Palm Pre not yet making an impact on Sprint

Once the Pre gets in Radio Shack and Best Buy, Hesse said, Sprint expects more new customers, churning from competitors’ networks. Such gross additions would not only offset its net subscriber losses, but presumably bring more high-value subscriptions to Sprint’s revenue base, boosting both overall and data ARPU.

Though the Pre has garnered rave reviews from analysts and customers alike, the simultaneous launch of the iPhone 3G S stole much of its thunder. According to analysis from Medialets Sprint sold 50,000 Pres on the day of launch and 100,000 more 18 days later. Those numbers pale in comparison to the iPhone sales racked up by AT&T in the same period, though many of the 2.4 million iPhones sold in June are likely the legacy iPhone 3G, which AT&T discounted steeply.

AT&T’s success in selling the iPhone has been so great that its wireless operating margins have swung erratically in the last several quarters as AT&T absorbs the cost of subsidizing so many new smartphones. Last quarter’s stellar iPhone sales caused AT&T’s profits to dip lower than expected. That trend may also provide a hint into how well the Pre is selling for Sprint.

Sprint’s wireless operating margins did fall in the second quarter from 25.7% to 21.7%, but chief financial officer Robert Brust wasn’t expecting any see-sawing in margins over the next few quarters, despite competitive or subsidy pressures. “Our goal is to keep them stable in the next couple of quarters—as stable as we can, Brust said. While that could mean Sprint expects to sell fewer Pres than AT&T is selling iPhones, keeping Sprint’s acquisition costs in check, it could also mean that Sprint is paying lower subsidy costs for the $200 Pre than AT&T is paying for the iPhone, the cheapest of which are retailing at $100 with a two-year contract.

Hesse acknowledged that the introduction of each new wave of iPhones does have an impact on Sprint’s churn rate, but he characterized each one as a temporary blip. But he said Sprint has always had a competitive device to help offset any customer losses. Last year it was the Samsung Instinct, and this year Sprint has both the Pre and the recently introduced BlackBerry Tour from Research in Motion (NASDAQ:RIMM), Hesse said. “I don’t want to lead you to believe there’s no impact at all from the iPhone,” Hesse said. “It’s a successful device, but I think we’ve mitigated the impact significantly with a strong device line up.”

While Sprint gives its strategy on the high-end time to work, it is consoled by its unprecedented gains in the prepaid market, driven largely by subsidiary Boost Mobile’s $50 unlimited plan. Those gains, though, are both a blessing and a curse as Sprint’s customer mix begins to shift from high-value postpaid CDMA plans to higher-churn and lower-value prepaid iDEN plans, said Bernstein Research senior analyst Craig Moffet. That transformation is still a long way off: only 11% of Sprint’s 48.8 million subscribers on prepaid plans. But with its increasing postpaid subscriber losses and a huge commitment to prepaid growth with its acquisition of Virgin Mobile, announced yesterday, Sprint is hastening that transformation, Moffet said.

“Sprint increasingly views itself as a primarily pre-paid, not post-paid, wireless operator,” Moffet wrote in a research note. “With a still-solid national network and a rock-bottom pricing plan, acquiring pre-paid subscribers isn't the question. It's whether they can make money at it. The pre-paid market is brutally competitive, with low cost competitors and too many players.”