Sprint grows subscribers with subsidy program
The carrier capitalizes on the federally-subsidized Lifeline service to attract prepaid customers.
The federally-subsidized Lifeline program provides millions of low-income Americans with 250 free monthly cellphone minutes, and pays carriers such as Sprint as much as $10 per month per customer to offer free or discounted wireless plans to qualifying subscribers.
Sprint uses the subsidies to offer free wireless service through its Assurance Wireless brand; competitors AT&T (T) and Verizon (VZ) also provide discounted plans of their own. SafeLink, a brand under América Móvil SAB’s TracFone unit, is the biggest provider of the subsidized service, with more than 2 million subscribers. In addition to the government subsidies, the companies also make money when Lifeline customers spill over their monthly pool of minutes.
Our $4.23 price estimate for Sprint stock is about 46% above market price.
Sluggish wireless growth and deteriorating economy
As carriers fight for customers in a saturated market, low-income subscribers may become an unexpected area for growth. According to U.S. Census figures, more than 46 million Americans were living in poverty last year, an 18-year high.
The Universal Service Administration Co., a non-profit that runs Lifeline's fund, disbursed a total of $783 million during the first half of 2011, up 26% from the same period in 2010. A chart from the USAC shows that Sprint's Assurance Wireless brand has consistently grown each quarter and made around $60 million in the last quarter from subsidies alone. If customers exceed the monthly free usage limit, Sprint makes money by offering Assurance subscribers the opportunity to buy 250 extra minutes or 200 texts for $5 per month.
Lifeline is expanding as a sluggish economy and rising mobile costs leave millions unable to pay for traditional wireless services. It may not be very lucrative to go after these customers as they do not bring in a lot of revenue, but Sprint has been able to capitalize on this subsidized service to attract low-end prepaid customers and post healthy net subscriber additions last quarter, signing on 1.3 million new subscribers.
Profit margins on Assurance customers may be razor thin, but Sprint benefits mainly because the services reduce prepaid churn, or the frequency with which prepaid customers leave. A customer is less likely to switch or drop a free phone service.
Prepaid services generally have low revenue per user, and what makes the business even more unprofitable is that people leave much more frequently than postpaid subscribers. This forces the company to spend more on marketing and customer service to attract and keep users. In the first nine months of the year, as the Assurance business grew, Sprint pared the churn in its prepaid business to 4.2% from 5.6% a year earlier.
Also, subsidized customers may also eventually sign up for more high-end Sprint services if their financial circumstances improve.
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