updated 03:45 pm EDT, Mon October 3, 2011
Described as 'bet-the-company' arrangement
Sprint's deal to carry the iPhone is worth about $20 billion, sources for the Wall Street Journal claim. Around the time the deal was made, CEO Dan Hesse reportedly told the Sprint board that in order to secure the iPhone, it would have to agree to buy 30.5 million units from Apple over the course four years, creating the $20 billion tally. Although the board ultimately agreed, it is said to have been resistant; one source describes the plan as a "bet-the-company kind of thing," a "staggering" blow to the company's operating income.
The core problem is that Sprint will allegedly be subsidizing the price of each phone by about $500, meaning that it won't start turning a profit until 2014. Some board directors are said to have worried that the payoff may be too long in coming; one asked if the deal might potentially outlast the iPhone's popularity. To sell 30.5 million iPhones, it must in fact double the amount of contract customers it has, convert all of them into iPhone owners or find some balance between the two extremes.
The iPhone deal was dubbed the "Sony" project, and is said to have been authorized because the board felt it couldn't compete otherwise. In the past Hesse has publicly admitted that the iPhone is the number one reason subscribers leave Sprint. The only official US iPhone carriers, AT&T and Verizon, have gained customers as a result.
The sources remark that Sprint's situation isn't unique in that Apple often makes carriers sign long-term volume agreements. For Apple, this offers the benefit of being able to secure components in advance. Sprint though is an unusually weak position, having not turned an annual profit since 2006, and having lost 80 percent of its stock value since the iPhone was launched in 2007. A large portion of its subscribers are on pay-as-you-go plans, not the sort which would typically buy an iPhone. Some rumors have had Apple introducing prepaid models tomorrow, but these claims have largely evaporated.
Sprint's ace in the hole may be unlimited data. Whereas AT&T and Verizon have imposed caps on smartphone plans, Sprint has held fast to its unlimited option, which could attract high-end customers wanting to actually make full use of their hardware.
The carrier may also be able to alleviate some of its iPhone burden through accessory sales, and lowering marketing and/or customer service expenses if subscriber bleed stops.