One Scenario for Sprint's Long Term Future

by: Ed Ketchoyian March 17, 2008 | about stocks: S    

Ed Ketchoyian

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Below is a possible scenario on how Sprint (S) will resolve its short term strategic issues and how this will all play out over the longer term in the wireless industry. In the end, the author suggests a slimmed down Sprint, after spinning off WiMAX and iDEN, is ultimately taken over.

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The Sprint 'Magical Mystery Tour'

Welcome to the Sprint Magical Mystery Tour! That’s an invitation! No need for a reservation! We’ve got everything you need! Satisfaction guaranteed! Step right this way! Come on!

What will and should Sprint do to right the ship? What should and will Hesse do? And after that, what will happen?

What we know today is that there have been announced layoffs of thousands in addition to thousands last year. If you are Sprint legacy, this is all part of the routine annual layoff season. Except this year, the situation obviously is more dire with the stock trading at or below book value.

Strategic decisions need to be made by the new CEO. All others have failed before him or been driven off to the desert. Sprint bled 377k negative postpaid net adds in 3Q07. An additional 500k negative postpaid net adds were reported for 4Q07 [the official number is minus 683k] (see Q4 conference call transcript). This is an amazing number, because it probably reflects especially weak performance on the iDEN network. In past quarters, Boost has done well, albeit with a high churn rate reflective of the prepaid business model, and the CDMA network has shown strength in positive net adds, only to be offset by iDEN losses. Assuming the strength of the CDMA network has continued, then iDEN must be doing particularly badly to more than offset any positive story with the rest of the business. The weakness of iDEN is even more astounding given that the quality of the network is better than it has ever been (whether that is due to increased investment or less stress on the network due to customers leaving for Verizon (VZ) is not relevant).

What are the clues that we can garner from Dan Hesse’s background and his statements for what will happen next? Hesse has stated that his aim is to simplify. He has done so in the past with success at AT&T Wireless (T) with the pioneering and industry changing Digital One Rate plan. Unfortunately, iDEN has turned into an abscess. It needs to be cut out and spun off. As we can see out the window of the Sprint Magical Mystery Tour, iDEN will be spun in order for Sprint to be able to focus on the profitable core CDMA network. Hesse has cover for this action, because he is not associated with the previous dismal management.

Rightly or wrongly, he also has pressure from the Street to spin WiMAX in order to preserve cashflow. All this makes sense in the context of another somewhat obvious site on our Magical Tour: that consolidation of headquarters to Kansas will likely happen, based on the deduction that consolidation was one of the driving forces for selecting him as CEO. A leading person on the board selection committee that picked Hesse is rumored to have done so because of a desire to save the Overland Park campus.

So far on the Tour, we have iDEN and WiMAX spun off, possibly to the same entity and headquarters consolidated to Kansas. Sprint, if smart, will then ensure in the spinoff terms interoperability between iDEN push to talk and Qchat, as well as access to WiMAX. Sprint might also want to hang on to the 5 MHz of spectrum at 1.9 GHz acquired as part of the iDEN rebanding agreement with the FCC and in turn bear the remaining rebanding costs of new equipment needed to move Public Safety entities to the reconfigured spectrum. These actions might be a fair trade as part of unloading the iDEN albatross.

Next on our Mystery Tour, Sprint will wait until after the 700 MHz auctions are over before announcing their intentions on 4G, i.e., UMB or LTE. More on how this fits into the big picture later.

At this point, without iDEN and WiMAX, Sprint will have become much smaller, but hopefully profitable, and most importantly to the Sprint mentality, costs will be controlled. At Sprint, cost containment is more important than strategic execution, customer care, network quality and having a clear marketing and brand message.

For Hesse, there should be an urgent need to clear out several layers of dysfunctional management thinking, but, since headquarters will be consolidated to Kansas, Hesse will have a protracted internal battle that will take many years to weed out the old line local and long distance mindset or will ultimately fail in trying to transform management. This failure will not be due to lack of effort, but will be due to extraordinarily entrenched management that he needs in order to execute any semblance of a turnaround.

