Much has been written in the past year about Sprint’s need to upgrade its network, including by iGR. Sprint management has been very public about plans to “densify” its network and make more use of the 2.5 GHz spectrum band. The question of how Sprint was going to fund this improvement was on everyone’s mind, with perhaps an underlying assumption that Softbank in Japan would step up with its checkbook open or perhaps Sprint would go to the debt or equity markets.
But Sprint’s second-quarter earnings announcement and conference call provided some significant answers as to how Sprint plans to find the cash to improve the network. And of course, those answers led to more questions.
The essence of the announcement is that Sprint will not go to the debt or equity markets for the investment dollars, perhaps not surprising given that Sprint’s stock price has been under significant pressure recently (a nice way of saying the company’s stock price has tanked since the beginning of May). As such, it is unlikely that Sprint will be able to either raise sufficient cash or get a good deal on debt.
Softbank also said it would not be opening its checkbook or backing a new debt offering for Sprint. Also came the comment that Softbank is disappointed in the U.S. regulatory environment and that it is now committed to moving forward with a turnaround for Sprint. You can read this to mean that Softbank bought Sprint originally with the goal of merging quickly with T-Mobile US and taking the battle to AT&T Mobility and Verizon Wireless. It does not appear that there was any intention of fixing the company Softbank purchased, but rather doing a quick Sprint/T-Mobile US deal. Now that the feds have closed that avenue (and T-Mobile US is in the process of talking to Dish Network), Sprint is forced to go it alone, for the short term anyway. In other words, Softbank has no option other than fixing what they bought.
The plan is to establish a new mobile device leasing company, with some investment from Softbank that will take ownership of new device purchasing and leasing. In other words, Sprint will not be paying out capital to buy new Galaxy and iPhones, but instead will lease the devices from the new company and pass the cost along to the consumer. Exactly what lease rates Sprint and the consumer will pay remains to be seen, but given the competition from the other operators, it can be assumed the lease rates will be attractive to the consumer. And it can be expected that other smaller mobile operators will want to participate as well.
If I am reading the financial statements correctly, in Q2 Sprint used about $554 million of capital to buy devices and then pass them to consumers. This capital will now be available to add to the network improvement war chest. Sprint has not said if the new leasing company will be on or off the books, but many expect it to be off-book.
The second part of the plan is far less baked and still in discussion, while plans to establish the new device leasing company are well underway. This part of the plan calls for the establishment of a second leasing company to own the network equipment. Essentially, the new leasing company will buy network equipment from the vendors and will then lease access to Sprint. Hence, Sprint does not have to use its own capital to buy network equipment and build a network. In essence, Sprint will own the spectrum, but will lease access to the network equipment.
Exactly how these companies will be structured, how much Sprint will own of each and how much Sprint will save remains to be seen. There is also the (important) question of involvement by other operators. For example, will T-Mobile US and others be allowed to participate in the device leasing company? Will other operators be able to lease their network equipment? And will other operators be able to lease the same network equipment that Sprint may use (i.e. network sharing)?
The final issue is perhaps the most important – timing. AT&T just closed on the DirecTV acquisition and is already offering new packages. Verizon Wireless is about to launch its new over-the-top video service. And T-Mobile US is of course discussing options with Dish Network.
By the end of 2015, the mobile industry in the U.S. could look very different. Sprint needs to start improving its network now (actually, they started months ago). But the new leasing companies must be established and operational before Sprint can start saving for the network improvements. How long will this take? It would seem that the device leasing company is already in the works and could be ready in a quarter or two.
But the network leasing company is now only being discussed and may not be ready until late 2015 or early 2016, at the earliest. This would therefore lead to Sprint not starting network improvements until at least Q1 2016, six months from now. This would seem to be a long time, certainly given the new level of mobile video competition that is likely to develop in the remainder of 2015. Time will tell, but lack of cash is not Sprint’s only issue: they are also short of time.
Obviously.
Iain Gillott, founder and president of iGR, is an acknowledged wireless and mobile industry authority and an accomplished presenter. Gillott has been involved in the wireless industry, as both a vendor and analyst, for more than 20 years. The company was founded in 2000 as iGillottResearch in order to provide in-depth market analysis and data focused exclusively on the wireless and mobile industry. Before founding iGR, Gillott was a group VP in IDC’s telecommunications practice, managing IDC’s worldwide research on wireless and mobile communications and Internet access, telecom brands, residential and small business telecommunications and telecom billing services. Prior to joining IDC, Gillott was in various technical roles and a proposal manager at EDS (now Hewlett-Packard), responsible for preparing new business proposals to wireless and mobile operators.
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