Sprint Corp. (NYSE: S), according to a number of media sources, will cut annual expenses by $2.5 billion a year. Presumably the brunt of the restructuring will be layoffs. In a brutally competitive industry in which Sprint has fallen into fourth place among the carriers, cuts of this size mean it has surrendered the race to catch number three carrier T-Mobile US Inc. (NYSE: TMUS) so it can consolidate and defend the customer base it already has.
In September, Sprint management said the company would not participate in the upcoming wireless spectrum auctions. On September 26, management announced its plans concerning the auction:
Sprint after thorough analysis, announced today that it will not participate in the 600 MHz incentive auction. Sprint has concluded that its rich spectrum holdings are sufficient to provide its current and future customers great network coverage and be able to provide the consistent reliability, capacity, and speed that its customers demand.
Many analysts viewed the decision more as a means to save costs than a belief that Sprint had adequate spectrum. The new $2.5 billion cost cuts signal a closely related retreat.
Sprint either cannot or will not spend the money to fight for customers as all costs. Its primary rival, T-Mobile, is willing to. Its “net adds” of subscribers was 2.1 million in its most recently reported quarter. Its growth has not destroyed its financials:
T-Mobile grew Adjusted EBITDA by 42% year-over-year for the third quarter of 2015 to $1.9 billion. The increase was primarily due to higher service revenues from growth in the customer base, strong cost control, especially in cost of services, and decreased losses on equipment sales, partially offset by higher selling, general and administrative (SG&A) expenses due to customer growth.
T-Mobile’s clever and aggressive marketing is working.
Just as troubling for Sprint is that it has abandoned the goal it has had for years, which was to take large market share from leaders AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ). With iron-clad balance sheets, 100 million subscribers and extraordinary marketing muscle, not even T-Mobile has a chance to do it. And Sprint has given up.