Just the other day, Sprint’s prepaid subsidiary Boost Mobile announced its “Slash Your Payment in Half” promo aimed squarely at subscribers of Cricket and MetroPCS. The scheme promises to do exactly what it says – cut the monthly payment of Cricket and MetroPCS subscribers if they ditched their carriers and jumped onto the Sprint bandwagon. While customers may be celebrating at the prospect of saving some money, looks like not all are popping the champagne. MoffettNathanson analyst Mr. Craig Moffett believes such promotions may well lead to a price-war within the industry, resulting in a “race to the bottom”.
For the uninitiated, Boost recently introduced the aforementioned scheme, which its parent Sprint had been running for some time now on its postpaid plans, targeting AT&T and Verizon customers. The scheme looks to lure customers away from rival carriers by charging half the rate for the same amount of data usage. The carrier is offering 2.5 GB of LTE data at only $20 per month, something that Cricket charges $40 for. MetroPCS meanwhile, charges $40 for only 2 GB of data. Boost is also offering 5 GB of data for $25 and 10 GB for $30. Plans that Cricket charges exactly twice as much for. MetroPCS charges $50 for only 4 GB of data as opposed to 5 GB and doesn’t offer a 10 GB plan.
Questioning the rationale behind introducing “a radically lower price point”, Mr. Moffett wrote on his blog that the effect of the new promotional scheme on Sprint’s bottom-line is likely to be disastrous and the company will likely run out of cash by the start of 2016. He dismissed Sprint’s healthy EBITDA, terming it as a “mirage”, saying Sprint is “artificially inflating today’s EBITDA levels relative to that of subsidy accounting in 2013 and earlier”, and that the company’s “wireless EBITDA would have fallen by a spectacular 40.4% in the first quarter”. He also predicts the company will probably have to look at raising funds from the equity market or look at parent SoftBank to bail it out, come 2016.
While Mr. Moffett noted “a laundry-list of limitations” for subscribers to actually be able to subscribe to the plan, he believes the very availability of such low-priced plans will “tend to attract a lot of attention”, even though he conceded that the entire pool of Cricket and MetroPCS subscribers don’t number any more than 15 million or so. Even though Sprint has been running the promotion on its postpaid service for Verizon and AT&T subscribers for a while, Mr. Moffett says he fears this one will actually have an adverse effect if extended to more customers, as the effective discount is much larger at 33% compared to the 20% odd net effective discount in the case of Sprint’s postpaid offer. Having seen T-Mobile already tweak it’s prepaid plan because of Sprint’s strength in the segment, Mr. Moffett fears the latest round of price-cuts will have a further adverse effect on the industry by forcing the hands of AT&T and Verizon to respond.