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Summary

Continuing with its new CEO’s promise of disruptive pricing, Sprint has launched the “Cut Your Bill in Half Event” initiative, targeting AT&T and Verizon customers. Under the promotion, AT&T and Verizon customers who switch to Sprint get unlimited voice and text and a data allowance that closely matches their current tariff plan for half the price they are currently paying.

Sprint is likely to gain new, value-conscious customers with this competitive offer, but of possibly greater importance is that the offer is likely to intensify competition among the four major US operators, which are already engaged in a price war.

Disruptive pricing set to further squeeze operator margins

Disruptive pricing is Sprint’s strategy to turn around its trend of subscription losses while it continues to work on modernizing its network. Sprint has openly admitted that it has been losing customers because of service disruptions caused by its network-modernization program.

Low-priced offers such as this one from Sprint and others from T-Mobile have resulted in a price war among the major four US operators – Verizon, AT&T, Sprint, and T-Mobile – with market leader Verizon being the most reluctant to participate.

Verizon and AT&T have EBITDA margins roughly twice those of Sprint and T-Mobile. The recent price competition is taking a toll on these profitability measurements. In December, Verizon released preliminary details of 4Q14 results. Verizon said that it had seen strong subscription growth but that it also saw a rise in churn because of the “competitive and promotion-filled” nature of the market, which has resulted in short-term pressure on EBITDA and EBITDA margin.

Verizon is calling the margin pressures short-term, but Sprint’s new half-price offer makes it clear that there is no end in sight to pricing competition. In fact, after Sprint launched its offer, T-Mobile introduced a new unlimited plan that undercuts those of the other three major operators.

Verizon and AT&T will find that they need to keep up with the promotional offers, as Sprint and T-Mobile continue to pull out all the stops. However, we shouldn’t expect to see AT&T or Verizon attempting to match Sprint’s half-price offer, and it would be foolish for either to do so. Sprint’s current strategy is to offer disruptive pricing to stem subscription losses while it continues to work on modernizing its network. AT&T and Verizon, on the other hand, have nationwide, robust LTE networks already built, along with growing subscription bases. AT&T and Verizon are likely to react with some promotional pricing, but not half-price cuts.

Appendix

Further reading

Sprint Update, September 2014, TE0001-000874 (September 2014)

Pricing: Sprint uses new tariffs as lever to return to growth, TE0001-000885 (October 2014)

“Sprint’s iPhone for Life leasing program repackages installment concept,” TE0001-000882 (September 2014)

“AT&T and T-Mobile offer dueling switching promotions,” TE0009-001270 (January 2014)

Author

Kristin Paulin, Senior Analyst, Americas

Kristin.paulin@ovum.com

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