Sprint Boss Defends Controversial iPhone Subsidies

Sprint Nextel Corp. CEO Dan Hesse recently acknowledged that the nation’s third-largest wireless operator needs to play catch-up this year in the 4G LTE race with its bigger rivals AT&T and Verizon Wireless.

But he anticipates catching up next year because Sprint expects to complete the majority of its 4G LTE network by the end of 2013.

Ironically, Sprint’s 55 million subscribers might not be too concerned.

Asked last month during a Mobile World Live interview whether consumers really care about technology as long as it’s fast, Hesse responded, “I don’t think so. The customers” do not “really understand what 4G is.”

“Most of them think the iPhone 4 is 4G because it has the number four,” Hesse continued during the interview, which was held at Mobile World Congress in Barcelona, Spain. “It’s really the experience.”

In the short interview covering a wide range of issues, Hesse also responded to concerns that Sprint is heavily subsidizing the iPhone, Apple’s phenomenally popular smartphone. Sprint reportedly has a minimum commitment to buy $15.5 billion in iPhones over four years. In the fourth quarter of 2011, Sprint listed its wireless equipment net subsidy as totaling $1.7 billion. That figure compared to nearly $1.2 billion in the year-ago period and in the third quarter of 2011. Sprint primarily attributed the higher figure to the launch of the iPhone 4 and iPhone 4S.

Hesse acknowledged that the big U.S. carriers, including Sprint, must heavily subsidize the iPhone, but he said “iPhone customers tend to have a much lower level of churn and they actually use less data on average than a high-end 4G network device.”

Although more subsidies are incurred in the short-term on the iPhone, “the iPhone customer is actually more profitable than the average smartphone customer …,” Hesse noted.

In October 2011, Sprint began selling the iPhone 4S and iPhone 4. Hesse said four out of every 10 iPhones it sold were traced to a new customer, meaning Sprint is nabbing subscribers from competitors. In the fourth quarter of 2011, Sprint sold 1.8 million iPhones and wooed 161,000 postpaid customers.

Asked whether he anticipated future consolidation in the U.S. wireless industry after AT&T’s $39 billion acquisition of T-Mobile USA collapsed in the face of government opposition, Hesse answered in the affirmative. He anticipated more M&A activity due to the vast investments in network capital that wireless operators must incur to keep up with capacity. Demand for wireless services continues to grow at an astonishing rate that the industry hardly could have predicted five years ago when the iPhone was first introduced.  

Hesse indicated he didn’t think AT&T or Verizon Wireless would be making acquisitions because of their large size relative to the rest of the industry, including Sprint and T-Mobile USA. U.S. regulators and critics of the failed merger had raised concerns that AT&T’s merger with T-Mobile USA would simply make AT&T too powerful, reducing consumer choice and resulting in higher prices.

“I think you will have fewer networks going forward,” Hesse said, “and you will see more consolidation outside of the big two.”