Why Sprint plans to eventually eliminate subsidy plans

Why Sprint’s stock plunged after the earnings announcement (Part 5 of 16)

(Continued from Part 4)

Installment plans becoming more popular

Under the subsidy plan, a customer enters into a two-year contract with the telecom provider. For example, you can buy an Apple (AAPL) iPhone 6 for a starting price of $199 under a two-year contract with the major telecom providers.

However, installment plans are different from subsidy plans. Under these plans, customers can pay the cost of their device in monthly installments for a certain period of time. The customers also have the flexibility to upgrade their devices early under these plans.

As a result, these plans are becoming more popular with customers. We discussed this trend shift in " Why we're seeing a telecom shift from subsidy to installment plans ." Sprint' (S) Easy Pay is a type of installment plan. It's similar to Verizon's (VZ)  Edge  plan, AT&T's (T) Next  plan, and T-Mobile's (TMUS) Jump plan.

Sprint wants to increase its installment plan penetration

Another benefit that telecom companies get from the popularity of these plans is that they save the subsidy cost. This boosts margins. This is why Sprint is thinking about eliminating the subsidy plans completely by sometime in 2015.

As the above chart shows, the installment plan penetration at Sprint was ~28% in the quarter ending in June. However, during the conference call to announce earnings, Sprint's CEO, Marcelo Claure, mentioned that the mix of installment plans decreased to 20% in August before he joined the company. He also mentioned that this penetration is currently its highest level ever.

In comparison,  Verizon's EDGE plan penetration was only 12% in the quarter ending in September. AT&T's plan was 52%.

Continue to Part 6

Browse this series on Market Realist:

• Part 1 – Must-know: Sprint's stock decreased after the earnings
• Part 2 – Why Apple's iPhone 6 could instill life into Sprint
• Part 3 – Why Sprint is targeting prime customers to improve its churn rate

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