The third-largest U.S. wireless carrier Sprint Nextel Corp. (S) expects to sell the new version of Apple Inc.’s (AAPL) iPhone from mid October. Besides, the company will also start selling the existing iPhone 4.
Apart from Sprint, the iPhone 5 will also be marketed by the two other dominant players, AT&T Inc. (T) and Verizon Communications (VZ), from mid October.
We believe the sale of iPhones would be a big win for Sprint, which is struggling to turn around its business after its disastrous merger with Nextel in 2005. Sprint’s share has been eroding continuously in the U.S. wireless market due to its inability to keep pace with its competitors in providing competitive services. The sale of the iPhone has yielded lucrative returns to both AT&T and Verizon, the former marketing it since 2007 while the latter in the fray from February this year.
Sprint has nevertheless revived to a certain extent from subscriber losses and gained from improving customer service. At the end of the second quarter, Sprint had roughly 52 million customers while AT&T and Verizon had 99 million and 106 million subscribers, respectively.
The addition of the iPhone will help Sprint to gain new customers while retaining the old ones. This will lead to increased subscriber growth, reduced churn and higher average revenue per user. The company expects to sell 6 million iPhones this year.
Ironically, the iPhone deal may in a way go against Sprint. The company’s deal would improve the chances of AT&T winning approval from regulators to acquire Deutsche Telekom unit, T-Mobile. If the merger is approved, it might significantly alter the structure of the overall telecommunication industry. The wireless industry will be dominated by two strong companies, AT&T and Verizon, that control almost 80% of the U.S. wireless post-paid market. The combined AT&T would be almost three times the size of Sprint further hurting its profitability and shrinking the subscriber base.
We currently maintain our long-term Neutral recommendation on Sprint. For the short term (1–3 months), the stock retains a Zacks #3 (Hold) Rank.
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