Sprint Nextel Corp. had a rocky second quarter, with plummeting retail postpaid net customer additions and negative net additions through its wholesalers. Carrier executives acknowledge the problem and blamed it on a tightening of the company’s credit requirements for customers, as well as the fact that its new mobile virtual network operator partners had yet to hit their stride. Sprint Nextel has positioned itself as the carrier most friendly to MVNOs and has done particularly well with its Boost Mobile L.L.C. sub-brand in recent quarters.
The nation’s third-largest carrier gained just 210,000 postpaid retail subscribers last quarter, and Boost contributed another 500,000 customers. Sprint Nextel lost 31,000 customers on its wholesale side-which primarily come from MVNOs.
“That is definitely something to be concerned about,” said Ozgur Aytar, analyst for Pyramid Research. She added that “the impact has to be coming from the larger MVNOs that Sprint is carrying,” noting that the new MVNOs that Sprint has taken on are unlikely at this point to even have enough customers to be able to lose 31,000.
Sprint Nextel’s largest MVNOs are Virgin Mobile USA L.L.C. and TracFone Wireless Inc. TracFone did not respond to a request for comment, but noted in its latest quarterly report that it gained 112,000 subscribers in the second quarter, typically its weakest. TracFone provides service via multiple carriers’ networks; more than half of the phones available on TracFone’s Web site run on GSM rather than CDMA technology.
Virgin Mobile USA declined to give numbers on its performance last quarter, but said that it has a customer base of 4 million subscribers.
“If (Sprint Nextel’s) resellers are doing well, that helps them, but really our long-term plans are pretty independent from what’s going on with them,” said Jayne Wallace, spokeswoman for Virgin Mobile USA “We’re having a very robust year … we’re continuing to grow.”
Aytar noted that various MVNOs are “essentially … going after the youth market that can also be captured with family plans. So they should be really feeling the impact of the family plans that are becoming ever more popular.”
The news from Sprint Nextel reinforced a picture of a tough second quarter for MVNOs; Verizon Wireless also indicated that its wholesale numbers were “slightly negative” in the second quarter.
However, a look at Sprint Nextel’s wholesale results over the past two years reveals that the second quarter has typically been a time of slower growth. In 2004, for example, wholesale subscriber additions were down almost 30 percent from the first quarter to the second quarter, and then rebounded in the third quarter. Last year, wholesale additions were down more than 85 percent between the first and second quarters, but by the fourth quarter wholesale net additions were exceeding first quarter performance. Several analysts have indicated that the busy fourth quarter will be a make-or-break time for the new generation of MVNOs.
Although few specifics are coming out of the new MVNOs, Walt Disney Co. President and Chief Executive Officer Robert Iger recently told analysts during a conference call that Mobile ESPN’s initial results were “disappointing,” despite $150 million in investment from the parent company in 2006.
“There are issues that we had to deal with in terms of our retail strategy, our overall marketing approach, our pricing approach, as well as the quality of the handset,” Iger said, then went on to emphasize that Mobile ESPN had added a new handset and made changes to its prices and marketing while ramping up retail distribution. While Iger made it clear that Mobile ESPN will have a mobile play, he didn’t guarantee a commitment to the MVNO model.
“ESPN’s presence in mobile platforms is a given into the future-under what circumstances or in what model, it’s really too soon to tell,” Iger said.
Disney’s other MVNO, Disney Mobile, launched in June and recently made a second handset available. The business also started running television commercials.
Meanwhile, Sprint Nextel is busily tweaking its price plans and readying a new ad campaign in hopes of shoring up its performance.
The carrier had used its inexpensive overage in its Fair and Flexible plans as a selling point for its service, but apparently that strategy came back to haunt it. Sprint Nextel recently adjusted its price plans: cutting the minutes on some plans, adding minutes to others and charging more for going over the number of minutes included with the plan. Sprint Nextel customers used to pay $5 for 50 additional minutes; new customers will now have to pay the same amount of money for 30 extra minutes.
Sprint Nextel announced last week that it will soon start a new series of ads with the tagline “Sprint. Power Up.” The ads will emphasize the quality, reach and capabilities of the carrier’s network-which Sprint Nextel’s biggest competitors, Verizon Wireless and Cingular Wireless L.L.C., have been doing for some time.
“[Sprint] has a long road to go to prove to potential customers that its network is just as good or better than those competitors,” noted Current Analysis analyst William Ho in a research report. “Given competitors’ head start in direct network reliability messaging, Sprint’s powerful network theme in comparison may be too abstract and therefore take longer to resonate.”
However, Ho added, Sprint Nextel’s new plans, and its mobile-to-mobile calling and unlimited walkie-talkie use, now put the carrier on much more even footing with Verizon Wireless and Cingular. Further, those companies will have to figure out how to compete with Sprint Nextel’s 7 p.m. off-peak calling.
“They have an excellent set of assets, and there’s a lot of value in the name,” said Jonathan Schildkraut, senior vice president of equity research for telecom and data services at Jeffries & Co. “But I will say, I don’t think the performance has been up to what they’ve done historically.”
Schildkraut said that Sprint Nextel has fallen off its game in making innovative handsets, an area in which it previously excelled.
“Cingular has really taken over the role as the handset leader … and that’s really hit Sprint in a very hard way,” Schildkraut said. “It took away their point of distinction and I think that they really need to get that back.”
Sprint Nextel recently announced that it was going to be adding new handsets from Motorola Inc. to its line-up; Motorola also provides handsets and equipment for Sprint Nextel’s iDEN network, and will be one of the carrier’s partners as it develops a next-generation mobile WiMAX network.
Despite the success of the Boost Mobile brand, chief operating officer Len Lauer said during a recent conference call that Sprint Nextel would be “pulling back the reins a little bit on the acquisition side, so that we do get a higher ARPU customer from Boost” as well as helping the carrier manage its capacity in markets where it is going through rebanding some of its 800 MHz spectrum. Lauer added that rather than pushing the Nextel brand in the general consumer market, the carrier would focus on business customers, Nascar fans and the Hispanic market.
“When you put those together, it means that we will focus again on more profitable customers,” Lauer said. “It will hit our gross adds a little bit … and a little bit on net adds short-term, but for the long-term, we think it is the right position to be in.”
