# Economic analysis of \$10 Evo charge

Discussion in 'Android Devices' started by camjen, May 14, 2010.

1. ### camjen New Member 6

May 13, 2010
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As a Sprint stock holder I have every incentive to want to see Sprint excel as a company. To that end I am baffled that they have chosen to attach an extra fee onto their flagship phone at a time when they desperately need subscribers. A fairly simple economic analysis will hopefully clarify why I feel this is a bad economic decision.

For simplicity imagine 10 people are considering the Evo-all wanting individual plans at 450 minutes. (using the \$69.99 plan give Sprint the strongest argument for implementing the fee)

If all 10 sign up with the \$10 fee then Sprint makes \$800/ mo.
If all 10 sign up without the fee then Sprint makes \$700/ mo.
Case closed then you say Sprint will make more money by charging more, but not so fast. Watch what happens if the fee is enough to dissuade some of the potential new customers from switching to Sprint.

If only 9 customers sign up- 720/mo. to Sprint (Still making more with the fee)
If 8 customers sign up- \$640/mo. to Sprint. Sprint is now making significantly less by charging the \$10 fee! As you can see the new fee only needs to turn-off ~ 12 % of potential new customers to end up costing Sprint money.

Now extrapolate this out to representative population- for this example consider the total population of people considering the Evo to be 400 (it makes the math simple). Assume 25% (100 customers) covered in 4g (about what it will be at time of the Evo release)

If only 5% (1 in 20) of the 4g population is unwilling to pay the extra fee the Sprint will have lost 5 of 100 potential customers. Not bad and definitely under the 12% mark detailed above. But remember the 4g population is only 1/4 of the total population.

In the non 4g areas it would stand to reason that a much higher % of the population would be unwilling to pay the extra fee, lets say 1 in 3 considering the Evo is turned away and opts for the Incredible or Iphone. Sprint will have lost 100 of the potential 300 customers in this population. Now of the original 400 people considering Sprint and the Evo roughly 25% (105 out of 400) will not be signing up.

Now obviously this analysis is oversimplified and doesn't take into account people not buying the Evo but still becoming Sprint customers as well as many other variables. However I hope it does point out why I think Sprint charging this fee at this time is wrong decision and the potential adverse economic effect of doing so.

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2. ### nefas New Member 5

Apr 28, 2010
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Excellent post, but you're also missing the impact of the phone subsidy.

Let's say the cost to Sprint to manufacture the phone is \$300 (I've heard of expensive exclusivity agreements with HTC). This is a wild guess, but it's reasonable to expect the cost to Sprint to be higher than Verizon's Incredible which is the same initial price with contract. Plus there are infrastructure costs for building up the 4g network to support the Evo.

That means each Evo is shipped at an initial loss of \$100 and only recouped over the life of the contract. Then Sprint suffers a lower initial loss and then recoups that money in the long term with your example.

My personal take is that, so far, they're not being straight with the customer by calling it a "premium data" charge. Sprint better buildup that 4g network in the big cities fast or they will be dealing with a lot of bad PR.

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3. ### Geegolly Member 16

May 13, 2010
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Well put.

Going by the poll a ways down in this forum you'll see that 21% have said that the 10\$ a month fee was a deal breaker.

This poll is small in comparison to one that would be needed to get a far more accurate scope. However keep in mind if a user is searching, posting, and partaking in a poll on AndroForums.com, then I think it would be safe to assume they are a little more ethusiastic over the EVO than the Average Joe.

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4. ### bendispo Well-Known Member 33

Mar 23, 2010
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You're making the mistake of assuming that whatever revenue Sprint earns from its customers can be treated as pure profit. Instead, you should take into account the fact that each customer also costs Sprint money (network infrastructure, customer service representatives, bills and promotions, facilities, etc.). Additional customers also means additional costs for the company. Thus, you need to base your calculations on the actual profit Sprint would make off each customer, not just upon revenue.

Profit margins are pretty tight for a telecommunications company like Sprint, which has such a large national footprint while having attempted in the past few years to appeal to the value-conscious crowd. Sprint has been consistently losing money not only because it hasn't brought in enough revenue (customer acquisitions and retentions), but also because revenues have overrun costs. Sprint needs to both add new customers as well as increase increase its ARPU (Average Revenue per User) and decrease its costs. At the moment, the average Sprint customer is actually generating a loss for the company.

Consequently, adding customers alone isn't going to fix things. I'm assuming that Sprint knows all this and that the extra \$10 fee is just enough to make sure that the average Sprint customer (and definitely the EVO customer) begins to create a profit for the company.

