Will Sprint's pricing gamble help turn it around?

Consumers have kept a tight grip on their wallets during the halting economic recovery that followed the Great Recession -- except for their cell phones.

In fact, when you look at discretionary spending areas like entertainment and eating out, compared to spending on wireless services and cell phones, it's clear the Americans are prioritizing impromptu Facebook (FB) check ins and on-the-move YouTube viewing over dinner and a movie. Better to live vicariously through your high school buddies than have fun yourself, I guess.

But that could be changing as some needed price competition hits the segment. Troubled wireless provider Sprint (S), which has seen shares fall by half since December, deepened the emerging industry price war this week by announcing a new, lower cost family plan: It's charging $100 for 20 GBs of data plus is offering upwards of $350 for customers switching in that have to pay to break an existing contract with a rival.

The move, on the surface, appears to be an act of desperation. The company has been mired by leadership changes, abandoned its bid for T-Mobile (TMUS), subscriber losses, and after falling behind the network quality offered by competitors finds itself in the midst of an expensive "Network Vision" infrastructure upgrade.

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Will the price warfare strategy pay dividends for Sprint?

Analyst Joseph Mastrogiovanni at Credit Suisse has his doubts since the company was already known for offering a strong value proposition while the potential to poach subscribers from other service providers seems limited.

Moreover, failed takeover target T-Mobile already broke the ice with a cash offer to entice subscribers to break their existing contracts. It enjoyed a 100 percent year-over-year increase in gross subscriber additions in the first quarter when the offer was first announced.

So there might not be enough low hanging fruit to move the needle for Sprint and get its stock price turned around.

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The good news for consumers is that all of this will put downward pressure on the cost of wireless plans, potentially freeing up disposable income for other areas of the economy, such as retailers, that have been hurting lately.

The savings offered by Sprint's new plan can be significant: 60 GBs of shared data will cost around $225 per month while rivals offer just 30 GBs for the same price.

Looking at it another way, for a family of four to share a plan it would cost $100 a month (assuming you purchase a handset with Sprint Easy Pay) to get 28 GBs of data. That compares with $160 for 10 GBs on AT&T (T) and Verizon (VZ) and $100 for 10 GBs on T-Mobile.

Even if you don't change providers, meanwhile, mobile users stand to benefit. That's because AT&T responded by allowing its existing subscriber base to move to a new lower pricing structure, resulting in record low subscriber churn in the second quarter.

Disclosure: Anthony recommended S put options to his clients in late July.

  • Anthony Mirhaydari

    Anthony Mirhaydari is founder of the Edge , an investment advisory newsletter, and Edge Pro, options newsletter. Previously, he was a markets columnist for MSN Money; a senior research analyst with Markman Capital Insight, a money management firm; and an analyst with Moss Adams focusing on the financial services industry.

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