Sprint's huge iPhone bet: Daring or desperate?

Sprint CEO, Dan Hesse, speaks at the product launch of the Motorola PHOTON 4G Summer and the Motorola TRIUMPH Virgin Mobile Summer in New York June 9, 2011. Credit: REUTERS/Andrew Kelly

No. 3 U.S. carrier to buy 30.5 million iPhones over next four years in 'bet the company' deal

Sprint has decided to make its stand in the smartphone market with a device it's never sold before -- Apple's iPhone.

The No. 3 U.S. wireless carrier has cut a deal with Apple in which Sprint has committed to buying 30.5 million iPhones over the next four years, at a cost (using current prices) of $20 billion, according to the Wall Street Journal.

The No. 3 wireless company is making a multibillion dollar gamble that Apple Inc.'s gadget will be the ticket to a turnaround, even though Sprint Chief Executive Dan Hesse told the board in August that Sprint would likely lose money on the deal until 2014, according to people familiar with the matter.

If Sprint has bet right, the iPhone will be the device that finally breaks the company's half-decade long slide and keeps much larger rivals Verizon Wireless and AT&T Inc. from running off with the bulk of the wireless industry's subscribers and profits.

And if it's wrong, the WSJ notes, Sprint will own a "costly albatross" along with the costs of a network upgrade and debt payments.

Apple is expected to unveil the iPhone 5 on Tuesday. It will be the first iPhone that Sprint will be allowed to sell. Until last February, when it was joined by Verizon Wireless, AT&T had been the sole U.S. carrier to sell the iPhone since its debut in 2007.

This left Sprint, with about 17% of the U.S. wireless market, in an increasingly untenable position, fighting a battle with two larger competitors who were selling a product with an incredibly loyal following.

A recent survey by UBS Research showed that 89% of iPhone owners responding said their next smartphone would be another iPhone, a retention rate more than double the runner-up (HTC, with 39%).

Which means -- as Sprint CEO Dan Hesse recently observed -- no iPhone, no customer loyalty. "The No. 1 reason customers leave or switch" from Sprint is the company's lack of an iPhone, Hesse told an audience at an industry event in September.

Well, now Sprint's in the iPhone game. But the company is laying a heavy bet on the Apple device. As the WSJ explains, "In order to keep the price people pay for the phone low and competitive with rivals, Sprint would be subsidizing the cost of each phone to the tune of about $500, which would take a long time to recoup even at the high monthly fees iPhone users pay."

On the other hand, Sprint generally scores high in customer satisfaction, and it still offers unlimited data plans, something Verizon and AT&T have phased out. Neither of those companies are about to reverse course on tiered plans, giving Sprint a potentially big edge.

This is arguably a huge gamble, with Sprint laying down a lot of money up-front in the hopes of getting a payoff some three years down the road. The board of directors reportedly had serious qualms about the plan before signing off.

You can't blame the board, either. According to a WSJ source, the iPhone deal could cost Sprint $1.5 billion in operating profit through 2013 -- and we're talking about a company that hasn't posted an annual profit in five years.

Hesse and the board believe the iPhone deal will become profitable in 2014, sources tell the WSJ. To shareholders that probably seems a long way off. But where would Sprint be in 2014 without making a dramatic move?

The truth is, it's Hail Mary time for Sprint. But at least they're trying to get the ball in the hands of a game-changer.

I'd love to hear what readers think of Sprint's iPhone plan. Feel free to weigh in with comments below.

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