Consumer-electronics retailer Best Buy (NYSE:BBY) and telecom company Sprint Nextel (NYSE:S) are teaming up this holiday season to offer a serious deal to students. Sprint is giving students 12 months of unlimited talk, text, and 1GB of data on new smartphones bought at Best Buy, with the offer including all of Sprint's phones. There is some fine print to be aware of, but it looks like Best Buy will be activating alot Sprint phones this holiday season. This not only is a boon for students looking for cell phone deals - it might have important ramifications for Foolish investors as well.
When I first read about this announcement, I assumed that it was targeting college students, but that's not actually the case. Any student currently enrolled in a U.S.- based elementary school, middle school, high school, or college is eligible for this deal. The new phone must be added to a My Way plan, and unlimited data can be added for $10 per month. There's also a $36 activation fee, and the price paid for each phone is the un-subsidized price.
It's clear what the strategy is here -- get parents to add their children onto their Sprint plan. It may even offer enough incentives for parents to switch to Sprint to take advantage of the free year of service. The deal doesn't require a two-year contract for the new phone, so there's no long-term commitment. The savings for a family with multiple children during that first year are quite significant.
The phones do cost quite a bit upfront, with high-end devices like the iPhone 5S priced at $700. The cheapest phone is $250, with a few more less than $300, so there are some affordable options. Given that a high-end phone under contract typically costs $200 subsidized, the prices aren't unreasonable.
What this means for Sprint
Sprint is in the unenviable position of being the third-place wireless network in the country. With high levels of capital expenditures required to continually build out and upgrade the network, Sprint suffers from a sparser 4G coverage area than Verizon or AT&T. While Sprint is less expensive than its competitors, customers pay for that discount through lesser coverage.
This deal acts as a way to keep parents with Sprint from switching to Verizon or AT&T, offering a deal which saves them quite a bit of money if they were planning to get phones for their children. Even with a free subsidized phone, a $70 per month plan comes out to $840 per year. This compares to less than $300 for a phone under the promotion.
Sprint has been losing subscribers as of late, with 313,000 lost during the last quarter. This is an improvement over the same period last year, but it highlights the struggle of retaining customers on an inferior network. This deal should help Sprint stunt these losses, at least in the short term.
What this means for Best Buy
This deal accomplishes two things for Best Buy. First, and most obvious, it increases the number of phones that will be sold during the holidays. With Best Buy's expansion of its small-footprint mobile stores, smartphones have been a big focus for the company. Second, it increases foot traffic and could lead to other purchases. If a customer takes advantage of the deal, phone accessories are an obvious add-on purchase. And if they ultimately decide against it, at the very least it gets them in the store.
With this holiday season shaping up to be highly competitive, Best Buy needs all the incentives it can get to drive people to its stores, and the company has been aggressive in making deals with various companies so far this year.
First it was installing Samsung mini-stores, then Windows mini-stores. Recently Google-branded endcaps started showing up in stores displaying the company's Nexus devices. And now the Sprint promotion offers an exclusive deal which can't be matched by competitors. Best Buy is looking for an edge this holiday season, and I think it just found one.
What kinds of phones will be sold
Because of the un-subsidized price, I doubt very many high-end phones will be sold under this promotion. In a way this hurts Apple (NASDAQ:AAPL), since it only sells high-end phones, and I suspect that low-end Android phones will be the standard choice. Since the deal is aimed at young students, a low-end phone is perfectly fine. Parents probably don't want to spend $700 on an iPhone just to have it broken by their 12-year old, so Apple is unlikely to benefit at all from this promotion.
Android's position as the dominant mobile OS will likely gain strength from this promotion, and getting kids using Android early is a good way to prevent them from switching to Apple later on. Apple has no budget phone, which puts the company in a position where it cannot possibly overtake Android. And this promotion certainly doesn't help.
The bottom line
This promotion should help slow the subscriber losses that Sprint has been suffering lately, although it's not a long-term fix to the issue of its inferior network. For Best Buy, the increased foot traffic and phone sales are a big positive, and I think that the deal benefits Best Buy the most. With this holiday season highly competitive, any edge might make the difference between having a great holiday season or coming up short.