Sprint invests $704 million into Network Vision alone in 2Q12

Telecom Lead America: Sprint will continue to struggle
financially throughout 2013 despite increased revenue growth of 6.4 percent
year-to-year in 2Q12, as the impact of Network Vision will offset the gains and
result in a negative bottom line. Sprint will focus on LTE deployment, the
decommission of the iDEN network, and on attracting new subscribers in 2H12 as
the operator is actively working on the completion of Network Vision. Sprint
will achieve improved margins in the long term, as 2014 will begin phase III of
Network Vision, where cost savings of $10 billion will be realized through

Network Vision initiatives are the main focus heading
into 2013 including the iDEN network shutdown and the LTE network rollout.

The iDEN decommission is ahead of schedule which will
allow Sprint to decrease the time until it can utilize the 800MHz spectrum for supplemental
LTE coverage. Sprint’s strategy to refarm its 800MHz spectrum for the company’s
LTE network picked up speed in 2Q12 due to increased investment and effort to
decommission the iDEN base stations. Sprint will likely free up the spectrum by
the end of 2013, allowing the operator to deploy additional LTE markets and
gain on AT&T and Verizon’s LTE networks.

Sprint reached the 2012 network thinning goal six months
early as the operator shut down 9,600, or 33 percent of the total iDEN cell
towers by the end of 2Q12. This was one quarter ahead of a schedule that was
already moved up once this year. The downside is that the fast progress came at
a price, as the increased operating costs continued to hurt margins. Sprint
invested $704 million into Network Vision alone in 2Q12, almost equaling total
Capex spend in 1Q12. This high investment will continue as the investment phase
will last through 2013.

Sprint got another boost in 2Q12, when the FCC approved
the use of the 800MHz band for 3G and LTE services in May. This will help speed
up Sprint’s plan to launch supplemental LTE coverage in this spectrum band in
2014 by eliminating the time of filing for approval later on.  The
remaining road block before Sprint can deploy LTE is the transition of the
remaining 4.4 million iDEN subscribers off of the iDEN network in 2H12 and
2013. Sprint is already preparing the future launch with 6,300 cell sites ready
for or already under construction and 2,000 already up live meeting the
required speeds and quality. The goal is to have 12,000 cell sites lit up by
the end of 2012 and the remainder finished in 2013.

The July launch of LTE will allow Sprint to begin to
build up its LTE subscriber base and play catch up to AT&T and Verizon’s
LTE networks. Sprint officially joined the LTE market with the company’s
mid-July launch of five LTE markets. Although the available LTE coverage areas
will be limited across the nation until the operator reaches 123 million POPs
at the end of 2012, Sprint will still be able to benefit from the launch due to
its LTE devices, which come with increased data capabilities compared to CDMA
devices. Many subscribers will begin to purchase LTE devices even in markets
that still operate only CDMA, allowing Sprint to increase data revenue.

Sprint lags behind AT&T and Verizon in terms of LTE,
yet the top two operators have not yet secured a large LTE subscriber base,
allowing Sprint an opportunity to gain LTE market share in 2H12. TBR believes
this will be difficult with the current LTE lineup consisting of only four
smartphones, compared to AT&T’s 13 and Verizon’s 12 LTE smartphones. Sprint
will release additional smartphones in 3Q12 that will attract additional
subscribers and help increase the operator’s LTE penetration.

Sprint will focus on retaining the iDEN subscriber base
and differentiating the Sprint platform device portfolio with the company’s
unlimited plans.

As Sprint moves to decommission the remaining iDEN cell
sites, the operator will attempt to retain as many subscribers as possible.
Postpaid recapture was 60 percent in 2Q12, up from 27 percent in 2Q11 and 47
percent in 1Q12 as subscribers were drawn to the unlimited plans. The 4Q11
addition of the iPhone has played a large part in subscriber retention. The
prepaid segment recapture rate was 32 percent in 2Q12. Prepaid subscribers have
a much lower retention rate compared to postpaid, yet Sprint has increased its
retention rate slowly each quarter as subscribers are attracted to the multiple
offerings available on Sprint prepaid brands. This ranges from inexpensive
plans, to the prepaid iPhone, to the availability of fast speeds on the WiMAX

Sprint will focus on differentiating its offerings
through its device portfolio and plans to attract new subscribers in 2H12. The
company will keep its unlimited data plans for all LTE capable devices,
including the upcoming release of the next iPhone model. This will help
diversify Sprint from the other Tier 1 operators, who either offer tiered data
plans or shared data plans. Postpaid segment net additions will continue to be
driven by Android and Apple devices, as Sprint remains the only Tier 1 operator
that has not openly backed the upcoming Windows 8 OS platform.

The operator is keeping its options open with the future
release of BlackBerry 10 OS also on the horizon in 1Q13. Sprint’s prepaid
segment will continue to rely on the strong multibrand strategy that the
operator has built over the past few years. New smartphones, including the
iPhone introduction to Virgin Mobile, along with new services, such as the
addition of WiMAX to Boost Mobile, will drive subscribers towards data plans
that will in turn drive prepaid revenue growth.

Eric Costa, Research Analyst in TBR’s Networking and
Mobility Practice
[email protected]