EK Telecom Analysis Newsletter

THOUGHTS AND COMMENTS, 3/28/08

The last newsletter was published on March 15, 2008.  This issue contains two fresh articles and feedback information.  In the past two weeks, I've submitted for articles from the EKTAN to Seeking Alpha at seekingalpha.com.  My author biography and an index of articles is at:  http://seekingalpha.com/author/ed-ketchoyian. These are practically identical to the articles here at the EKTAN, but at Seeking Alpha, there have been some very interesting comments.  One article garnered 27 including one response from myself.

Unlike Jerry Springer's system of providing profound Final Thoughts at the end of the show after there's been torn hair from who knows where and whatever else dispersed through the studio, I'm providing these thoughts at the beginning. 

I have been asked if I'm going to CTIA this year.  Unfortunately, no. I'll be monitoring from afar.  I have been to many CTIA and PCIA shows over the years, including the PCIA show in 1998 in Orlando that was cut short by an impending hurricane.  In my opinion, that was the beginning of the end of the PCIA show.  There was already fatigue setting in with having two major trade shows a year.  CTIA and PCIA were in heavy competition.  The vendors were whining that it was very expensive to support two shows per year.  The hurricane provided a excuse to many at the time to put their resources in the safer and larger CTIA show in the Spring. 

I believe the show this year will be the beginning of some major industry announcements that will happen through the rest of 2008.  With the quiet period ending next week from the 700 MHz auction, coincidentally coinciding with the CTIA show, we could have some interesting announcements.  By the way, am I imagining things or did Verizon really win the A, B and C blocks for Chicago?  There's a lot of good analysis out there on the auction results, especially from Wireless Strategy (no, they don't pay me to plug them, but I know them personally and I know the quality of work they produce).  I'll be working on providing unique observations next week. 

Some of the ideas and topics I'm mulling on for future articles, not including the popular Sprint Nextel Watch series, include the following:  LTE deployment issues, 700 MHz post-auction analysis, Motorola, and a suggested topic called Near Field Communications. 

A lot of the feedback that you have given me has been positive and encouraging and I very much appreciate it.  As I have commented to a few people in emails, I really love writing and analyzing.  I mentioned in the previous email version of the EKTAN that I was going to publish one article a week.  It seems like I'm working on that timetable, but the email version will be going out every two weeks.  You may have to check the sonicblues.typepad.com every now and then or subscribe to the RSS feed to get fresher material. 

If you would like to subscribe to the email version of the EKTAN, which contains the same content as on this web site, please email me.

Sprint Nextel Watch: Hesse, Continuing to Show Leadership, but Doubts Remain About the Long Term

Related Links:

Sprint Nextel Names Steven L. Elfman as President - Network Operations and Wholesale

Summary

CEO Dan Hesse appears to be focused and decisive.  He's bringing in trusted, new blood to the executive ranks.  He still faces an uphill struggle.  Investors, alienated employees and customers will need persistent and encouraging news to rebuild confidence in order for Sprint Nextel to stay in one piece long term.  However, Hesse continues to earn positive marks for his leadership, regardless of the final outcome. 

Analysis

It's easy to sit back and offer suggestions and criticism on a particular company, especially if you don't have much skin in the game, i.e., your primary livelihood isn't tied to the enterprise.  Dan Hesse continues to make decisive moves.  After years of dysfunction throughout the executive ranks at Sprint Nextel, he deserves credit.  It will still be weeks and months before we know if real changes are starting to take hold, and, indeed, more leadership of the kind we are seeing will be necessary for Sprint to stay whole and / or independent, if that is the goal.  The level of discontent both within and outside Sprint Nextel is unusual, even for a company in distress.  There are unconfirmed accusations by people who claim to be current or former employees of Enron-like fraud. 

That said, Hesse continues to make positive moves.  I've given him kudos in the past for going public with the customer care woes in the Business Week article.  I believe it was a good move for him to personally star in current television ads.  It seems that Hesse understands that the challenges he has are both internal and external.  Most recently, he added Steven Elfman as President - Network Operations and Wholesale.  What's interesting to me in this article is that Kathy Walker, Chief Network Officer, now reports to Elfman. 

