In the year-and-a-half since Sprint Corp. closed on its acquisition of Nextel Communications Inc., a company that once looked like a valuable asset has proved difficult to integrate. The loyal, high-average revenue per user Nextel customers that the company once generated like clockwork have fled, hurting the combined Sprint Nextel’s churn as well as its ARPU even though the CDMA side of the carrier’s business is growing.
“So far, I think most people would have to conclude that we’re in a long transition period on whether or not this was truly a good deal,” said analyst Albert Lin of American Technology Research. “What sounded like a very basic and rather simple, logical plan has been, I would say, horribly executed and bordering on a nightmare.”
So far, he noted, Sprint Nextel’s success at giving Nextel customers incentives to move to CDMA has not worked and the dual-mode handsets haven’t yet proven to be a popular solution. But the
simplest and largest reason for the dissatisfaction, Lin said, has been deteriorating iDEN network quality. He noted that Nextel’s capital expenditures in its final years were typically very low, so that Sprint Nextel was left with an aging network, as well as lacking comparable handset and research and development support that goes along with broader-based CDMA and GSM technology. Testing done by American Technology Research over the years showed a “dramatic decline in quality and coverage,” Lin said.
Part of that, Sprint Nextel has
acknowledged, has been due to the spectrum reconfiguring that was part of the conditions for the merger to get federal approval.
Before the acquisition, Nextel itself noted in financial filings the potential difficulties ahead with rebanding, in terms of investment and possible network disruption. “We will need to construct additional transmitter and receiver sites or acquire additional spectrum in the 800 MHz or 900 MHz bands. In markets where we are unable to construct additional sites or acquire additional spectrum as needed, the decrease in capacity may adversely affect the performance of our network, require us to curtail subscriber additions in that market until the capacity limitation can be corrected, or a combination of the two,” Nextel said in the filings as it cited risks to its business. “Degradation in network performance in any market could result in increased subscriber churn in that market, the effect of which could be exacerbated if we are forced to curtail subscriber additions in that market.”
Was Boost the problem?
Those risks are now reality; Sprint Nextel had to dial back on sales of its popular Boost Mobile prepaid sub-brand in order to keep enough capacity in certain markets. Boost, which was introduced in 2002, really began taking off in late 2004 and 2005 as the acquisition approached. According to Doug Smith, Sprint Nextel’s VP of network, the curtailing of Boost had more to do with network quality issues than the merger itself. As Boost began to add significantly more high-usage, sub-prime customers to the network, he said, those customers were “really having an impact on specific parts of our network.” Since then, Sprint Nextel has “gone through a number of initiatives to try to add capacity back into the network, as well as reduce some of the sales volume of the sub-prime, high-volume customers. As we’ve done that, we’ve been able to restore quality back to the network. . We’ve really relieved the pressure.”
Rebanding progress
Smith added that the carrier has “made very good progress” on the first phase of spectrum rebanding, although he added that the company believes “that the timelines that have been set need to be adjusted” for the complicated second phase and that the company is working with the Federal Communications Commission and public-safety stakeholders to adjust the timelines.
Sprint Nextel is now saying that its wireless network investment (on the order of $2.2 billion in 2006’s fourth quarter, including rebanding costs, up 46 percent from the same period in 2005) will pay off as customers feel the effects of improved quality, particularly on the iDEN side. Smith said that customer complaints on the iDEN side have fallen by about 50 percent in the last 12 months and that the network is running with its lowest-ever dropped call and blocked call rates.
Raymond James analyst Ric Prentiss said in a recent research note that he expects to see continued growth in Sprint Nextel’s data revenue and a return to positive postpaid net adds in the second half, with churn dropping and improving performance from the company during the second half of the year. He added that the redundancy offered by the dual-mode handsets “has led to a number of iDEN customers coming back to Sprint Nextel, especially in the public sector.”
But Lin said he believes that the real make-or-break for the company will be that it has to go through the same painful decision process that Cingular Wireless did when it acquired AT&T Wireless Services Inc.: move to one network, in spite of the risk of making customers unhappy.
“Running a dual-mode, incompatible network has not worked for any carrier,” he noted.
Customer service challenges
Meanwhile, the company also is trying to get on the ball with its relationship to customers. The company and some analysts are beginning to predict an end in sight for Sprint Nextel’s troubles, estimating that its performance could improve by the second half of this year in terms of churn as network improvements to iDEN take effect.
Sprint Nextel spokeswoman Roni Singleton said that the carrier’s proclaimed focus on improving “customer experience” includes “all the touch points: service and repair, to billing, networks, customer service . we know that we have customers that want us to address all of these issues. I don’t think I would point to a single, particular thing. I think I would say that there are some operational challenges in all of those areas that we know we need to address, and we’ve begun that process.”
The carrier plans an easier-to-read bill and a new point-of-sales system.
