Sprint touts prepaid as balm for bad economy

Financially Sprint still continues to suffer, posting a widening loss and a 12% drop in revenues from the first quarter of last year, though its effort to save cost through 8000 job cuts and other measures gave the company a $4.5 billion balance at the end of the quarter. Sprint may also be considering outsourcing its network operations to cut cost further. The Wall Street Journal today reported that Sprint is negotiating with Ericsson to have the vendor take over the operations of its wireless network—a deal that could be worth $2 billion over several years, cut Sprint’s costs by 20% and see 5000 to 7000 Sprint employees move to Ericsson. While outsourcing network operations has become popular in developing countries and Europe, the trend has been slow to pick up in the US, where operators still compete on network quality. No major wireless operator has turned over its network to a vendor yet, though Embarq has outsourced its network operation centers to Nokia Siemens Networks, an arrangement that is still in place despite CenturyTel’s acquisition of Embarq.

While prepaid subscribers are mitigating Sprint’s overall customer losses, Hesse said Sprint is now focusing on improving results on the postpaid side of the business. Sprint lost 1.25 million postpaid subscribers in the first quarter, including 531,000 CDMA subscribers, highly valuable customers that drive normally drive ARPU growth due to a high $18 a month average data usage. Sprint, like the other 3G operators, is facing customer losses from businesses as they scale back on data plans and lay off employees. Sprint has been trying to arrest the flight of those customers through better customer service and today announced several improvements in its customer satisfaction ratings that Sprint hopes will keep subscribers loyal.

Sprint is also going after the smartphone subscribers that have been lured away by AT&T and Apple in recent quarters. This quarter Sprint will launch the Palm Pre, a highly anticipated mobile data device that may siphon off adherents to Apple’s iPhone and Research in Motion’s Blackberry.

“We are far from satisfied with our postpaid subscriber numbers,” Hesse said. “We are hopeful that with the foundation we are laying of strong network performance and customer service improvements, that the Palm Pre and a variety of other initiatives we have planned will get traction later in the year.”

Several analysts are skeptical about an immediate Sprint turnaround, however. Prepaid may not have as big an impact on future quarters as it did on the last, said Craig Moffett, senior analyst for Bernstein Research. Other operators are starting to counter Boost’s unlimited plan, particularly T-Mobile, which announced its own $50 offer in February, though only for existing subscribers. In fact, Moffett said, the whole industry may be in a feel-good daze about prepaid after the first quarter, only to have their notions dashed in the second quarter.

“The sustainability of the industry's [first-quarter] pre-paid results remains a question mark,” Moffett said in a research note. “If, as is likely, Sprint's pre-paid bonanza came primarily in the month of March, then many of the subscribers Sprint gained may not be counted as losses for other carriers until [the second quarter]. Overall growth rates for the market could therefore be significantly worse than they appear.”

While the launch of the Pre is expected to give Sprint a boost in postpaid data-plan sales, JBB Research CEO and principal analyst Julien Blin said Sprint might have trouble selling it at a low enough price point to compete with the iPhone and BlackBerry. “While several reports seem to indicate that the Palm Pre could cost about $170 to build and be sold to carriers for around $300, Palm’s financial issues could make it difficult to subsidize the Pre enough to compete on price with the iPhone and BlackBerry, especially if Apple introduces a cheaper iPhone this summer,” Blin said.