The article states that Sprint’s cost to run the iPhone is $15.5 billion over four years. Unclear to me what that “cost” means from the article. The iPhone won’t have a positive impact on Sprint operating income before depreciation and amortization until 2015. The article then implies that outside of that cost are the costs of upgrades to network to support iPhone data useage on its unlimited plans, resulting in a “cash shortfall of up to $5 billion” through 2013. Again, vague what that exactly consists of. Sprint says that the estimated wholesale cost of the iPhone is 40% or $200 more than other smartphones.
If Apple is running margins that essentially suck the profit out of the wireless phone telcos and into its own pockets, then there is another way that dropping market share can rapidly attack Apple’s margins – and that is by removing their leverage against the wireless phone companies
The article is oriented around a reference made by Hesse, CEO of Sprint Nextel, in a earnings call where he made a reference to “Moneyball” about how smart the iPhone is to him. But the article points out, that the Moneyball theory is low wage value players not high wage players, and claims that Hesse got his metaphor backwards.
SPQR is quite right, but to understand the degree of wishful thinking Hesse is exhibiting here you have to bear in mind the huge Damned Fact that drives the behavior of Sprint and other telcos: the real rates of return on carrier cell networks are negative! The carriers are burning capital, all day, every day.
When ROI is negative, you become desperate to drive down costs or pull up margins. Desperation makes CEOs stupid; Hesse is exhibiting that kind of stupidity by placing a bet that even if he shovels most of Sprint’s present profits down down Apple’s throat, the iPhone will push Sprint’s margins up soon enough for the deal to be a net positive in four years.
Meanwhile, in the real world, Android’s U.S. market share is probably passing 50% right about now. I wonder how long it will take for Sprint’s board to realize they’ve been had and fire Hesse’s ass?