Browned off

Sprint Nextel, the third largest mobile operator in the US, is finding life much tougher than its Brown Telephone Company antecedent.

Ken Wieland, Contributing Editor

March 9, 2009

8 Min Read
Browned off
Company profile: Sprint

Sprint Nextel, the third largest mobile operator in the US, is finding life much tougher than its Brown Telephone Company antecedent.

The origins of Sprint can be traced back to 1899 when Cleyson L. Brown set up the Brown Telephone Company to compete against the Bell monopoly in Abilene, Kansas. Building on the company’s initial success and expanding through acquisition, the Brown Telephone Company-after undergoing numerous name and structural changes-had morphed into the largest independent local telephone provider in the US by the 1970s.

Taking on the Sprint moniker in 1989, the company continued on the merger and acquisition trail. After its purchase of Centel Corporation in 1993, Sprint became the only major telco providing long-distance, local and wireless services in the US. But it was in 2005 that Sprint made its most spectacular purchase. For the enormous sum of $35bn, it acquired Nextel Communciations, which uses Motorola’s propreitary iDEN technology to target business users with data and push-to-talk services. This marked the birth of Sprint Nextel.

Shortly afterwards, Spint Nextel spun off its local landline business (Embarq) and bought Nextel Partners for $6.5bn, enabling it to provide wireless services to rural US markets.

Now the the third largest mobile operator in the US (behind AT&T and Verizon), as well as the owner of a nationwide fibre-optic backbone, Sprint Nextel provides a range of national and international services for consumers, businessses and government organisations. Moreover, it offers wholeslae capacity to MVNOs (mobile virtual network operators), including Virgin Mobile USA.Sprint Netxel has also become synonymous with mobile WiMAX, a high-speed fixed and mobile network standard backed by US chip giant Intel. Launching the ‘Xohm’ service in  September 2008 in Baltimore, Sprint’s Nextel mobile WiMAX interstes are now represented by Clearwire, in which it owns a 51 percent stake. Other shareholders in Clearwitre include Intel, Google and three US cable companies.

But if Sprint started out life more than 100 years ago as the small, nimble upstart taking on the big monopoly and winning, Sprint Nextel now resembles an ageing and unfit incumbent strugglng to stay on its feet. It looks, in short, well past its prime. In the week that MCI went to press, Sprint Nextel announced that it was to axe 8,000 jobs, which is around 14 per cent of the company’s workforce. The aim is to save $1.2bn a year in response to sharply declining falling revenues as customers desert the mobile operator in droves.

Sprint Nextel is partly a victim of the credit crunch as many other major firms in the US, across different industry sectors, have also had to announce significant workforce cutbacks during 1Q 2009. But Sprint Nextel has been on the back foot much longer than the credit crunch has been landing forehand jabs on the company’s top and bottom lines.

Since the Sprint Nextel merger in 2005, the company has acquired an unenviable reputation for dreadful customer support and the worst performing 3G mobile network of all the tier one mobile operators in the US (like Verizon, Sprint uses CDMA2000 EV-DO). In the 12 months ended 30 September, 3.6 million contract customers churned off Sprint Nextel, while 600,000 pre-paid customers left the company during the same period.

Revenues and losses have plummeted accordingly. In the nine months ended 30 September 2008, Sprint Nextel’s turnover dropped by ten per cent to $27.2bn. During the same period, net losses climbed from $128m to $1.17bn. Loyal Sprint Nextel shareholders are hurting badly. At the tail end of January 2009, the Sprint Nextel’s share price was trading at around $2.45, a 60 per cent drop on its 52-week high.

It is hard to argue that the decline of Sprint does not directly stem from its purchase of Nextel in 2005. The deal raised eyebrows at the time because it was questionable from the outset whether the two companies were ever going to find much in the way of meaningful ‘synergies’ as they each operated different wireless technologies (Nextel used iDEN, Sprint had CDMA). Customer service subsequently deteriorated and Gary Forsee, the Sprint CEO who oversaw the merger, resigned in October 2007 following a period of heavy customer losses and a share price freefall. His replacement, Dan Hesse, the former CEO of Embarq (the Sprint spin-off), took over in December 2007 and immediately put the company in cost-cutting mode. In January 2008, Sprint announced it would slash 4,000 jobs, reduce outsourcing, eliminate more than 4,000 third-party distribution points, and close about 125 retail locations.

