Sprint (NYSE:S) appears to be a company in disarray. After reporting a worse-than-expected second quarter, the company lost more than 22% of its market capitalization, and the stock has been bouncing around 52 week lows. Although investors mostly focused on the company's loss of $0.19 per share versus analyst expectations of a $0.06 loss, perhaps the most discouraging sign was its loss of 272,000 postpaid subscribers.
The Overland Park, Kansas company plans to cut 2,000 jobs as a part of its cost-saving initiative; a measure it estimates could save the company $400 million. However, this does nothing to address Sprint's real problem: falling postpaid subscribers amid intense competition from legacy providers Verizon (NYSE:VZ), AT&T (NYSE:T), and a much-improved T-Mobile US (NASDAQ:TMUS). Based on Sprint's CEO conference call comments, it appears Sprint may attempt to mimic T-Mobile's plans to save money: The company may eliminate phone subsidies.
It's worked out well for T-Mobile
The company has an encouraging example to look forward to. In 2013, T-Mobile eliminated device subsidies, and has fared well without them. It wasn't as if T-Mobile left customers without device choices -- prospective customers could pay the full cost of a device up front, bring their own device, or pay for the device through a financing plan from T-Mobile. Instead of charging increased wireless prices to make up for device subsidies, the company separated the cost of the device from the cost of the service.
It's done well for T-Mobile. Under brash CEO John Legere, the company has grown from a distant fourth place to competing with Sprint for third place by total subscribers. Once considered a takeover target for Sprint, the company is now the biggest competitor to the company going forward.
After Sprint withdrew the bid amid government and regulatory scrutiny, both companies lowered prices to compete for new subscribers. And it appears T-Mobile is winning without device subsidies; the company reported 1.18 million postpaid subscribers during its last quarter compared to Sprint's loss of 272,000.
Verizon and AT&T are watching intently
If T-Mobile has the most to lose from Sprint's strategy, AT&T and Verizon have the most to gain. These companies are taking a middle path by offering the subsidy model alongside their phone financing plans with Verizon's Edge and AT&T's Next programs. That said, the companies would prefer not to offer subsidies. AT&T CEO Randall Stephenson famously commented the phone subsidy model is unsustainable, and Verizon CEO once called T-Mobile's subsidy-scrapping plan "a good idea."
If Sprint decides to eliminate device subsidies, this means Verizon and AT&T would be the only major wireless providers with subsidies. Eventually, these major carriers could chip away at the lucrative subsidy deals they offer, or choose to follow T-Mobile. The end result would be more transparent billing and better carrier-to-carrier comparisons.
Many want to know how this will affect end consumers and, unfortunately, that answer is less clear. If AT&T's Next plan is any indication, the numbers will initially be close. The company is initially offering savings of up to $25 per month savings on its Mobile Share Value plan, making its Next 18 and Next 12 plans cheaper than a standard two-year contract currently. What is less clear is will those savings continue; if they do not, the Next plan appears more expensive.
Even though Sprint is quickly losing clout as a wireless provider amid unreliable coverage and an "Unlimited everything" plan that appears to be T-Mobile's "Un-carrier lite," the company still has the ability to change the wireless landscape. If Sprint ends device subsidies, it's very possible that AT&T and Verizon will do the same in the future. For T-Mobile, this is another clear indication that John Legere is changing the industry by leading instead of following.