Sprint network starting to outgrow its customer base

Chief Executive Officer Dan Hesse focused much of Sprint’s third-quarter earnings call on customer retention efforts — on consolidating the customer base it has before it seeking out new customers. While the company’s churn rate remained stable, reflecting that strategy, Sprint’s lack of gross customer additions led to a 1.3-million drop in net customers, a big problem that could compound into an enormous one if the trend keeps up.

“For all the talk about fixing churn, the problem is now more one of making the product appealing to new subscribers than it is simply keeping the ones they have,” said Craig Moffett, senior analyst with Bernstein Research, in a research note today. “Sprint's share of gross additions has dropped to 13%. As gross additions fall, sales per square foot in their retail network falls with it, putting increasing pressure on retail costs. That, in turn, puts pressure on the company to close stores, furthering a downward spiral.”

By not focusing on growth right now, Sprint could be compromising its ability to grow in the future when it finally does right the ship, Moffett said. He pointed out that in order to reach equilibrium—zero net customer loss—Sprint would have to cut its post-paid churn rate of 2.15% in half to match that of the other operators, as well asincrease its share of gross additions from 13% to 19% to match Sprint’s percentage of the overall US wireless customer base. Sprint has already shrunk 6.3% over the past year in terms of subscribers, while the industry overall has grown 7%.

If that market-share freefall continues, Sprint will face enormous cost pressures as it maintains a network designed to handle a much larger volume of customers as well as a retail operation designed to handle much greater volumes of growth, Moffett said. Sprint’s wireless service margins have already been affected, falling from 32.4% in last year’s third quarter to 23.4% last quarter. “With 30,000 or so towers – each with lease costs, powering costs, backhaul costs, maintenance and labor requirements – the cost structure of a wireless network is hugely sensitive to losses in volumes.” Moffett said.

Hesse defended Sprint’s retention strategy today, saying that while gross adds are still declining, they’re declining at lesser rate than in the past. Sprint has already begun stepping up its marketing efforts in the third quarter and plans to accelerate them, Hesse said.

“We felt it was important to have our house in order to know we could provide a good customer experience at all customer touch points before inviting new customers to visit,” Hesse said. “While we’re not 100% of the way to our end goal, the customer experience at Sprint today is vastly improved from where we were at this time last year, and we’re comfortable inviting customers to experience what we have been calling the Now Network.”