Sprint iPhone brings its share of problems

The enthusiasm over Sprint Nextel possibly getting the iPhone is overblown.

News that Sprint may finally get the iPhone garnered universal praise yesterday, from a pop in Sprint's stock to longtime subscribers cheering at the prospect of finally owning Apple's smash-hit handset. Today, a few analysts have already begun to hit the brakes, noting the potential headaches that may come with the iPhone.

"Sprint iPhone? Be careful what you wish for," William Power, an analyst at Robert W. Baird, said in a research note today.

Sprint will have to deal with higher subsidy costs for the iPhone, a potential new strain on its 3G network, and may even be forced to end its unlimited data plan. The iPhone, meanwhile, isn't nearly the competitive advantage it was when AT&T was the exclusive partner and won't be a guaranteed draw with the three biggest carriers in the U.S. offering the same device. Other handset vendors, meanwhile, may get the short shrift as Sprint's marketing dollars flow to the iPhone.

To be sure, Sprint would gladly take on the headaches for a chance at the iPhone. The device would put Sprint on equal footing with its larger competitors. Wall Street liked the move, giving the stock a 10 percent gain yesterday. But as Wall Street is quickly realizing today, the price for that parity will be steep.

Financially, Sprint could take a hit in the near term. Apple commands a massive premium for the iPhone, and Sprint will likely have to pay a much higher subsidy for it than any other product in its lineup.

J.P. Morgan analyst Philip Cusick estimates that AT&T currently pays Apple $400 to $425 for the iPhone 4 and $375 for the iPhone 3GS--all so the customer can buy the phone for $200. In comparison, Sprint pays an estimated $150 subsidy for the new HTC Evo smartphone.

Sprint's margins are already strained by the high costs associated with adding and retaining customers. In the second quarter, the company took a lot of flack for the surprisingly large expense related to promotions, something it vowed to cut. But adding the iPhone to the mix would only further stretch its margins.

Assuming that a fifth of Sprint's phones sold in the fourth quarter are iPhones, Cusick estimates an additional $150 million in subsidy costs.

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There are other costs beyond financial ones. The iPhone brought a ton of traffic onto AT&T and Verizon Wireless' network, and it's expected to do the same for Sprint. While Sprint has plenty of experience with bandwidth-hogging Android phones, many of its higher-end devices have the luxury of running on the 4G WiMax network, run by partner Clearwire.

Sprint's iPhone isn't expected to run on Clearwire's network. The device is widely expected to a world phone able to run on multiple carriers and will likely include only the major wireless network technologies, HSPA for AT&T and other global carriers, and EV-DO for Verizon and Sprint.

Apple isn't going to waste its time on WiMax technology when even Clearwire is looking to move to LTE.

As such, the iPhone could lead Sprint to reinvest money into its 3G network at a time when it is spending capital on its Network Vision upgrade project and looking toward 4G.

The iPhone could also potentially be a negative for Sprint customers if it causes the carrier to end its much-loved unlimited data plan. It's the only carrier left that offers such a plan with no restrictions.

While an unlimited data plan with the iPhone would be a draw, some analysts question how effective Sprint will be at attracting new customers. Power cited a January survey in which only 15 percent of Sprint customers were interested in the Verizon iPhone. Many are likely content with their faster 4G smartphones.

"We suspect that many Sprint subscribers who wanted the iPhone may have already left for AT&T or Verizon," he said.

That said, the iPhone will present a competitive challenge to other handset manufacturers that have counted on Sprint as a strong partner. HTC, in particular, has seen tremendous success with its Evo line of phones, while Samsung has had a top-selling phone in the Epic 4G with Sprint, as well as a successor coming in the next month or two.

These companies, along with Motorola, which recently renewed its partnership with Sprint through the Photon 4G, are expected to lose market share to Apple in the fourth quarter, Power said.

Mizuho Securities analyst Michael Nelson said in a note that during the past two quarters, about 78 percent of Verizon's iPhone sales were upgrades from existing customers. He said he expects to see a similar ratio at Sprint.

Sprint, however, isn't just content to see upgrades from existing customers. It's looking to return to customer growth, and quickly. The company set a goal to return to contract customer growth for the year, but ended the first half losing 215,000 subscribers, suggesting blowout numbers in the back half.

Nelson estimates Sprint will sign up 1 million iPhones in the fourth quarter, followed by 5 million iPhones next year.

So while Sprint may sell a whole lot of iPhones this year, Apple may not necessarily be escorting Sprint to Camelot.