If there were a RoundUp management chemical, that kills both grass and weeds, that might get the job done quicker. Hesse has been successful for turning around Embarq, but I would argue that the Sprint mess is greater and will take at least two years of organization change to fix.

Now, what happens to this spun-off iDEN dog of a network? Well, it could thrive once it comes out from the dark cloud that was the muddled and destructive stewardship of the Nextel PTT brand and cost containment mindset. An analogy comes to mind here, that of a baseball player that is not able to perform well under the pressure and spotlight of New York City, but then thrives once traded to another team. iDEN might also thrive under different management. Will iDEN be sold to the Feds as part of a Public Safety network? Hard to say, but to comply with Public Safety requirements would require substantial development and is beyond the scope of this Tour. Please sign up for the 4 pm Tour next week to find out what happens next.

IF and this is a big IF, hence the capital letters, Verizon does not win the C block in the 700 MHz auction, they will be in search of spectrum by other means and to achieve scale. In this scenario, our Tour sees Sprint declaring LTE as a next gen technology after the 700 MHz auctions are over, thus signaling to Verizon Sprint’s desire to be taken out of their mystery, I mean, misery through a takeover.

To those who might say, “no way, the FCC and Justice Department would never allow such a merger, especially under a Democratic administration,” our Tour guides are instructed to point out that there may be additional and potentially formidable competition in the market introduced or strengthened by whomever wins the C or D block. Thus, if Verizon loses, they might be able pass muster with a smaller, more compatible Sprint CDMA only network. Besides, Hillary is not as liberal as y’all think she is.

I hope you have enjoyed this Tour. You may keep the 3D glasses that were handed out while you were waiting in line for future tours.

Disclosure: Author has a long position in S

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This article has 16 comments:

  •  
    Mar 17 07:39 AM
    It really bugs me when someone with no knowledge whatsoever of the telecom industry just spouts off on a public internet forum as if they were an expert.

    Sprint wont be spinning off iden or wimax. And where do you come up with retarded statements like "Sprint is more concerned about cost cutting than network quality" because thats not true. In fact, none of what you have planned out here is based on any fact.

    For example, you claim Sprint will choose LTE. Sprint has already chosen wimax. You do not understand that 4G doesn’t mandate specific technical network standards.

    And finally, Hillery is more Liberal than we think she is and apparently so are you.
    Reply | Link to Comment
  •  
    Mar 17 08:06 AM
    As a just laid off employee of Sprint, I love reading articles like this. This article reads like someone who only does research by reading other articles. With Sprint about to launch QChat and how QChat will slowly but eventually rid Sprint of the IDEN network, why sell off those customers. I worked in Florida and 80% of NEXTEL customer who cancelled in my store was because of lack of construction work, not to go to another network. These accounts holders would cancel the phones that they got for their once expanded workforce, so now that the construction business is down they no longer need those phones.
    Reply | Link to Comment
  •  
    Mar 17 08:37 AM
    Sprint values the IDEN network more than people think, I don't think they will sell it unless the situation gets much worse.
    Reply | Link to Comment
  •  
    Mar 17 08:43 AM
    where did mt comment go?
    Reply | Link to Comment
  •  
    Mar 17 05:09 PM
    ?
    Reply | Link to Comment
  •  
    Mar 17 05:38 PM
    This article seems dead on about OP. It is run by managers and directors who exercise the hubris of tenure and are more concerned about superfluous metrics to justify their job and the size of their fiefdoms, than customer service or network integrity.
    Reply | Link to Comment
  •  
    Mar 17 06:50 PM
    What does political party affiliation or ideological preference have to do with running a company? Successful companies have been run by people on both sides of the political spectrum. Capitalism and its subsequent beneficient greed transcends ideology.
    Reply | Link to Comment
  •  
    Mar 18 01:56 PM
    A view from ground zero.