At the end of the day, I'm disappointed about having to pay an extra \$10 for service I may not use. However, while a lot of people the last few days have been calling Sprint greedy, I think we we should withhold our judgment until the company at least become profitable again: There's a big difference between being greedy and clawing for survival. Sprint has to at least start garnering enough profit to begin paying off its sizable debts. Sprint's surviving will continue to generate competition in the market, and even with the extra EVO fee, I'll still be paying much less than I would at any other major national carrier. ;-)

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5. ### Caloy Well-Known Member 153

Jan 16, 2010
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Whether or not Sprint made a good choice by adding the \$10 dollars will be revealed in the next few months. I was dismayed by this, effectively increasing my monthly budget for a phone to almost one hundred dollars. At least I have 30 days to decide if 4G without tethering is worth it at almost a hundred, or does Verizon with it's Incredible would be a better option for me. We'll see if 4G coverage could in fact cover me at my home as well as work and all around.

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6. ### Caloy Well-Known Member 153

Jan 16, 2010
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I think it's a business gamble for sprint. Will it work? I don't think it will give the results that Sprint expects. Your so called ARPU is based on their investment on their 4G infrastructure. So if they don't meet their expected new business, that ARPU would increase if they didn't get their expected new business and would in fact lose more money.

Thus making camjen analysis correct.

Of course this is just based on my opinion.

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7. ### bendispo Well-Known Member 33

Mar 23, 2010
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Very few of us in these forums has the economic expertise to run a large corporation, let alone a large telecommunications corporation, and my basic point is that simple explanations such as those presented by camjen are just that: gross oversimplifications.

ARPU isn't just my "so called" term. It's an industry-standard measure of the Average Revenue generated per User for a telecommunications company: Average revenue per user - Wikipedia, the free encyclopedia. To put it simply, it is the average amount each Sprint customer pays each month. Please see the just-released info here: U.S. Wireless carriers get graded, ranked for their Q1 2010 performance Boy Genius Report. From your response, I'm not sure you understand what ARPU means... :-/

I don't know what's Sprint's average cost per user is, but just to give an illustration:

Let's say, as camjen does, that the ARPU for each EVO customer is ~\$70/month without the fee. Let's also assume that the average cost associated for each EVO customer is \$75/month. That means that Sprint would actually be losing \$5 per EVO customer. The more people that sign up at this price point, the more money Sprint would lose.

However, let's say that the ARPU for each EVO customer is ~\$80/month with the extra fee. Now, instead of losing money, Sprint makes \$5 per EVO customer. So, even if Sprint might have 25% less customers at this price point (again, camjen's estimate), it would still be making a profit, whereas before, the increase in customers would actually equate to an increase to losses.

This scenario is of course still very much hypothetical and simplified. But, I'm trying to make the point that you can't just look at revenue. You have to look at costs too (both variable and fixed costs).

Like I said, I know it sucks as consumers to have to pay more money, but let's not assume that we know how to run the company.

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8. ### Caloy Well-Known Member 153

Jan 16, 2010
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Hey, don't look at me, I'm no economist. I sure as hell don't know what ARPU means, I just took what you posted before it.

I apologize if I'll be over-simplifying it again and humor me a bit... Sprint already gambled on making a better and larger infrastructure. The towers are in place, Customer service is in place, a lot of them which you factored into your ARPU calculation has already been place. Meaning that for every *NEW* customer, that ARPU (Average Revenue Per Customer) will actually go up. And hopefully with the revenues for each new customer can actually alleviate the loss from the current customers. Meaning that a New customer will always be a good thing, because the cost you're talking about has already been spent in infrastructure. Maybe you can factor in man-power and electricity, rent etc. as incurring cost, but infrastructure has already been spent. Let's simplify it a bit further. Every customer is revenue, how you spend that revenue will be the deciding factor whether a company makes it or breaks it.

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9. ### camjen New Member 6

May 13, 2010
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As I said in earlier and others have pointed out it is definitely oversimplified. However if we take Sprint's pricing at face value then this phone should cost them no more to subsidize than whatever margin they normally have above the price to consumer. Therefore in my example I did not consider phone price as something Sprint would need to recoup anymore than any other phone. If this phone is costing Sprint more then it should be passed along up front and not cost an extra \$10 over the life you own the phone. I would also point out that the majority of costs in modern telecommunications are fixed. Adding more customers to a network has very small variable cost, therefore I treated adding additional customers as revenue only to Sprint. I assume in Sprint's previous pricing models infrastructure build was already incorporated, if anything this should be less as they move towards 4g.

As others have said Sprint is a multi-million dollar corporation with many people smarter than me working there, however I find the \$10 fee interesting to say the least.

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