Sprint Nextel (Overland Park, Kan., U.S.A.) confirmed that it will sell the next version of Apple Inc's (Cupertino Calif., U.S.A.) iPhone, ending months of speculation about whether it would become the third U.S. operator to sell the device. While carrying the device should help Sprint keep subscribers from fleeing to other operators, some analysts worried whether the costs would outweigh the benefits because Apple phones come at a steep premium to other devices.
Sprint would not say whether its iPhone would come with a flat-fee service for unlimited data use - an offering analysts see as Sprint's only hope for making its iPhone more competitive than rivals.
Sprint shares closed up 5% after the confirmation, recouping some losses from the previous day when investors fled due to worries about the cost of the device to Sprint, which has been shedding subscribers and posting quarterly losses for several years.
"This is a huge gamble for Sprint and people are justifiably worried that they won't be able to make any money doing it. It's not a company that's in great financial shape right now," said Stifel Nicolaus analyst Chris King.
Analysts questioned how Sprint will be able to find the money to pay a premium to Apple on top of its obligations to pay back billions of dollars in debt and its plan to spend about $5 billion on a network upgrade in coming years.
The day before the phone was announced Sprint shares fell 10% after a Wall Street Journal report that the money-losing company committed to buy 30.5 million iPhones from Apple over the next four years and would pay $500 to subsidize each phone, leading it to lose money on the device until 2014. Sprint and Apple have declined to comment on that story.
But since carriers always end up paying a premium for Apple phones, the addition of a third U.S. iPhone distributor also highlights Apple growing power in the U.S. wireless market, said Pacific Crest analyst Steve Clement.
"The more skews Apple has out there and the more distribution partners, the more market share they'll take. It's generally taking more profits from the carriers," says Clement.
On top of this worry investors and gadget fans were less than enthusiastic about the iPhone 4 product upgrade that Apple unveiled on Tuesday.
AT&T Inc, Verizon Wireless -- a venture of Verizon Communications and Vodafone Group Plc -- and Sprint are expected to begin taking pre-orders for the iPhone 4S on October 7.
Unlike Sprint, neither Verizon nor AT&T offer unlimited data services. Analyst John Jackson of CSS Insight was skeptical that enough consumers would move from AT&T or Verizon Wireless to Sprint to make the expense worthwhile.
"Even with unlimited data Sprint will have a challenge here," say Jackson. "Will it be sufficient mass to move the needle? I think it's questionable."
Concerns about Sprint also dragged down Clearwire Corp, which is majority-owned by Sprint. Clearwire, which needs billions of dollars in funding to finish building its own network, saw its shares fall 11% to $2.15 on Nasdaq.
Worry about Sprint may put Clearwire's "viability into question, especially if you thought Sprint was going to wind up buying them," say Stifel's King.
Sprint shares closed up 5% at $2.86 on the New York Stock Exchange on Tuesday but were still below their $3.04 close on Friday before the Wall Street Journal report about Sprint's commitment to Apple.
(Reporting by Sinead Carew; Editing by John Wallace, Phil Berlowitz)