What Will Happen if Sprint Cancels Unlimited Data?

After a turbulent year for the telecommunications sector, the big four wireless service providers have changed significantly. Earlier in the year, AT&T T announced that it would purchase T-Mobile for $39 billion. Currently, agencies including the Federal Communications Commission are poking holes in the merger, but there is still a chance that it may go through. Furthermore, Apple AAPL released the iPhone for use with the Sprint S Networks.

Recently, rumors started to circulate that Sprint may be discontinuing its unlimited data plan service, a move mirroring decisions made by AT&T and Verizon VZ earlier in 2011. How will this affect its existing client base? The most obvious result is that customers may leave Sprint for other carriers. Given the limited resources in terms of customer service and overall wireless coverage, customers have few incentives to stay with Sprint without an unlimited data plan.

While naysayers could claim that Sprint offers the iPhone and other Android-based smartphones, most other carriers do as well. The other three large wireless service providers offer smartphones that can compete with Sprint's current product offering. Moreover, customers can get an unlimited data plan from T-Mobile for $60 per month. If Sprint stopped its unlimited plan, then T-Mobile will be the only large carrier to have one. If none of the big four competitors had unlimited data, customers would likely flock to AT&T and Verizon, simply because of their wide wireless coverage.

Sprint's management may not want to sever one of the last few reasons customers stay with it. Especially if the AT&T and T-Mobile merger goes through, Sprint will have to compete with two telecom behemoths, without many advantages available. In the event Sprint's executives decided to axe the unlimited data plan, what would happen to the wireless telecommunications industry?

The first thing that would happen is that many Sprint customers will likely switch to other carriers. They will either flock to T-Mobile, which still carries an unlimited data plan, or they will bite the bullet and go to AT&T or Verizon, accepting higher fees and payments in exchange for better service and coverage.

An alternative is that some customers may downgrade themselves to wireless providers like Metro PCS PCS, United States Cellular USM, or Leap Wireless LEAP. This scenario is likely to play out if unlimited data plans are taken down across the big four providers, or if AT&T and T-Mobile successfully merge. In that case, the oligopoly present in American telecommunications may be dismantled.

Investors should understand the importance of Sprint's unlimited data plan. It may very well be the primary selling point for the company, keeping many of its customers latched on to the company and its services. Investors should also keep the AT&T and T-Mobile merger drama in mind, as the FCC is actively denying AT&T's plans. Investors should also keep the global macroeconomic outlook in mind, as the telecom industry tends to react violently to large shifts in broader markets.

ACTION ITEMS:

Bullish View:
Traders who believe that Sprint is an appropriate long investment might want to consider the following trades:

  • One of the company's strongest selling points is that it currently has an unlimited data plan, for individuals and whole families.
  • It is the only cellular provider that offers unlimited plans in conjunction with the iPhone and other popular smart phones, including Blackberry RIMM and Android GOOG based phones.
  • Sprint was one of the first adopters of the 4G network, and current R&D plans point to early adoption of the next big wireless technology.
Bearish:
Traders who believe that Sprint is more suited for a short play may consider an alternate position:

  • If rumors are true, Sprint's offerings to customers will be very limited, in terms of products, pricing, and service.
  • Sprint lacks significant customer loyalty. As customers have the ability to upgrade services to Verizon or AT&T, or if they simply desire a different product, they are quick to leave Sprint.
  • The company has failed to market its Palm OS platform in the past, being forced to sell it to Hewlett Packard HPQ. Its marketing abilities may be limited in this case as well.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.
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