Sprint - Nextel 2011 Annual Report Download - page 42

Table of Contents
Cost of Services
Cost of services consists primarily of:
Cost of services increased $619 million, or 7%, in 2011 compared to 2010, primarily reflecting increased roaming due to higher 4G MVNO data usage. In
addition, higher service and repair costs were incurred driven by the increase in the cost per unit of new and used devices due to the growth in smartphone popularity. We
are also in the process of renegotiating cell site leases to enable further flexibility in connection with Network Vision, including spectrum hosting services, which has
resulted in a net increase to rent expense and is expected to continue until such time we can successfully deploy Network Vision and benefit from an overall reduction in
our total portfolio of tower leases. These increases were partially offset by a decrease in long distance network costs as a result of lower market rates and a decline in
payments to third-party vendors for use of their proprietary data applications and premium services as a result of contract renegotiations providing more favorable rates.
Cost of services decreased $96 million, or 1%, in 2010 as compared to 2009 primarily reflecting a decline in service and repair costs by focusing on device repairs and
refurbishment rather than utilizing new devices, a decline in long distance network costs as a result of lower market rates, as well as a decline in payments to third-party
vendors providing premium services as a result of changing from usage-based payments to flat rates. This decline was partially offset by increased roaming due to higher
data usage and an increase in license fees as a result of the continued growth in smartphone devices, which carry higher fees.
Equipment Net Subsidy
We recognize equipment revenue and corresponding costs of devices when title of the device passes to the dealer or end-user subscriber. Our marketing plans
assume that devices typically will be sold at prices below cost, which is consistent with industry practice, as subscriber retention efforts often include providing incentives
to subscribers such as offering new devices at discounted prices. We reduce equipment revenue for these discounts offered directly to the subscriber, and for certain
payments to third-party dealers to reimburse the dealer for point of sale discounts that are offered to the end-user subscriber primarily associated with obtaining a service
plan. Additionally, the cost of devices is reduced by any rebates that are earned from the supplier. Cost of products (primarily devices and accessories) also include order
fulfillment related expenses and write-downs of device and related accessory inventory for shrinkage and obsolescence. Equipment cost in excess of the revenue generated
from equipment sales is referred to in the industry as equipment net subsidy. Equipment revenue increased $208 million, or 8%, in 2011 compared to 2010 and cost of
products increased $1.1 billion, or 16%, in 2011 compared to 2010. The increase in both equipment revenue and cost of products is primarily due to a higher average sales
p
rice and cost per device sold for both postpaid and prepaid devices in addition to an overall increase in the number of prepaid devices sold, partially offset by a decline in
the number of postpaid devices sold. Equipment revenue increased $749 million, or 38%, in 2010 compared to 2009 and cost of products increased $1.4 billion, or 26%,
in 2010 compared to 2009 primarily due to an increase in the number of postpaid devices sold with a greater mix of devices that have a higher average sales price and
cost, as well as an increase in the number of prepaid devices sold.
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• costs to operate and maintain our networks, including direct switch and cell site costs, such as rent, utilities, maintenance, labor costs associated with
network employees, and spectrum frequency leasing costs;
• fixed and variable interconnection costs, the fixed component of which consists of monthly flat-rate fees for facilities leased from local exchange carriers
based on the number of cell sites and switches in service in a particular period and the related equipment installed at each site, and the variable
component of which generally consists of per-minute use fees charged by wireline providers for calls terminating on their networks, which fluctuate in
relation to the level and duration of those terminating calls;
• long distance costs paid to the Wireline segment;
• costs to service and repair devices;
• regulatory fees;
• roaming fees paid to other carriers; an
d
• fixed and variable costs relating to payments to third parties for the use of their proprietary data applications, such as messaging, music, TV, and
navigation services by our subscribers.