Sprint's huge bet on iPhone is a potential disaster

Sprint's huge bet on iPhone is a potential disaster

Summary: Sprint's future largely rides on the iPhone. If the bet works, Sprint will be in a better position. If Sprint stumbles it will be on the financial ropes.

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Sprint is getting the iPhone, but it's going to cost the company about $20 billion in an all-or-nothing bet Apple's iconic device.

According to the Wall Street Journal, Sprint has agreed to buy at least 30.5 million iPhones over the next four years. That is a staggering number of iPhones. Sprint is likely to lose money until 2014.

If Sprint is correct in its bet, the iPhone will put the carrier in a better position to gain customers and the recurring revenue they bring. If Sprint's bet is wrong the company will find itself on the ropes.

Great debate 3 p.m. EDT Tuesday: iPhone Yes vs iPhone No

For Sprint's bet to work, it will have to sell nearly 8 million iPhones a year. What's unclear is whether Sprint can activate that many iPhones. For instance, Verizon activated roughly 2 million iPhones in its two quarters since acquiring the device. AT&T activates more iPhones a quarter---3.6 million in the last two quarters---but that includes the iPhone 3GS, which runs $49.99.

If Sprint sells two iPhones---a premium and lower cost one---its bet may pay off. However, Sprint will face iPhone demand spread across all three carriers. Sprint may keep its current customers, but not land new ones. If Sprint is forced to change its iPhone mix for the Apple deal it will be swapping profitable Android phones for a loss leading iPhone.

Toss in the Sprint costs to acquire the iPhone as well as the potential network costs and the carrier is making a bet with the devil. It's not clear that Sprint's balance sheet can take the hit.

As of June 30, Sprint had long-term debt of $17.3 billion and cash of $4.27 billion. Sprint's return on equity is -20.97 percent while Verizon's is 13.7 percent and AT&T's is 18.78 percent.

And if you consider Sprint's Clearwire potential financial time bomb, the iPhone bet looks a bit crazy.

Topics: Telcos, Hardware, iPhone, Mobility, Smartphones

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89 comments
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  • RE: Sprint's huge bet on iPhone is a potential disaster

    Add a terrible economic outlook in US...
    tatiGmail
    • RE: Sprint's huge bet on iPhone is a potential disaster

      @tatiGmail - a 0% tax rate for all!

      I mean, all the tax cuts, corporate welfare, and bailouts to date have surely helped prevent today's economic quagmire... oh, wait, they hadn't... I know, <b>-</b>20% tax rate! That'll do it!
      HypnoToad72
      • What tax cuts?

        There haven't been any. Except for temporary reductions in payroll tax WITHHOLDING, which means you just paid it when you filed your income taxes. Or did you buy the mantra that maintaining current tax RATES was a tax cut? If so, congratulations, propaganda works on you.
        baggins_z
      • RE: Sprint's huge bet on iPhone is a potential disaster

        @HypnoToad72 So you're running for the GOP Presidential Nomination as well? Good luck, my friend - I'm running on a platform of raising taxes on all of those making less than $200k a year to ~65%, cutting all social programs, education, privatizing all government agencies to Halliburton, and - get this - making it illegal to be anything BUT Christian. In other words, I'm a far-right dream. :D
        Champ_Kind
      • Champ_Kind: Apparently, the progressive propaganda does work on idiots.

        Keep it up, you're the kind that the democrats keep targeting and the kind taking the country into the crapper.
        adornoe
      • RE: Sprint's huge bet on iPhone is a potential disaster

        @HypnoToad72
        Of course. It couldn't have been that they kept things from being worse. And it has to have all been caused by the actions of the last four years. Can't be a longer term problem. Can't have been made extra sticky by a lack of compromise by both sides. I must just be dreaming.
        mdeans@...
  • You're basing your theory on pure assumptions...

    How do you know how a carrier figures its profits? Do you think you know better than them what kind of deal to make? You don't think they ran the figures and decided that iPhone will MAKE them money? You think they are going to throw 20 billion away without thinking it through?

    This isn't microsoft selling kins, or zunes, or getting into search and losing money like its going out of style. Or Nokia betting the farm on dead technology.

    It's a fact that iPhone users MAKE companies money. Android users are penny pinchers. Them's the facts.
    ShazAmerica
    • RE: Sprint's huge bet on iPhone is a potential disaster

      @ShazAmerica <br><br>uhmmm, he just pointed out the number of activations by at&t and verizon. if its a fact that iphones will make money, they why isn't at&t and verizon kicking ass? the article is just pointing out possibilities and you're busy defending iphone. i'm not saying i know anything, but if you're so sure, bet all your money on sprint's stock.
      webprogrammerdude
      • But he lied/was wrong on his Verizon numbers.

        @webprogrammerdude

        Verizon activated 2.3 million iPhones in it second quarter of iPhone availability not 2 million in 2 quarters.

        One value scales to 9.2 million/year or 36.8 mini lion over 4 years. The other value scales 4 million/year or 16 million over 4 years.

        The Sprint bet is pretty much a sure bet.
        Bruizer
      • Bruizer: There's no sure bet in a bad economy,

        and the Sprint "bet" could be its undoing. In fact, within 1 or 2 years, Sprint may be up for a merger or into bankruptcy. It's only rescue plan might be one of Obama's "too big to fail" strategies, but, Obama will be out of office by then.
        adornoe
      • RE: Sprint's huge bet on iPhone is a potential disaster

        @adornoe@... It's -> Its, dolt
        &acirc;€‹
      • &Atilde;&cent;&Acirc;?&Acirc;? : Petty...