Throughout last year, Sprint Nextel issued a series of cost-cutting announcements. It also had the ignominy in February 2008 of having to announce a $29.5bn write-down on the book value of Nextel. “We have yet to turn the corner,” Hesse candidly told analysts in a Q3 2008 conference call. Last month’s 8,000 job cut announcement was confirmation, if any were needed, that Hesse’s observation was on the money.

The deadlines for dept repayments are also creeping up on Sprint Nextel: $600m of debt is due on May 2009 and $2.4bn in 2010. At the end of 3Q 2008, however, the company said it had a cash balance of $4.1bn and that it expected to generate free cash flow in 4Q 2008. To assist in its cost reduction efforts, Sprint says it has no plans to acquire new capital in the next two years and that it will extend a 2008 suspension of salary increases through to 2009.

Hesse appears unafraid of starting a price war in a bid to try and claw back market share from its rivals. In February 2008, the company launched its ‘Simply Everything’ package for existing and new contract subscribers on both its CDMA and iDEN networks. For $99.99 per month, users get unlimited calling and texting, web surfing, and other services that typically carry a premium, such as video and navigation. Comparable services at the time of Simply Everything’s launch were around 30 per cent more expensive from Sprint Nextel’s rivals.

In January 2009, Boost Mobile, a subsidiary of Sprint Nextel targeting budget-conscious pre-paid subscribers, announced an unlimited package (calling, texting and web surfing) with a $50 per monthly fee. This is only available on the iDEN network, however, which has a much narrower range of handset choice than CDMA.

Sprint Nextel has also made a concerted effort to attract younger customers, with the aim of increasing the uptake of multimedia services. The operator has signed deals with numerous content providers, including Walt Disney and ESPN, as well as offering a link to MySpace. Since December 2007, Sprint has also been offering ‘Mobile Shopper’, a mobile online price comparison shopping service powered by start-up mShopper that allows people to make purchases by cell phones.

How far these measures will work is open to debate, particularly as the Sprint Nextel brand has taken such a pummelling in recent years. But the operator  believes it has an ace up its sleeve with its commitment to mobile WiMAX. In December 2008, Sprint Nextel unveiled a dual-mode EV-DO/WiMAX dongle, which allows its EV-DO users to switch over to the much faster mobile WiMAX network of Clearwire when in coverage range. According to reports on the ground, the Clearwire network typically delivers between 2Mbps and 4Mbps on the downlink while the most advanced cellular networks struggle to exceed 1MBps. The dongle is manufactured by Franklin Wireless and is priced at $149.99 with a two-year subscriber agreement. The wireless data plans start at $79.99 per month.

The problem for Sprint Nextel is that Clearwire’s mobile WiMAX network (from which it purchases wholesale capacity) is only available in Baltimore, Maryland, and Portland, Oregon. Unless Clearwire ramps up coverage quickly, Sprint Nextel will not be able to exploit the better performance that WiMAX has compared with the current crop of cellular technologies. And already Clearwire appears on the back foot. Both Intel and Google have made 4Q 2008 write-downs on most of their respective investments in the mobile WiMAX JV.

For a company that successfully grew in its early years through acquisition, Sprint eventually tripped up over its most ambitious  purchase of them all-Nextel. And now with its share price reaching all-time lows, speculation grows whether Sprint Nextel will itself be taken over. South Korea’s SK Telecom and Germany’s T-Mobile have each been mentioned as potential suitors.

Cleyson L. Brown may well be turning in his grave.

Sprint Nextel company history

1899: Cleyson L. Brown organises the Brown Telephone Company in Abilene, Kansas.

1942-1972: Brown Telephone Company becomes United Utilities then United Telecom

1986: US Sprint is formed, a partnership owned by GTE and United Telecom. The company launches long-distance services under the Sprint brand name.

1990: Untited Telecom changes name to Sprint due to incresed brand recoginition of the long-distance service.

1993: Following its merger with Centel Corporation, Sprint becomes the only major US telco providing long distance, local and wireless services

1996: Sprint announces global alliance with Deutsche Telekom and France Telecom and begins doing business as Global One (sells its stake in the JV in 2000).

2001 Sprint PCS announces its migration strategy to third generation (3G) technology.

2005: Acquires Nextel Communications for $35bn. Spins off Embarq, its local landline business (Embarq) and buys Nextel Partners for $6.5bn, enabling it to provide wireless services to rural US markets.

November 2008: FCC approves Clearwire JV, in which Sprint Nextel owns 51 per cent. Clearwirte intends to roll out a nationwide mobile WiMAX network.

January 2009: Axes 8,000 jobs, 14 per cent of its workforce.

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