Even if your profits are down, this is no reason not to back your winning horse.
Per the Barrons.com blog, despite expecting a decline in wireless profits due to the high subsidy cost associated with carrying the iPhone, Sprint plans to exceed its US$15.5 billion minimum purchase agreement with Apple and looks to make up for the profit loss with subscriber revenue.
In the Monday filing of Sprint’s 10-K report for the 2011 fiscal year, it was revealed that the company is betting on subscriber dues to offset an expected 2012 deficit from the agreement with Apple, which called for a minimum order of around US$15.5 billion worth of high-subsidy iPhones.
During 2011, the company entered into a purchase commitment with Apple, Inc. to purchase a minimum number of smartphones, which on average, is expected to carry a higher subsidy per unit than other smartphones we sell.
Sprint’s plan is to take a hit in profits early by purchasing and subsidizing iPhones, then reap the benefits yielded from subscribers with lucrative smartphone contracts. There is evidence that the strategy may be working, as the carrier sold 1.8 million iPhones over the holiday quarter, 40 percent of which were to new subscribers. In contrast, iPhone activations at the top two U.S. carriers Verizon and AT&T stood at 4.2 million and 7.6 million, respectively.
Carriers pay heavy subsidies to carry the iPhone, and Sprint is currently paying US$450 for every unit sold with a two-year contract. On top of what the company calls an “instant savings,” Sprint is the only carrier in the U.S. to offer unlimited data for any iPhone model.
The nation’s third-largest mobile carrier was the last of the “big three” networks to get the iPhone, and only started selling the device in October, 2011 when the newest iPhone 4S was debuted. Combined launch-day sales of the iPhone 4S and last-generation iPhone 4 helped set a new one-day record for Sprint, and the product line continues to draw in new customers.
Previous reports called the iPhone agreement a “bet the company” move, and estimated that the telecom would have to put up US$20 billion for rights to sell the popular Apple handset.
Stay tuned for additional details as they become available.