Sprint’s Spectrum Position Bolstered By U.S. Cellular Deal

It hasn’t taken long for Sprint (NYSE:S) to put its recently acquired cash from Softbank to use. The third largest wireless carrier in the U.S. announced Wednesday that it has acquired spectrum as well as around 585,000 subscribers in the Midwestern markets from U.S. Cellular for $480 million. The deal is the first that Sprint has announced since receiving $3.1 billion in cash infusion from Japanese telecom Softbank only last month.

If the deal receives regulatory approval (which is expected by mid-2013), U.S. Cellular will exit the Midwest and lose around 10% of its subscriber base but be able to focus better on the rest of the markets where it has the highest penetration and increase efficiency. At the same time, Sprint will get its hands on additional network capacity that not only improves its competitive standing against bigger rivals Verizon (NYSE:VZ) and AT&T (NYSE:T) but also helps it augment its lagging LTE buildout.

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Sprint’s lagging LTE plans get a boost

While Sprint has only just started its LTE rollout with its LTE coverage in all of 32 metropolitan cities as of October, the country’s largest wireless carrier, Verizon, has its LTE network available to more than 250 million Americans in close to 420 markets across the U.S. AT&T’s lead over Sprint is not as wide, but it still offers LTE in as many as 77 U.S. markets to over 80 million Americans currently, and plans to almost double that reach by the year-end.

In order to bridge the gap, Sprint is aggressively executing on what it calls its Network Vision strategy to get most of its 4G LTE network ready by the end of 2013. The carrier is trying to phase out iDen gradually and consolidate its network holdings into one 2G/3G/4G network using a combination of CDMA and EV-DO. In addition to using spectrum from the U.S. Cellular deal, Sprint is planning to shut down the iDEN network completely by next summer and use the freed up iDEN spectrum to boost its LTE network in 2014. (see Sprint To Build LTE Over iDEN’s Grave)

Since Sprint plans to maintain its niche by keeping its plans for LTE unlimited as well, the carrier needs enough spectrum to meet the needs of an increasing number of data-hungry smartphone subscribers. At about 73%, Sprint’s postpaid smartphone penetration is the highest among the top three carriers. The acquired spectrum from U.S. Cellular will therefore help Sprint provide better service to subscribers while bolstering its Network Vision plan with additional capacity for both 4G LTE and 3G.

Margin improvement

While Sprint is rolling out LTE in new markets, a majority of its subscribers are on 3G and will continue to do so for the next few years. LTE adoption so far has been sluggish and the technology has yet to be widely adopted. Verizon, despite its huge lead over the rest, has managed to convert only about 16.5% of its postpaid subscriber base to LTE. Therefore, while rolling out LTE is important in order to keep pace with the industry trends, improving 3G capacity is also crucial. Since Sprint already services the markets where it is acquiring spectrum and subscribers, the carrier will be able to service these customers without taking on additional employees, hence leveraging its increased scale to improve margins.

Margin improvement is also one of the key goals of Sprint’s Network Vision plan – a successful implementation of which will help reduce operating expenses substantially by eliminating duplicate fixed costs of maintaining different networks. It will also allow for better 3G/4G coverage and reduce roaming costs as the spectrum previously used for iDEN will now be available for the CDMA/LTE network. Also, since 4G LTE is more efficient at handling data, Sprint will be able to realize the margin benefits as it rolls out in new LTE markets and more people adopt the high-speed technology.

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