Will the Palm Pre Give Sprint the Lift It Needs?

Wireless Carrier Needs a Breakout Hit Akin to the iPhone to Reverse Its Fortunes

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SAN FRANCISCO (AdAge.com) -- Now that the Palm Pre smartphone is set to fill the missing link in Sprint's handset lineup, the question is whether the winning device can allow the struggling carrier to reverse its declining customer base.

Until the Pre, Sprint had been the only major carrier without a flagship smartphone.
Until the Pre, Sprint had been the only major carrier without a flagship smartphone.
The accolades showered on the Pre, a sensation at last week's Consumer Electronics Show, should ease the way for the country's No. 3 carrier to articulate a compelling campaign. It should also raise the carrier's appeal and help bring in new subscribers to its network while trimming its customer turnover rate, which at 2.2% is among the highest in the industry. Until the Pre, Sprint had been the only major carrier without a flagship smartphone.

Needs to make bold pitch
The carrier needs to act quickly and make a bold pitch, however. Many industry watchers expect Sprint to have only a window of several months before the handset goes on sale at other carriers, given similar precedents with other Palm devices. Sprint had a three-month head start with the Palm Centro, for example, before the phone hit the shelves at Verizon and AT&T.

Sprint would not discuss details of the current plan.

As a customer-loyalty incentive, some analysts say Sprint may offer the handset to their existing base first, as it did with the Samsung Instinct and as T-Mobile did with the G1 Google smartphone late last year.

Timing will also be key. The handset is set to hit the market in the first half of this year, but given that Apple has announced a new iPhone in June for the last two years, Sprint and Palm would do well to aim for a release before then. "The earlier they can launch, the better, and the bigger the splash, the better," said Avi Greenhart, an analyst at Current Analysis and a former product manager.

David Owens, director-consumer acquisition at Sprint, said both companies would have a hand in promoting the handset, though with its bigger budget, Sprint is expected to shoulder more of the marketing.

Said ad spending will increase
With Sprint CEO Dan Hesse taking the stage with other Palm executives at the phone's unwrapping last week, "you can expect a substantial marketing effort by Palm and Sprint in making this an iconic product," Mr. Owens said. Sprint, which ranks No. 11 by U.S. advertising spending, has said it would allocate more marketing dollars this year than last, when it slashed its ad budgets in a wholesale cost-cutting initiative.

For some months now, the talk at Sprint has been "we need a phone," said a former Sprint executive who asked not to be named. The Instinct, which filled in as Sprint's exclusive smartphone earlier this year, saw some traction, but the handset is past its prime, particularly after Apple's 3G iPhone stormed the market.

And the drive to outclass the iPhone is now an industry obsession. After all, the device resuscitated AT&T, with defectors from the competition accounting for 40% of new iPhone activations last quarter.

Armed with features and functions lacking in the iPhone, the Pre is widely seen as a viable competitor to the Apple device and is expected to find an audience among first-time smartphone buyers. Mr. Owens said the phone will be targeted at "the middle," a segment between users of the entertainment-centric smartphones dominated by the iPhone and the BlackBerry workhorse favored by the business-minded.

Equipped with a physical keyboard, Palm's latest offering can multitask, and building on the company's legacy in personal organizers, it can aggregate contact data from multiple sources, including Facebook, LinkedIn and Outlook. "No question the Pre is attractive," Mr. Greenhart said. "It's going to be a story that's relatively easy to tell."

The phone is also expected to be marketed with Sprint's unlimited $99 voice and data plan, the cheapest amongst the top four carriers, said Charles Golvin, a Forrester analyst.

Entry pricing a key
Amid a souring economy, the plan's tie-in should help, while the all-important entry pricing could also determine the phone's success. Estimates for the Pre's subsidized price tag have ranged between $149 to $200. To make up for the difference, Sprint could pay Palm up to $250 per phone, according to estimates by Avian Securities, a fee substantially less than the roughly $375 that AT&T is paying Apple. It is believed that Apple uses more expensive components in the iPhone and the privilege of selling Apple commands a premium.

Thanks to the iPhone, which gave application developers a seat in the mobile ecosystem, any smartphone marketing will have to address the application piece. Yet because the Pre runs on Palm's brand new and much buzzed-about operating system WebOS, the phone has yet to attract a critical mass of developers. And given that iPhone users can choose from some 10,000 applications, a challenge will involve marketing to independent developers. "Developers are a crucial part of the ecosystem, because consumers really want to do more on the phone than talk and text," said Mr. Greenhart. "Consumers aren't buying smartphones; they're investing in them."

Given positive reviews for the Pre, prospects are good that Sprint can get some mileage out of it. "The Pre will give [Sprint] more relevance with users who care about the latest and greatest and it may stave off a few defections," Mr. Golvin said.

Overcoming an image problem
But Sprint will still have a time living down its image problem as a result of the poor integration and service following its merger with Nextel in 2005. "This would ... put Sprint in better position from a branding and perception perspective, but won't be enough to allow Sprint to steal other customers," said Matt Thornton with Avian Securities. "Sprint and Palm are not on the same level of Apple and AT&T."

In the last analysis, the phone will unlikely lighten Sprint's baggage. "It's not going to be enough to save Sprint on its own," said Jeff Kagan, an independent telecom analyst.

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