It's been a couple months since Hesse's joined the company.  He's had a chance to make initial assessments.  At this point, it doesn't matter whether it was part of the grand plan coming in or something decided after coming on board; Hesse has decided that he needs help.  Elfman is part of Hesse's "army" having worked for him at Terabeam and AT&T Wireless.  Elfman is a trusted, competent and loyal executive from Hesse's past. 

There are three interesting parts to the announcement:

1. President Wholesale reporting to a President (Patterson to Elfman)

2. Chief Network Officer reporting to a President (Walker to Elfman)

3. Product Development and Tech Dev now reporting to Elfman

But for Marketing and Customer Care, Elfman is essentially a COO.  Up to now and in the absence for several months of an official COO, Patterson and Walker reported to the CEO.  It will be interesting to see in the future if and how these peer to peer reporting relationships are resolved.  In addition, with Tech Dev reporting to Elfman, there is an open question as to where the CTO reports.  Previously, the CTO reported to the Chief Strategy person that deposed CEO Forsee brought in. 

Conclusion
The bottom once again is that Dan Hesse appears to be focused and decisive, and continues to earn positive marks for his leadership, regardless of the final outcome. 

Sprint Nextel Watch - UPDATE: How Low Can the Stock Price Go Before Sprint Gets Taken Out?

This week, the Sprint has a market cap that has bumped up to around $18.5B.  The bump happened immediately, almost to the hour, when the 700 MHz spectrum auctions closed.  I originally thought the bump was due to imminent takeover activities.  Today (being a little on the slow side), my belief is that the stock price jump might only be reflecting the final updated market value on Sprint's spectrum, which would still be an input in calculating any breakup price for the company.

Other Feedback on EKTAN

I've gotten a number of positive comments from people on my email distribution list and wanted to share some here:

Anonymous:  "Thanks for sending this to me.  Great collection of articles!"
Anonymous:  "Even though I have moved on to tolling and transport revenue, I enjoy the connection to the wireless industry your newsletter provides me."

EKTAN Feedback on the Web: The Navel Gazing Post

Well, this has been a busy week.  Not for adding analysis and content to the EKTAN, that's for sure.  Rather, it's been interesting to track the two posts, my first "pillar" post of the EKTAN, "One Scenario for Sprint's Long Term Future" and the more recent "Undoing the Sprint Nextel Merger," from the EKTAN that I've made to Seeking Alpha.com.  I've submitted a third article also that will probably hit the web site in the next day on the "How Low Can The Sprint Stock Go" post.   In this post, I wanted to repeat a smattering of where these articles end up, once they get posted on analysis sites that get real traffic and some comments and feedback.

As of now, the "Undoing" article has received 27 comments on Seeking Alpha.  There's been a very interesting debate, some of it logical.  Same thing for the "One Scenario" article, which received 16 comments.  All of these comments include those from a particular profane and emotional Sprint defender, who has had at least one offensive and vulgar comment deleted at my request. 

The day that Undoing was posted on Seeking Alpha, Contributing Editor Gary Kim, of TMCnet.com, picked up on my piece, wrote an article on it, titled, "Could Nextel be Spun Off?" and referred to my post.  Thank you, Gary. 

If you go to Yahoo Finance and get a quote for Sprint, you will see the "Undoing" Seeking Alpha article in the blog section.

Also, on Yahoo message boards, someone pasted my "One Scenario" article there, to which a thoughtful poster commented the following (edited for space):

I'm sorry but Ed Ketchoyian needs to take off the rose colored glass and put down the pipe. His basis and conclusions are all over the place and just simply incorrect.   Anyone with half a brain and that knows anything  about the wireless industry can pick this "article"  apart.    SN will not spin off  iDEN.  SN will not spin off WiMax (they will gain outside  investment).  SN will not be bought by VZ, regardless of voice 4G  path.  Sometimes Seeking Alpha articles need to be taken  with a huge dose of  salt.

My pipe has been unused for several years.

The articles were also picked up by FinanceMart,CNBC.com, Wikio News, and a site that indexes blogs based on some key words.  In this case, the word "abscess" was picked up and the "One Scenario" article was listed with a bunch of medical articles describing the different kinds of abscesses you can develop on your body.

"Undoing" also somehow got listed on Social Picks. 

Clearly, many of these sites pick up the feed from Seeking Alpha. 

