About two years ago, Sprint's (NYSE:S) marketing team started breaking out chainsaws and other power tools to promote the wireless carrier's "Cut Your Bill in Half" offer. AT&T (NYSE:T) and Verizon (NYSE:VZ) customers could bring their wireless bills to Sprint, and it would give them a service plan with nearly identical data allotments for half the price they paid at the two larger carriers. T-Mobile (NASDAQ:TMUS) customers didn't get to join in on the overzealous chainsaw-bill-demolishing fun until last year.
But those earliest takers of Sprint's bill-shredding offer are now facing the fact that the promotional pricing is limited to two years. Sprint faces the challenge of moving those customers to its regular pricing without losing them to competitors.
Price is Sprint's only differentiator
Sprint has been unable to make any headway in differentiating its service from its competitors. AT&T and Verizon have video assets and in-home services that help them standout and retain customers. T-Mobile has aggressively offered various perks to subscribers, and it's significantly improved its network density (improving speeds and coverage) over the last couple of years. While Sprint has improved its network, it still ranks at the bottom of Consumer Reports' ratings for the big four wireless carriers.
Even Sprint knows that pricing is its only differentiating factor. Its newest advertising campaign featuring "Paul from Verizon" touts how its network is almost as good as Verizon's and its service costs half the price.
When the thousands of Sprint customers who switched over for the Cut Your Bill in Half promotion see their bills increase, they're going to have a hard time rationalizing sticking with Sprint. It will also mark the end of any two-year installment or leasing plans they signed when joining Sprint, providing an optimal time to switch carriers.
T-Mobile could be the big beneficiary
T-Mobile is trying to move away from being viewed as a low-cost service provider like Sprint to a best-value service provider. It's made a few significant price increases over the last few years with the shift to T-Mobile One -- its unlimited data plan -- being the most noticeable.
Still, it's hard to argue that T-Mobile doesn't provide one of the best values in wireless service if it has good coverage in your market. And its coverage is improving significantly with the deployment of its recently acquired 700 MHz spectrum -- which provides better signal strength inside buildings.
During T-Mobile's third-quarter earnings call, CEO John Legere noted that it's seeing improved porting ratios with Sprint in the early fourth quarter -- i.e., more Sprint customers are coming to T-Mobile for every customer that's leaving it for Sprint. The other carriers' porting ratios remain stable, indicating the results are largely due to customers leaving Sprint specifically, not anything T-Mobile is doing differently.
How bad is it for Sprint?
During the first quarter that Sprint ran its Cut Your Bill in Half promotion, it saw a 20% increase in gross postpaid phone additions year over year. It saw strong double-digit percentage growth in postpaid phone gross additions for the next few quarters, although management would often obscure exact details in their earnings releases.
The point is, the promotion worked in that it attracted a lot of new customers to Sprint. The problem currently is that those customers are now about to experience a rate hike -- if they haven't already.
BTIG analyst Walter Piecyk expects Sprint's postpaid phone gross additions growth will decline to just 1.7% in the fourth quarter from 18.7% last year. He also sees subscriber churn increasing to 1.53% from 1.37% last quarter.
As such, Sprint can expect to see continued declines in average revenue per user and slowing postpaid subscriber growth. The result is a likely return to net revenue declines after just breaking out of a two-year slide last quarter.
Adam Levy owns shares of Verizon Communications. The Motley Fool recommends T-Mobile US and Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.