        Get a life.
        adornoe
    • RE: Sprint's huge bet on iPhone is a potential disaster

      @ShazAmerica It is not clear, especially in AT&T's case that they make money on the iPhone, Apple soaks them. They have to look at the big picture of customer retention etc.

      Like that old baseball saying, sometimes the best trade is the one you never make. Personally Sprint is shooting themselves in the foot with this. If ATT and Verizon both have it then what is their unique selling proposition? That's without pointing out the surge of Android.
      stano360
      • RE: Sprint's huge bet on iPhone is a potential disaster

        @stano360 My point is that Sprint doesn't have the balance sheet to take a soaking if this doesn't quite work out.
        Larry Dignan
      • RE: Sprint's huge bet on iPhone is a potential disaster

        @stano360 Their "unique selling proposition" is their true unlimited data plan. That's a big plus.
        BillDem
      • RE: Sprint's huge bet on iPhone is a potential disaster

        @BillDem You beat me too it. If they can keep those plans going that is what is going to set them apart from AT&T and Verizon.
        non-biased
    • RE: Sprint's huge bet on iPhone is a potential disaster

      @ShazAmerica actually apple doesn't share profits with the carriers. Google gives a percentage of Market sales to the carrier.
      LarsDennert
      • Plus the carriers get paid to install crapware onto Android

        @LarsDennert No way Apple will ever allow that.
        otaddy
    • Hardly that simple.

      @ShazAmerica

      Get used to the idea, first off that companies make bets on the market place. A bet doesn't mean they know they are going to win, a bet means they think they can win...if they bet right.

      Corporate bets on the market place can come in a number of flavors. First flavor is the "we can afford to loose this if we do" kind of bet. Its probably the most common kind of bet companies make because it doesn't put them out of business if they do lose.

      Then there is the "we really need to win this" kind of bet. This is a bet more common with companies that have some kind of problem or issue they are trying to overcome. There are of course all sorts and kinds of parameters that may be involved in the reasoning behind the particular marketplace bet, but the final issue comes down to the same thing with this kind of bet, while loosing their bet may not kill the company outright, losing will do them some kind of serious dirt, either due to the financial loss the bet produced or the failure of the bet they made to gain badly needed market share or some similar strategic failure. In any case, the loss will create a nasty blow that may end up being disastrous at some point if solid corrective steps cannot be taken.

      Then there is the "we cant lose this or we are FUBARed" bet. This is the bet no company really wants to make unless they either absolutely feel they have to, or unless the upside looks so very promising they would be foolish not to make the bet. Sometimes its an odd blend of both.

      The realities of this kind of bet can be harsh. Sometimes a company is so bad off to begin with that this kind of last shot in the dark approach is all they can think of to stave off what would otherwise be inevitable collapse. Its not unusual for many situation to occur where a company has been looking into their crystal ball and seen the not too distant future and seen that while collapse is not imminent, the writing will be on the wall in a few years if they don't get moving seriously fast on something. They foresee that they may not have much of a future without some kind of powerful boost and they often find they are in between a rock and a hard-place and the only way out is to make the bet. Smart companies really do their homework on this, largely because they recognize that wining on a very safe bet is not likely to create the impact they need and it will only forestall what the future will bring and is essentially wasting their precious time. They also understand that what they cannot afford to do is lose on a really big bet because that is likely to bring everything that could possibly be bad about their future to their doorstep right now. Once they realize they are in a long term "play it big or go home" situation they should be looking at the biggest move with the likeliest opportunity for success as the place to make their bet.

      It looks like Sprint has just made one of these kinds of bets. If the math is right.

      But, the thing is this; they surely have done a pile of math on this themselves and I guess they feel fairly safe they have made a good bet. On the other hand, because of the fact that they must know the math on this its pretty hard to believe that Sprint will not have a really great idea if their bet is paying off the way it needs to long before 2014. In these kind of situations its nothing like 2014 comes along and the company gets to open a sealed "profits closet" to see how much has accumulated on that date, if any.

      Sprint will have some very good ideas about how their progress has to go to be profitable by 2014. The fact is they are dealing with such large numbers of iPhones here that if the sales were not coming at expected rates early on its doubtful that they could find ways to increase the sales enough to not only get up to speed but to cover the shortfalls in the past months. And of course the longer the situation goes on, the more obvious it would rapidly become that even if things improved they could never make up for several quarters falling short...just too many iPhones involved.

      Suppose by year two Sprint says, this isn't working at all and two more years of this and we will be finished? Where does that leave the whole deal. Nobody is going to follow through with a deal thats going to wipe them out. Its pointless and a time waster. Your better off trying to fight your way out of the deal then simply carrying on to your inevitable demise.

      Just food for thought.
      Cayble
      • Sprint's iPhone bet is a Disaster

        @Cayble

        great write up, but you missed the single most important kind of decision, the FORCED one. We are talking about Apple here, you do NOT make deals with Apple, you contact them and tell them you would like to make a deal with them. They ask for your current and expected financial information, then tell you what you have to do to get a contract with them. I'll put my money on Apple TELLING Sprint that this was the deal they would get, take it or leave it.

        As personally, as a Sprint customer, I will be sending a communication to Dan Hesse informing him of how poor a decision this was.
        aiellenon