    iDEN under Nextel was extremely profitable. Sprint could not grasp the concept because of a "not invented here" mentality.
    Nextel brought Qualcomm's Q-Chat that let's CDMA and iDEN networks mesh seamlessly together.
    Sprint marketing under Hesse is leading with the PTT differentiator.
    Nextel had the lowest churn in wireless because of the encapsulated PTT base that even with stodgy handsets and enormous coverage issues still stayed with the product right up until the merger.
    VZ technical crews actually used Nextel as opposed to their own cdma system.
    To spin off 18 million custmers on iDEN when the rest of the network is now technically ready to interact with it does not make sense until you migrate those customers.
    Sprint unlike Att and VZ does not have a big bunch of wireline real estate that it has to make a profit on. Sprint can be extemely price competatve if and when it gets back on track.
    Reply | Link to Comment
  •  
    Mar 18 03:39 PM
    I almost wish that they would spin off IDEN so that we could work for a company that appreciates us. In the affiliate market (where all I can sell is IDEN) we are not only underappreciated, we are basically laughed at as we can not make the numbers that our CDMA counterparts make.

    They are laying off (read that terminating) former Nextel employees as fast as they can and consequently losing hundreds of years of cumulative experience and customer relationships.

    The company has adopted an agressive attitude that basically says perform EVERY month or we replace you next month but with no tools to allow us to perform the task is nearly impossible.

    Since the merger they have eliminated stock options, eliminated monthly gas allowance, and provided a culture that has company morale so low that nearly everyone hates to be employed here.

    Merit increases were not given yet again (however they didn't hesitate to give our former don't have a clue ceo a multi million dollar severance package for his failures!)

    There is no relief in sight from this madness. We are supposed to lose 1.2 million customers this quarter and the same next quarter.

    In regad to the Nextel migrations you don't have a clue. The real issue is the sales staff. They found that they could hit their numbers by selling current Nextel customers (who have been with Nextel at least 6 months) CDMA phones on the Sprint Network and utilizing the P2K system "Port" the Nextel user over therefore getting credit for a sale that isn't a sale. This has been the number one cause of the IDEN Defections, and it is all a game so that these sales reps can make thousands of dollars without really selling a thing!!!

    If people really understood what was going on inside of Sprint (including our management) there would be a wholesale call for accountability to the shareholders! But this won't happen. Too many have their heads in the sand. Even our directors don't really care as long as they can report satisfactory gross activation numbers it doesn't matter that many of these numbers are blatently fraudulent! And if you try to object you find yourself without a job. This is ok with the local management too, as they get their own quota relief for hiring a new employee to take your place!

    This company is dishonest, greedy, and an absolutely horrible place to work. All of us legacy Nextel employees sure miss the days when we worked for a real company that gave a damn about both the customers and us!
    Reply | Link to Comment
  •  
    Mar 18 09:08 PM
    As a former Nextel employee during the "deal from hell", I would like to comment from first hand experience.

    First of all, the promise of synergy-savings touted to the investors, through the possibly of combining existing sites; was at the least, an uneducated promise, and at the most an out-and-out lie. In either case, it was unexcusable. In my opinion, Sprint, for too long, depended on its ability to cast a spell over the public, convincing them to part with hard earned cash for a promise in the future they couldn't deliver.

    Telecom is no longer an elusive, little understood hobby for the wealthy. It is a potentially high-profit business, that should support a world that wants everything now and with as little of hassle as possible. Its development is dependent on educated landlords, tower owners, zoning officials, and consultants; all looking to get a piece of the pie. Let's face it, towers are vertical real-estate, and prime property sells/leases at prime rates to the wireless carriers.

    Second, some or many of the legacy Sprint persons, came from the landline business. Some had over 30 years experience. That puts them back to the days prior to deregulation...when you didn't have ANY choice in picking your landline company. Remember the old Bell commercials "We may be the only telephone company in the area, but we try not to act like it." In a business where your customers are pretty much locked into the service, there isn't much incentive for the management to be concerned with customer satisfaction.

    On the other hand, the legacy Nextel persons help build a wireless network, during the boom of the industry. They knew the importance of delivering a top-notch service including customer satisfaction. There was a commitment to give the best was to get the best. Nextel was pricey compared to the competition, yet they had the LOWEST churn rate in the business. Business counted on them, and they delivered on their promises.

