligible phones, though the companies haven't revealed the precise terms of the deal -- some of that money could be going back to Sprint.

If it is a success, it will net Best Buy some more smartphone sales that it might not have gotten otherwise. It also, obviously, works as marketing -- reminding people that, when they're shopping for new mobile devices this holiday season, they might head over to their local Best Buy store.

Not as free as it seems
Ultimately, however, I don't think it will result in too many more sales for Best Buy. Ideally, Best Buy would sell a ton of Apple's iPhones during the promotion, getting lots of students acclimated to Sprint's service.

But, given that the the phones have to be purchased upfront, at an inflated cost, and then remain shackled to the Sprint network after that free year runs out, I wouldn't expect too much demand. Students might be best served staying on their parent's plan -- some 40% of adults under the age of 35 remain on family plans shared with their parents.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 20, 2013, at 12:21 PM, hunterintustin wrote:

    The article is not very well researched and makes assumptions based on what facts?

    Yes Sprint lost a lot of subscribers but not because their network is bad, yes they have some issues and currently rebuilt their entire network, but they lost the subscribers due to the shutdown of Nextel. Many accounts that had both iDEN/CDMA phones decided to leave Sprint.

    Giving Students free access, WHEN THEIR PARENTS ACCOUNT is linked is a smart idea. You lock in the parents and their kids for 24 months. There is no question what people will do with the phones just purchased because most phones remain locked to the network and can only be used with the Sprint network.

    Do yourself a favor, do your research first before you write.

  • Report this Comment On November 20, 2013, at 1:13 PM, metoo5 wrote:

    The dirty secret is that the carriers are hooked on Apple and needs Apple worse than Apple needs them. If there were no subsidy, and someday there may not be, Apple stands to benefit more than anyone else in that environment. Just like Macs have benefitted more than any other vendor by the "consumerization of IT", where consumers make their own choices instead of their managers making the decision.

  • Report this Comment On November 20, 2013, at 1:20 PM, aeosfool wrote:

    $10 less for trade-in of a Sprint phone is hardly discouraging. If you do the math, it's a great deal for students that can afford the upfront payment...much less expensive than ATT or Verizon.

  • Report this Comment On November 20, 2013, at 2:03 PM, TMFMattera wrote:

    Hey hunterintustin, thanks for your comment. While the shutdown of Nextel may have been a key catalyst, Sprint has been bleeding subscribers for years. There are likely a variety of reasons specific to each individual defector, but the quality (or lack thereof) of Sprint's network cannot be ignored. There's a reason Softbank intends to invest in Sprint's infrastructure.

    Also, not really sure what you mean by the 24 month lock-in. This deal is 12 months of free service, no contract. At the end of the year, they can continue paying for the service, or opt out.

  • Report this Comment On November 20, 2013, at 3:35 PM, Rippenbocker wrote:

    @metoo5 - I'm not certain you are correct on your points regarding subsidization. Yes the carriers definitely need Apple to drive sales but without the carrier subsidy on new/upgraded phones Apple would price itself outside many current consumer's reach.

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