First Published 1/18/2008
Overview
A possible scenario is submitted on how Sprint 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.
Analysis
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. Thestreet.com reported last week that there will be an additional 500k negative postpaid net adds reported for 4Q07 [the official number is minus 683k]. 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 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 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.
Originally posted in:
************************************************
EK Telecom Analysis Newsletter, Issue 1, January 23, 2008
Copyright 2008 by Edward Ketchoyian
Some Rights Reserved by Creative Commons License
******green-t@mindspring.com -- 571-233-2909 ********
************************************************
Comments