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Sprint Takes the Nuclear Option in the Mobile Price War

By Adam Levy – Updated Jun 15, 2017 at 4:55PM

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You can't get cheaper than free.

Sprint (S) really wants you to switch service providers. For a limited time, the fourth-place carrier is offering a free year of its unlimited data plan to customers who switch from Verizon (VZ 0.92%), T-Mobile (TMUS -1.32%), or AT&T (T -0.25%).

Apparently the discounts Sprint was offering on its unlimited plan following the rollout of Verizon's similar plan weren't working well enough to grow subscribers. If Sprint can't add subscribers when it's literally giving away the service, it's got a big problem.

To be sure, Sprint's decision may foretell a bad quarter. The promotion notably concludes at the end of June, which coincides with the end of the second quarter. Verizon had similar reasons for launching its unlimited plan.

Paul Marcarelli (formerly the "Can you hear me now?" guy from Verizon) advertising for Sprint.

Image source: Sprint.

Escalating the price war

The wireless industry is in the midst of a price war. The average phone plan declined 13% over the past 12 months, and consumers are able to get more data for less regardless of which service provider they use.

Verizon's service revenue has come under particular pressure, and its new unlimited plan isn't helping, at least not in the short term. The company suffered a 6.1% year-over-year decline in service revenue in the first quarter, and that trend could accelerate in Q2 with a full quarter of unlimited-plan results.

But Sprint's results have been just as bad as Verizon's, if not worse. It's in a race to the bottom, as it's been unable to produce a differentiating factor other than price. Well, it just won that race.

While Verizon expects its service revenue to stabilize over the next couple years, Sprint's fall seems to have no end. Of course, Sprint's aggressiveness could put added pressure on Verizon and the other competitors in the market to produce promotions of their own. While it might not show up on the service-revenue line, free phones or other promotions will definitely show up on the bottom line.

How can Sprint even do this?

Sprint isn't heavily promoting its free-service promotion. If a deal is good, you'll hear about it eventually, so management argues that it's saving significant marketing dollars that it can put toward offering the free service. It's just a different way of approaching customer acquisition costs.

But the customers it acquires might not be as high quality as if they were paying full price (or at least some price) for the first year of their relationship with Sprint. That could lead to challenges down the road, as Sprint can expect higher churn rates following the end of the promotional period next year. Sprint is already dealing with a similar challenge, as its earliest adopters of its "Cut Your Bill in Half: promotion start to see their bills increase: Sprint's churn rate has increased in each of the last two quarters.

Sprint is taking a big risk assuming that a significant percentage of customers will stick around after their free service ends. It's been unable to hold on to customers for the long term, sporting the worst churn rate in the industry.

Will the competition respond?

These days, wireless carriers are fighting for every last net customer addition they can get. While it's unlikely any of the carriers are as desperate as Sprint, we could see continued promotions from AT&T, Verizon, and T-Mobile. All three have offered free devices for new customers and for those who upgrade to higher-priced plans.

AT&T has an ongoing promotion for $25 off one of its various television services and free HBO for subscribers to its highest-priced plan. T-Mobile is currently offering a third line free on its unlimited plan. Verizon isn't being as aggressive, as it's apparently seeing decent results with its unlimited plan as is.

All this is to say that none of the carriers are completely averse to offering promotional discounts or freebies to entice customers to its service. However, the latest move from Sprint could put further pressure on service revenue or profit margin, or both, at all the major carriers.

Adam Levy owns shares of Verizon Communications. The Motley Fool owns shares of and recommends Verizon Communications. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.

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