Last week, prospective smartphone shoppers were treated to continued good news -- this time courtesy of T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S). If anything, this is becoming commonplace for the industry. After years of competing on coverage area, it appears wireless providers are finally getting around to competing on price. And it seems to be led specifically by these two CEOs: After watching T-Mobile's John Legere add more than 8 million subs in 2014, new Sprint CEO Marcelo Claure appears to be following in T-Mobile's footsteps.
Recently, Sprint shook up the wireless industry with their Cut Your Bill in Half promotion. The deal, aimed at converting Verizon and AT&T subscribers, helped Sprint grow its postpaid phone subscribers 20% year over year in its third fiscal quarter. However, critics noted the deal did not include a device subsidy, making the half off claim an apples-to-oranges comparison to plans that included one. In addition, T-Mobile was conspicuously absent from the deal, a tacit admission Sprint could not discount substantially from T-Mobile's industry-low rates.
But unlike his predecessor Dan Hesse, Claure appears determined to aggressively compete for wireless subscribers. Last week, Sprint added promotion to address prospective T-Mobile subs: a guaranteed $200 device credit. And while it doesn't seem as bold as cutting your bill in half, this is a smart move on behalf of Sprint to benefit from T-Mobile's churn problem.
All about that churn ... and what T-Mobile plans to do about it
While Verizon and AT&T have churn rates (read: customer cancellation rates) that hover near 1%, T-Mobile's hovers near 1.5%. And while that sounds like a small difference, over a long enough time frame those numbers matter for investors. In short, a T-Mobile subscriber is 50% more likely to cancel than AT&T or Verizon. There's a combination of factors at play here, but the two main reasons are easy -- T-Mobile doesn't lock subscribers into a contract, and T-Mobile's coverage is still spotty in certain geographies.
T-Mobile's new promotion seeks to ameliorate the first condition. T-Mobile's new Score program costs $5 monthly, but gives subscribers the opportunity to upgrade to an entry-level 4G smartphone at no additional cost after six months or exclusive discounts on every phone after 12 months. Essentially, the program acts like a rewards program and should encourage subscribers to stay. In addition, the company announced a Smartphone Equality plan that rewards loyalty by avoiding hefty downpayments for new devices. I've been critical of T-Mobile before, but these two programs are a smart way to lower its churn rate.
Speaking of churn, Sprint has a serious problem
If T-Mobile has a churn problem, Sprint has a full-blown crisis. With a churn rate hovering near 2%, the company has struggled to keep subscribers as concerns about network quality continue to dog the company. The company is diligently building out its Spark enhanced 4G LTE service, which is now available in 62 cities, but still faces poor perception in regards to its network quality.
In the end, T-Mobile and Sprint are shrewdly offering deals to entice prospective wireless subscribers and appear to be attacking the industry stalwarts. However, in order to compete with AT&T and Verizon in churn rates, both companies need to intently focus on their networks. Coverage area may not be as head-turning as promising to cut wireless bills in half, but it certainly helps to keep subscribers. And while it is does not solve all of its problems, T-Mobile's Score program seeks to address its churn issues, Sprint's newest deal does nothing substantive to address its churn.
Jamal Carnette owns shares of Verizon Communications and AT&T. Jamal had Sprint as a provider once, but they felt the then Motorola Razr was only cool enough for new subs and not contract renewals; I've been with AT&T ever since. The Motley Fool recommends 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.