Editor’s Note: Welcome to our weekly Reality Check column. We’ve gathered a group of visionaries and veterans in the mobile industry to give their insights into the marketplace.
It was a morbid week for Sprint Nextel Corp. (S) and Clearwire Corp. (CLWR), no doubt about it. The question the telecom community is asking is “Is there a light at the end of the tunnel for Sprint Nextel, LightSquared or Clearwire?” To provide a balanced analysis of Sprint Nextel, let’s go to the heart of profitability – postpaid net additions.
In the context of previous performance, as well as relative performance, Sprint Nextel is actually doing pretty well. It’s very likely that Sprint Nextel is even if not slightly ahead of the combined AT&T Mobility/ T-Mobile USA in terms of postpaid net adds, but both are being trounced by Verizon Wireless. Over the past four quarters, the Sprint Nextel to T-Mobile USA spread has grown to a cumulative 1.1 million postpaid customers – in Sprint Nextel’s favor. Compare that to the 1.8 million customer difference that occurred from Q3 2009 to Q2 2010 and it’s a real turnaround. Sprint Nextel successfully stole customers from their smaller sibling (and probably a few from their older siblings as well).
If revenues are up and net losses have stabilized then why the massive loss? The answer to this question provides the thesis for this column. Success in wireless (and likely any other technology company) comes from three sources: a) loyal customers; b) innovation; and c) superior financial management. It must be a daily mantra, the basis for accountability and the brand promise. Sprint Nextel is losing to Verizon Wireless and AT&T Mobility because it is not winning the war on these fronts.
First, customer loyalty. We are in the middle of the largest re-balloting that the telecom industry has even seen. The voters in this election are not just current wireless customers moving from feature phones to iPhones and Androids, but wireline customers who are thinking about cutting home phone service. In determining the best candidate, many questions are being asked:
–Who has the best network for the fewest dollars (generally, this is dealing with voice, but for the younger crowd, it could include data)? Network value is critical.
–Who has the iPhone (as all carriers have the Android)?
–What are the total monthly costs for me and my family?
–Where can I get my phone fixed and how helpful is the provider with this?
Unlike Verizon Wireless’ claims of network and AT&T Mobility’s strategy around product breadth, customer loyalty is driven by brand (which AT&T and Verizon use to communicate their network’s size) and by selection (which includes the iPhone and iPad products). Sprint Nextel has actually seen this in their prepaid brands, with Boost being one of (if not) the first to introduce branded smartphones into their prepaid lineup. Everyone else at that point played catch-up. But in postpaid, Sprint Nextel has a gaping hole in their product lineup, and CEO Dan Hesse acknowledged as much on the earnings call last week.
Nowhere is the device disadvantage more apparent than in the latest smartphone market share information from Nielsen. Android is still the top operating system, but Apple Inc. is the top manufacturer. Sprint Nextel is missing the middle, and, to the extent the second question above is critical to the buying decision, it’s going to rule out Sprint Nextel from consideration.
That said, Sprint Nextel has improved postpaid (and prepaid) churn. Second quarter results ov 1.75% monthly postpaid churn means that fewer customer left Sprint Nextel’s network than in 2010. But, Verizon Wireless and AT&T Mobility are still far lower than Sprint Nextel. To put this in context, if Sprint Nextel had Verizon Wireless’ churn of .89% throughout the quarter, they would have had a net postpaid gain of 745,000 customers in Q2. Even at a 1.2% churn rate, they would have beaten AT&T Mobility on the net addition front. At $57 average revenue per customer, a .89% churn rate on Sprint Nextel’s postpaid base would result in $145 million in incremental revenues per quarter. Take that over a few quarters and Sprint Nextel has accumulated $1 billion of incremental service revenues.
This is not a “what if” or academic exercise – Sprint Nextel is running out of time to steal customers from T-Mobile USA. The next frontier is the larger, more integrated players. That Sprint Nextel lost 101,000 customers is not as surprising as most analysts believe, but that Sprint Nextel did it on a lower churn rate without the iPhone is remarkable. Bottom line: Loyalty in wireless is shifting quickly to operating systems. If Sprint Nextel or others can make the switch as easy as we saw with number portability, they can capture a disproportionate number of switchers over the next two years.