    Third, the Nextel company, with its approximately 26,000 employees, depended on each member of their team to make this promise happen, up to and including the CEO. Sprint on the other hand, brought to the table nearly double that amount of employees, many in executive positions who seemed to have rehearsed hundreds of different excuses as to why it couldn't be fixed, instead of creative solutions that got business done.

    One of the things that struck me most during this time was management's ability to pigeon-hole a problem and refuse to take it to the Director or VP level. These were not small issues and involved departments outside of the area department managers territory. I can only imagine that if information wasn't going up, then it wasn't coming down either. Too many hidden agendas from people trying to stay one step ahead of the lay-offs I suppose. In any case, I know for sure, that even two and 1/2 years later, some of those problems have never been rectified and will only add to the flailing company's problems.

    I was part of the Nextel team. A group of people who cared enough to be of service to the public, and deliver quality, value, and commitment to the communities we served. It personally sickens me to see that my many years of hard work was so callously mismanaged down the drain by a group of highly paid executives who don't much care about the company as they do their own ego and pocketbooks.

    I don't know that there is much hope for a solution that will be win-win for anyone. Hard to hang on to hope when public opinion doesn't support the CEO's actions for the long haul road. Good luck Dan. I hope you can weed out the snakes, stand strong, and turn it back around.
    Reply | Link to Comment
  •  
    Mar 19 12:04 AM
    Nextel couldn't last on there own. They begged Sprint to take over there ancient network. They learned how the real world works. Sprint bent over backwards to make it a merger of equals, Big mistake. Former Nextel and current Nextel employees buy your company back.
    Reply | Link to Comment
  •  
    Mar 19 08:18 AM
    I wish that we could buy Nextel back. Before the merger, Nextel let the entire telecom industry with the highest ARPU (By Far!) and the lowest churn in the industry. They were the first to launch a comprehensive data portfolio and they achieved free cash flow status long before Wall Street predictions. The consistantly hit Wall Street targets and continued to grow at an aggressive pace. Merging with Sprint was a huge mistake that ruined this company.

    Now everyone sees all of the IDEN defectors and thinks that the demise of Sprint is the fault of Nextel. Let's write off all of the Nextel goodwill, let's spin off that company etc. The fact is that the number one cause of the massive defections is Sprint sale staff gaming the system to inflate their own commission checks. It's provable. If the company would investigate it properly their would be massive terminations for fraud. But that won't happen.

    When we were Nextel, we believed that we were the best in the industry and consistantly went out and proved it. Our customer service was consistantly rated number one by industry anaylsts. Sprint's customer service is rated the worst.

    If Motorola would have licensed the IDEN technology out to Nokia and Samsung and the others, then I believe none of this disaster would have occurred. But we should have seen this coming. Our advertising was basically prophetic in regard to it. When the slogan went from Nextel How Business Gets Done to simply Nextel Done it should have sent off warning signs to us employees. Unfortunately we were blinded by the fact that we worked for the best company in the industry and had given it 100% of our loyalty. If only they would have given back the same to us.
    Reply | Link to Comment
  •  
    Mar 19 10:51 AM
    zzzzzzzzzzzzzzzzzz
    Reply | Link to Comment
  •  
    Mar 19 11:56 PM
    There you go you didn't work for the best company in the world. Blinded by the light. If Motorola blah blah. Like all mergers the executives make all the money. If Bill Esrey wouldn't have blah blah. If Worldcom had been a real company blah blah blah.
    Reply | Link to Comment
  •  
    Mar 20 04:38 AM
    If the executives at the new S company, both legacy Sprint and Nextel, would have gotten past their egos and complacency, this discussion wouldn't be happening. Nextel was a better company than most to work for when you look at the authencity of the people who were a part of it. I stayed true to myself by leaving. I couldn't stomach the way that upper management squashed reality and tried to make the investors and public buy off on total b.s.

    I notice that a lot of former Nextel affiliates and employees like to post. Probably because their opinions were squashed and ignored. Amazing that even will the "ancient network", we made a strong company. Go figure...maybe there is something to be said for integrity.
    Reply | Link to Comment
  •  
    Mar 20 09:26 AM
    Integrity. Now there's a word. Unfortunately current management can't even spell it let alone understand the meaning of it.
    Reply | Link to Comment
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