Home & Office

Sprint: iPhone deal 'worth every penny,' but there's a big financial hit

Sprint likens the iPhone to an expensive baseball player that can fill the stands of a high-priced stadium.
Written by Larry Dignan, Contributor

Sprint CEO Dan Hesse made his case for bringing the Apple iPhone to the carrier and argued that a short-term financial hit in the years ahead is worth the long-term gain. Sure, the iPhone has a pricey contract, but the device will bring customers to Sprint and become profitable faster.

Hesse likened the iPhone to an expensive baseball player that can fill the stands of a high-priced stadium. "iPhone has an expensive contract but he's worth every penny," said Hesse, speaking on a conference call with analysts after Sprint's third quarter earnings report. Also: CNET: Sprint loss narrows as customer growth doubles

However, the iPhone is pricey. Sprint CFO Joe Euteneuer detailed how more iPhone additions translate into a bigger hit on the bottom line. "We expect the combination of both increased volume and rate impacts associated with the iPhone to result in a reduction in fourth quarter OIBDA (Operating Income Before Depreciation And Amortization (OIBDA) of between $500 million and $700 million," said Euteneuer.

In other words, Sprint will lose money on the iPhone through fiscal 2015. OIBDA will be hit by $900 million in 2012 and $1.2 billion in 2013. Then, iPhone customer margin will turn the Apple deal profitable.

"Our ultimate spend with Apple to depend on many variables including anticipated rate of future subscriber growth, number of different devices offered and the cost of devices offered. We anticipate outperforming the current contract minimum commitment of $15.5 billion, for the iPhone, over the four-year period," said Euteneuer.

Is it worth it? Hesse certainly thinks so.

Hesse defended the deal with Apple. He said:

We expect that customer lifetime value for the iPhone customer to be at least 50%, yes, at least 50% greater than a typical smartphone user. Driven primarily by more efficient use of our network and lower churn. In addition, not reflected in this chart, is the upside of more, new revenue to spring, new fans offset the fixed cost of our stadium, if you will, because we expect the iPhone to generate a significantly higher number of new users to Sprint.

Hesse also shot down the perception that the iPhone will hurt Sprint's network.

There is a misperception that our launch of the iPhone will increase the load on Sprint 3G network and require us to spend more 3G capital. The reverse is true. IPhone users are expected to use significantly less data than the typical user of a dual-mode, 3G, 4G device. Even adjusting for more total new customers being added to the network, we believe will put less load on our 3G network than they would have if we did not carry the iPhone. We're pleased to announce that we have signed a nonbinding cooperation agreement with Clearwire, to work together on the technical specifications of the Clearwire LTE network and to ensure a superb customer experience for Sprint customers on the Clearwire LTE network.

In other words, Sprint's network can handle the load. What's unclear is whether Sprint can handle the financial load.

Editorial standards