This leads us to the second critical success factor: innovation. This is much larger than network innovation, which Verizon Wireless deserves for their LTE pioneering (and which Sprint Nextel lost because of their wavering commitments to Clearwire). Innovation also involves product and service improvements that are closely linked to the brand promise. Verizon Wireless, Sprint Nextel, and AT&T Mobility each have the following assets:
–Spectrum that can deliver bandwidth in excess of 3 megabits per second.
–Nationwide branded distribution.
–A nationwide IP backbone that connects 90% of the server volume in the United States.
–Handset relationships (Apple being the missing link for Sprint Nextel) that include 1-1.5 GHz processors.
–Basic product capabilities (voicemail, messaging, etc.).
Do any of these carriers really have a deep partnership with Microsoft Corp./Skype Ltd. (who could pay Sprint Nextel’s entire debt obligations twice with their cash on hand)? How about Google Inc. (who offered more for the intellectual property of InterDigital and the 1,000 IBM patents than rival Sprint Nextel’s entire net book value of their CDMA asset)? Or Facebook? Or Zynga (AT&T)? Or Tiny Speck?
The next level of innovation occurs at the application layer. It involves trading capabilities for placement (e.g., free bandwidth for applications for a year if you host on Sprint Nextel or a Sprint Nextel partner first). It involves marketing the latency of a network in some other terms than iDEN push-to-talk call setup speeds. Sprint Nextel, Verizon Wireless and AT&T Mobility are one step away from a significant loyalty event through a preferred applications strategy. Verizon Wireless started to set the bar with their Skype relationship, but behind Skype is Tango, ooVoo, Fring, Google and others. No one owns video – start there.
Also, Sprint Nextel has a significant opportunity with business innovation thanks to their local fiber assets and cable relationships. It begins with thinking about the communication from the corporate server to the handset/module as one and not multiple products. The machine-to-machine module is an extension of the IP network, not a separate product. Verizon Wireless may have difficulty thinking about it in this manner due to telecom and wireless sales force competition issues, but AT&T Mobility is not, given their conference call comments. As Sprint Nextel struggles with wireline, they cease to realize that their paid-for assets are actually the differentiator from all of their smaller competitors and perhaps the only weapon to defeat their Goliaths.
Superior financial management was a weak spot when Dan Hesse entered Sprint Nextel at the end of 2007. At that time (Q4 earnings) Sprint Nextel had $22.1 billion in debt, $2.2 billion in cash on hand, and $26.5 billion in net “property, plant and equipment.” Fourteen qu
arters later, Sprint Nextel has $18.5 billion in debt, $4 billion in cash on hand, and $14.4 billion in net PP&E. Sprint Nextel has done a tremendous amount of work to get the balance sheet shored up, but in the process of managing cash, their PP&E decreased faster than their net debt (30% faster). Contrast this with Verizon Wireless who revealed on their conference call that their net debt was $6 billion (2.7-times the customers and 60% less debt) and that their net PP&E was flat to growing (vs. a decrease of 46% for Sprint Nextel since the beginning of 2008).
Cash management was needed in 2008 to shore up the mess left by the previous CFO and CEO. But asset management in 2011 is different than cash management in 2008. It goes beyond controller and treasury functions to investments and strategy. This is where the new CFO, Joe Euteneuer, adds immense incremental value to the company. If Sprint Nextel can go from an investment-grade balance sheet to junk in sixteen quarters, they can find the financial partners to provide the flexibility and expertise to guide the company back to investment grade. The decisions will be challenging, but without a steady telecom hand on the wheel guiding investments, Sprint Nextel’s remaining PP&E will continue to wither and their costs of service will continue to rise.
Using Sprint Nextel’s earnings as an example, we see the seeds of the next generation of growth: a) investments in loyalty (which in the case of the network provider come from smartphone and data leadership); b) investments in relationships with a multitude of applications providers; and c) superior financial management and accountability. It’s a recipe for success for the industry, not just Sprint Nextel.
Jim Patterson is CEO and co-founder of Mobile Symmetry, a start-up created for carriers to solve the problems of an increasingly mobile-only society. Patterson was most recently President – Wholesale Services for Sprint and has a career that spans over eighteen years in telecom and technology. Patterson welcomes your comments at:[email protected].