EKTAN Debuts on Seeking Alpha

I just wanted to let you all know that I submitted my first blog article A Sprint Magical Mystery Tour: One Scenario for the Long Term Future to the website Seeking Alpha.  The article can be found here.  If you haven't been referred to this my blog from Seeking Alpha, I recommend checking out some of the lengthy and interesting comments that some readers have made on the article at Seeking Alpha.

There were some negative comments initially, but then I noticed some of the naysayers were people who defend Sprint and put down other people who write about the company in order to diminish their credibility.  I've been on the chat boards for many years, including the political ones, so I'm familiar with this particular breed.  It's funny, because there's also the opposite side as well.  All my article does is provide a canvas for these ongoing battles to continue. 

Anyway, those were the initial comments.  There were more lengthy and thoughtful comments as well and these are the ones I recommend checking out. 

Sprint Nextel Watch: How Low Can the Stock Price Go Before Sprint Gets Taken Out?

Related Links:

Sprint Nextel Fate Source of Speculation

Sprint Falls Amid Downbeat Analyst Notes

As auction wanes, public safety weighs its options

Tim Donahue Letter

Deal Yenta: A Mexican Rescue for Sprint?

Summary

There are lots of possibilities and scenarios for Sprint to be in play at its current market capitalization and stock price.

Analysis

With a market capitalization as of this writing hovering around $17B, Sprint Nextel is certainly a company in deep distress and, may be a steal for the right suitor.  Regardless of the initial positive leadership shown by CEO Dan Hesse in these early days of his tenure, with a stock price hammered to the $6 range, the Street may be betting that even a good captain would not be able to save Jack and Rose, I mean, the Titanic, from inevitable disaster. 

The underlying intrinsic assets, such as Sprint's spectrum holdings, internet backbone and still positive cash flow  from the dwindling post-paid customer base, may also lead one to the conclusion that, at this point, Sprint's breakup value might be higher than the whole.  As an analogy, it might be instructive to think of Eddie Lampert's play for a depressed at the time Sears.  Mr. Lampert was correctly able to understand where the intrinsic value was for Sears (in its underlying real estate holdings), where others focused too much on poor operations.

As mentioned in my previous Sprint Nextel Watch analysis, there may be more suitors than meet the eye, especially for the piece parts.  A selected list of scenarios could be the following (not in priority order):

• Clearwire / Craig McCaw / Intel / Google buys Sprint's WiMAX business and, potentially, the iDEN network. Rationale:  VoIP on the WiMAX network might not be available in handset devices for a few more years.  A WiMAX / iDEN dual mode device play would give a standalone WiMAX entity a differentiated voice offering until VoIP devices are available.
• Public Safety Spectrum Trust (PSST):  This group might be comprised of any combination of Morgan O'Brien, other ex-Nextel executives swimming around the Northern Virginia ecosystem, Tim Donahue, and private equity players.  The aim would be to buy iDEN and use it as an interim public safety / first responder system.  iDEN today does not fulfill the full feature requirements set for public safety, but, assuming the 700 MHz D-Block has no takers, then iDEN may be the next best short term alternative.
• Alltel or Verizon:  The scenario here is that either company (in the event Verizon does not win spectrum at 700MHz or Alltel in any case) purchases Sprint on the cheap and spins off iDEN and / or the WiMAX Xohm business to pay for the deal.  Verizon can pass Justice Department and / FCC muster in the case of AT&T or Google winning the C-Block AND by divesting iDEN.
• Tim Donahue and the undisclosed management team he had previously assembled as part of the SK Telecom, Providence Equity syndicate in a bid to invest $5B in Sprint around last Thanksgiving. That $5B bid would have bought about 11% of the company back then based on market capitalization.  Based on today's market cap, that $5B alone would be enough to own 30%. 
• Mr. Carlos Slim:  Buys Sprint, spins off iDEN.  On the other hand, Nextel International (NIHD) is a scrappy, pain in the butt competitor to the larger Mexican carriers the way pre-merger Nextel used to be.  A Slim purchase of Sprint and holding on to iDEN could have a dual purpose of cutting off NIHD in the home Mexican market AND gaining entree into the U.S.  I read a comment that AT&T has 9% equity stake in Telmex, so I'm not sure how that information, if true, would play out or complicate a Slim investment.
• T-Mobile: Not likely, for reasons you can read about elsewhere.
• Lastly, there's speculation that Google might make a play for the spectrum.

