Sprint is gonna commit to buy 30.5 million iPhones over the next four years

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http://online.wsj.com/article/SB1000...795839250.html

With the new iPhone coming out this week, Sprint Nextel Corp. is finally expected to gain access to a device it has long coveted?but at a staggering cost.
The No. 3 wireless company is making a multibillion dollar gamble that Apple Inc.'s gadget will be the ticket to a turnaround, even though Sprint Chief Executive Dan Hesse told the board in August that Sprint would likely lose money on the deal until 2014, according to people familiar with the matter.
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Sprint CEO, Dan Hesse

If Sprint has bet right, the iPhone will be the device that finally breaks the company's half-decade long slide and keeps much larger rivals Verizon Wireless and AT&T Inc. from running off with the bulk of the wireless industry's subscribers and profits. If it's wrong, the iPhone deal will saddle the company with a costly albatross at a time when it is already stretching to manage an expensive network upgrade and cover debt payments.
New details, not previously reported, give a rare look at Apple's closely guarded dealings with carriers, and reveal just how high the stakes are for Sprint.
Mr. Hesse told the board the carrier would have to agree to purchase at least 30.5 million iPhones over the next four years?a commitment of $20 billion at current rates?whether or not it could find people to buy them, according to people familiar with the matter. In order to keep the price people pay for the phone low and competitive with rivals, Sprint would be subsidizing the cost of each phone to the tune of about $500, which would take a long time to recoup even at the high monthly fees iPhone users pay.
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Directors debated what they had just heard. Some worried the payoff would be too long in coming. One member questioned whether the multiyear deal might outlast the iPhone's popularity. To sell that many iPhones, Sprint would have to double its rolls of contract customers, convert all of them to the Apple device or a combination of the two.
"This is a bet-the-company kind of thing,'' said a person familiar with Sprint's decision-making. The projected hit to the company's operating income is "staggering," the person said.
The board ultimately signed off on what the company internally called the "Sony" project, concluding Sprint couldn't compete otherwise. Directors figured, "How can we pass this up? We have to have it," the person familiar with the matter said.
Apple is expected to unveil its newest iPhone at its Cupertino, Calif., headquarters Tuesday. Carriers like Sprint, which people familiar with the matter have said will get the new phone, are expected to announce their plans to carry the device later in the week. Verizon Wireless, which is a joint venture of Verizon Communications Inc. and Vodafone Group PLC., broke AT&T's exclusive hold on the U.S. market for the phone in February, but Sprint remained out in the cold.
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The lack of the iPhone is "the No. 1 reason customers leave or switch," Mr. Hesse said at an industry conference last month.
Sprint spokesman Bill White declined to comment. Apple spokeswoman Natalie Kerris said the company doesn't comment on "rumors and speculation."
The details of Sprint's deal lay bare the leverage Apple has won with carriers, which before the advent of the iPhone essentially dictated terms to handset makers. Apple isn't singling Sprint out. It also requires its other carriers to make long-term volume commitments for the iPhone, people familiar with the matter said.
What distinguishes Apple's deals from those struck with other handset makers are their scale and a tendency to have the committed volumes grow larger over time, the people said.
The practice of locking in long-term, high-volume deals fits with Apple's habit of locking in components for its devices well in advance. It also sheds light on how Apple can be confident about future sales as ailing former chief executive Steve Jobs steps back from the company he helped found.
That Sprint would accept such costly terms highlights the pressure the company is under to get its roster of contract customers growing again. While the company has stemmed the revenue declines and subscriber losses that followed its disastrous 2005 merger with Nextel, it is much weaker financially than its larger competitors and hasn't posted a full-year profit since 2006.
Sprint's weakness makes shouldering Apple's terms riskier for the carrier than for its rivals. Sprint's stock has lost more than 80% of its value since the iPhone hit the market in June 2007. Its debt carries junk-bond ratings. The carrier had more than 52 million subscribers at the end of the second quarter, but many of them were pay-as-you-go customers who typically don't buy the most advanced devices. That compares with 106 million subscribers for Verizon and nearly 99 million for AT&T.
It isn't inconceivable that Sprint could sell the 30.5 million to 32 million iPhones under its commitment to Apple. AT&T and Verizon together sold nearly 12 million iPhones in the first half. At that rate, Sprint could hit 32 million iPhones by capturing a third of U.S. sales.
Sprint does have some advantages in the iPhone wars. Consumers like its overall service, which ranked roughly even with Verizon's in a survey by Consumer Reports last year. AT&T's ranked dead last.
Unlike its rivals, Sprint also will almost certainly offer unlimited data plans for its iPhone buyers, since it is a clear competitive advantage, one person familiar with the matter said. The company believes the combination will allow it to poach customers from Verizon and AT&T, the person said.
Sprint's unlimited plans mean consumers will have more chioice when signing two-year contracts, which is where buyers see the bulk of their iPhone-related costs. AT&T and Verizon are steering new customers into plans that get more expensive the more you use. Those tiered plans are frequently cheaper now, but could prove costlier as appetites for wireless data rise.
IPhones are expensive for carriers to buy. Apple got $655 on average for each one sold in its most recent quarter. For its iPhone inventory, Sprint would be pledging to pay out some $20 billion over the course of its deal ? though the volumes involved could signal Apple's interest in broadening the base of customers by rolling out a cheaper device, which could lower Sprint's total cost.

In contrast to past events, there is little pre-event buzz before Apple's iPhone event tomorrow. There are several issues at play for why the stock is lagging, MarketBeat's Mark Gongloff explains.

Carriers say the iPhone is ultimately a profitable device even given the high up-front cost and the load it puts on their networks. Sprint, however, expects the deal to depress its results until 2014, the people familiar with the matter said. Under a baseline scenario, the carrier expects the deal to cost it some $1.5 billion in operating profit over the next two and a half years, one of the people said. The company forecasts selling the bulk of the iPhones between 2013 and 2015, with the deal turning profitable in 2014, this person added.
The precise financial impact depends on a number of variables, including how many phones are sold, the amount of data the iPhone buyers use, sales of high-margin accessories and whether the phone keeps subscribers from leaving Sprint, which could lower marketing and customer service costs.
It also depends on whether Apple can hang on to its market-leading position.
"Five years ago, the Motorola Razr was the top-selling phone," says Credit Suisse analyst Jonathan Chaplin. "Imagine trying to sell 6 million of them today."


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