Did you know that Sprint Corporation (S, Financial) was originally founded in 1899 – more than 115 years ago – as the Brown Telephone Company? Companies don’t last that long if they’re not doing something right, but Sprint’s present and future don’t look as rosy and solid as its past.
In the current telecommunications scenario, AT&T (T, Financial) and Verizon (VZ, Financial) rule the roost with T-Mobile (TMUS, Financial) and Sprint coming in a distant third and fourth. From a net subscriber addition perspective, Sprint is far behind the other three and has the highest churn rate.
Source: Fiercewireless
As you can see, T-Mobile has emerged with the third-largest market share, leaving Sprint to deal with yet another problem. But a 14.5% market share isn’t the end of the world; the problem is that it is bleeding customers to other providers and not getting enough to replace them. The high churn rate and low net adds are causing that gradual bleed, and that’s not a healthy sign for a company operating in a mature market with little room for play.
As you can see, market share is just one of its problems. All three major competitors managed to stay in the black through the recession, but Sprint was losing money before that.
A tough industry
Telecommunications is a vicious industry to be in. Not only is it capital intensive – preventing new players from entering unless they’ve got really deep pockets (like Alphabet [GOOG] pushing its Google Fiber) – but it’s also a highly mature one in the U.S.
Naturally, with such stiff competition at the top, any company in this space has to keep investing just to stay relevant. Sprint’s Capex has been in the $6 billion to $7 billion range for the past two years, but it still hasn’t given Sprint the results it sought.
Moreover, this is an industry where, very soon, growth can only happen if someone else loses. The entire pool of prospective customers is finite, and the market penetration is expected to hit 86%-plus as soon as three years from now.
The investment angle
To be honest, there’s really no investment case for Sprint at this point.
If Sprint can’t get its act together before then, it will be looking at picking up the crumbs dropped by other providers because of poor service and other reasons. And by “getting their act together” I mean come up with something a whole lot more relevant and enticing than discounts and bundle deals. They need to be thinking along the lines of AT&T’s GigaPower project for superfast fiber connectivity, for example. The one edge it has right now is the recent deployment of its 2.5 GHz spectrum – that’s something T-Mobile doesn’t have at the moment.
If that doesn’t happen in the next couple of years (or perhaps sooner), we could see either a consolidation within the industry or a larger company like Comcast (CMCSA, Financial) grabbing them up. Rumors have been floating around for a while about Sprint buying T-Mobile or Comcast buying Sprint. Either way, the deal can only work if there are enough synergies to justify a takeover.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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