Conclusion
The bottom line here is that there are lots of possibilities and scenarios for Sprint to be in play at its current market capitalization and stock price.

Sprint Nextel Watch: Undoing the Merger

Related Links:

Sprint Merger Would Be Hard to Undo, Officer Says

Sprint Nextel Corporation at Bear, Stearns & Co. Inc. Media Conference

Summary

An iDEN spin would be complex, but it would still be achievable with competent people in charge, and not as difficult as projected, given the relative lack of integration between the iDEN and CDMA networks.

Analysis

Kathy Walker, Chief Network Officer, is quoted in the Washington Post article, "Sprint Merger Would Be Hard to Undo, Officer Says" as saying that, "With everything we've done, it'd probably take longer to undo it."  This quote took the headlines from the publicly available Bear Stearns conference that took place on March 12, 2008. 

If you listen to the whole event, though, you get a different picture of the level of integration that has taken place between the iDEN and CDMA networks.  On a cell site collocation basis, Ms. Walker indicated that, to date, only 10% of iDEN and CDMA cell sites had been collocated.  Furthermore, she said that it turned out that the costs of collocating existing sites was much higher than anticipated, so, a significant percentage of those 10% of collocated sites were for new construction.  This matter-of-fact response, if accurate, calls into question one of the major drivers for the justification for the original $12B savings claim that would result from the Sprint and Nextel merger, that is collocation savings.  As such, if less than 10% of existing sites are currently collocated, then there has been public disclosure at least through this media conference of why the original projected cost savings were never realized.

Next, in response to another question on just what had been integrated between the two networks, Ms. Walker cited the following items:  voice mail, messaging platforms, billing and field technical support.  Generally, from a network element perspective, these are all generic, standard interface, technology independent platforms, and, with the exception of the billing platform, a relatively low proportion of total network value. 

Since there have been limited cell site collocations, the opportunity to leverage backhaul over a single transport pipe also appears to have been limited.  The big ticket network items, namely, switches, HLRs, base stations, BSCs, OMCs for each technology were disclosed to be operating separately. 

So, besides the largely peripheral or secondary, standardized network elements just mentioned to be "merged," Sprint has at least managed after more than two years to have implemented a single physical Network Operations Center, or NOC. 

A footnote on the merged field technical support staff:  it was disclosed that, in large markets, the technical support people likely retained their specialization of either iDEN or CDMA technologies.  Thus the cross-training of field staff has likely only occurred in secondary markets. 

How hard would it be to split off iDEN in the case of a spin-off?  Probably not as hard as the Washington Post article or Sprint indicates.  The major tasks needed, in addition to recreating headquarters, sales, customer care and retail functions, would be:  augmenting technical support, building a new NOC, planning for an HLR and billing system cutover, procuring ancillary network elements or reverting to existing ones, and, or course, negotiating procurement and support agreements with vendors and partners.

Conclusion

To be sure, an iDEN spin would be complex, but it would still be achievable with competent people in charge, and, from a hardware point of view, not as difficult as projected, given the relative lack of integration between the iDEN and CDMA networks.

700 MHz Auctions Coming To A Close: Implications and Speculation

Related Links: 

Only a few days left: Auction 73 drawing to a close 

Wireless Strategy

A Sprint Magical Mystery Tour: One Scenario for the Long Term Future

Cable's wireless quandary

Public Safety Spectrum Trust Selects Cyren Call as Advisor

Summary

Speculation on moves by selected players in the wireless area that are presumed to be interested in the C-Block when the 700 MHz auctions close.  There is also speculation on implications of the likely outcome of the D-Block failing to reach the reserve price.

Analysis

With the bidding almost over and the only action left being in places like Hunterdon, NJ, where, presumably, some ex-AT&T or Verizon executives are undoubtedly trying to eke out a B-Block license so as to offer their secret dream of being a broadband access provider to their neighborhood, some big questions are:  will Google end up with C-Block spectrum or, instead, will one of the incumbents, AT&T or Verizon, scoop up the band.  As the people at Wireless Strategy point out, these remaining blocks in the B-Block appear to be undervalued on a MHz-pop basis.

