Sprint to buy 30.5 million iPhones over 4 years: report
NEW YORK (Reuters) - Sprint Nextel Corp shares fell more than 10 percent after a report that it committed to buy at least 30.5 million iPhones that would cost it about $20 billion in the next four years.
The deal also involves Sprint paying a subsidy of $500 per phone and the iPhone would not be profitable for the No. 3 U.S. mobile provider until 2014, according to a Wall Street Journal story that cited unnamed people familiar with the matter.
Sprint and Apple officials declined to comment. Sprint, which had about 32.9 million contract customers at the end of June, has not confirmed widespread speculation it will sell the next model of Apple Inc's iPhone to be unveiled October 4.
On Monday investors fled Sprint, which has been losing customers for years, on concerns that such a commitment would thrash the operator's profit margins which already trail well behind those of bigger rivals Verizon Wireless and AT&T Inc.
Pacific Crest analyst Steve Clement said that while Sprint investors had expected big costs related to the iPhone the $500 subsidy was a surprise. In comparison, Verizon and AT&T pay subsidies of $400 for each iPhone, he estimated.
"It puts more pressure on them than was previously expected," Clement said.
Other than the iPhone, the typical smartphone subsidy is about $250, he noted.
A 30.5 million commitment over four years would represent 40 percent of Sprint's typical phone sales to contract customers, Clement said. By contrast, the iPhone accounted for about 21 percent of Verizon Wireless' phone sales to contract customers in the second quarter, he said.
"You're displacing phones you're subsidizing at a much lower level. That's what's bad about it," said Clement.
He also noted that Sprint's operating profit margins are already languishing in the mid-teen percentage range. Margins are closer to 45 percent for Verizon Wireless, and often approach 40 percent for AT&T.
On top of a hefty outlay for the iPhone, Sprint is planning to announce details of a massive network upgrade on Friday this week. It has estimated that the upgrade will require it to buy about $5 billion in new network equipment.
On top of that, it has to repay or refinance billions of dollars worth of debt that comes due in the next two years.
"It stretches them," said Clement.
The reported iPhone deal with Sprint underscores Apple's power in an industry where service providers generally call the shots because their level of promotion of a device often determines its success or failure.
For devices other than the iPhone, a carrier typically initially commits to and forecasts for up to six months of supply, according to a source at a global wireless distributor.
"Other manufacturers don't get the same thing Apple gets in terms of commitments because the Apple product has such demand it sells itself," said the source, who noted that a longer term pact may ensure a supply guarantee.
One factor that could work in Sprint's favor in selling the iPhone compared with AT&T and Verizon is that it is the only one of the three that still offers new customers unlimited data use for a flat monthly fee.
But if it is expecting to replace practically all its contract customers with data-hungry iPhone customers over the next few years it is unlikely its network would be able to cope with the strain of having unlimited data plans.
"That probably does it for unlimited data on the Sprint network," if the report is correct, said CCS Insight analyst John Jackson.
Sprint shares closed down 31 cents, or 10 percent, at $2.73 on the New York Stock Exchange after the report. Verizon Wireless is owned by Verizon Communications and Vodafone Group Plc.
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