There will be a number of large strategic moves in the industry in the three to six months after the auctions close, depending on who wins what.  If Google or another non-incumbent is a big winner, as I mentioned in previous analysis, expect some big moves on the part of Verizon, AT&T or a foreign entity towards consolidation.  If Verizon or AT&T is a big winner of the C-Block, then a different set of strategic options and moves kicks in with the some chess pieces being arranged differently.  Instead of Sprint falling into the hands of a Verizon, perhaps Alltel becomes a suitor.

I believe a wild card might be the cable companies.   They haven't been talked about much in the trade press, although they are mentioned in passing as another set of players to be considered.  It's not clear how seriously they are being taken and how their aspirations align in the bigger picture.  There's been a lot of talk about integrating mobile into the cable bundle, but there really hasn't been much on the execution side or in having a coherent overall strategy.

With the D-Block likely to be unclaimed, what are the options for the Public Safety Spectrum Trust (PSST) and the FCC?  There are some interesting possibilities, but I would only like to point out the following:  coincidentally, a number of the public safety entities are stacked with ex-Nextel executives who actually understand wireless business, technology, public safety, spectrum and the government.  Although many of them are ex-colleagues, I have not had any public or private conversations with them on the future of the D-Block.  That said, I would not be surprised if this band of brothers and sisters come together in some form in the future to again rock the industry in some manner that includes public safety. 

iPCS Reaches Detente with Sprint Nextel

Related Links: 

iPCS posts greater Q4 loss, inks new affiliate agreement with Sprint Nextel

Sprint Nextel continues to raise ire of iPCS

Summary

The recent resolution of so many outstanding issues between Sprint Nextel and iPCS may be a small indication of yet another culture change at Sprint.  From a Sprint perspective, the question on many investor's minds these days is:  are these changes too little too late to make a difference?

Analysis

When iPCS, the CDMA affiliate of Sprint Nextel, announced operational results last week, the big significance was the  announcement that some of their court claims with Sprint Nextel were mutual withdrawn and new, lower cost per gross add user rates that Sprint Nextel charges affiliates to handle back office services were now in place. 

The feud between iPCS and Sprint Nextel is personal and goes back many years, at least to 2003, when iPCS filed for bankruptcy.  In distress, Sprint had the opportunity to help out its affiliate.  Instead, Sprint refused to help its partner and, as iPCS charged, withheld roaming fees and reduced roaming rates.  Of course Sprint was not obligated to help its partner.  On the other hand, Sprint certainly had the option to not take advantage either.  iPCS did the only thing any red-blooded American company could have done under they circumstances after being kicked while on the ground:   they sued Sprint for breach.  The relationship, of course, went further down from there as both companies played hard ball in every facet of the relationship. 

Some people have suggested that the roaming partners enjoyed the good life, collecting high roaming fees with little financial and operational risk, given that much of the back office operations were outsourced.  (If that were the case in this situation, though, how is it that iPCS filed for bankruptcy at all in 2003?)  Alternatively, from a true partnership and integrity perspective, if a key business partner has problems, you might consider the relationship from a holistic view and not take any failure or minor crack as an opportunity to treat your partner as an enemy.

After the Sprint Nextel merger was announced, as other CDMA affiliates were bought out, little iPCS held out and sued again over alleged territory, marketing and branding breaches related to the Nextel iDEN network competing with the CDMA network.  This time, though, it didn't turn out to be a ploy to get a higher takeover price.  It appeared to be personal.

To be sure, iPCS is a small player, covering about 15M pops and having well under 1M subs.  Its markets are in places like Grand Rapids, Davenport (IA), Scranton and along the Tennessee / Virginia border (i.e., bubba country).

Conclusion

So, although today one of the law suits in Illinois is still outstanding, the resolution of so many of these other issues between the two companies in favor of iPCS (note the CEO public comments of approval as well as the stock market's positive reaction) may be another small indication of a culture change at Sprint, which would be in the direction of treating partners with a win-win long term view.  Either that or Sprint may have just decided that fighting iPCS's only substantial leverage point, the exclusivity breach claim, wasn't worth the legal fees and the risk of losing.  From a Sprint perspective, the question on many investor's minds these days is:  are these changes too little too late to make a difference?

Update

Sorry there haven't been any posts in a couple weeks.  I'm working on several entries and will have them posted in the next day or two.  There will also be a new issue of the newsletter in the same timeframe.