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.
Change abounded last week in the telecom industry. Ben Verwaayen announced his plan to leave Alcatel-Lucent by the end of the year, amid mixed results. In cable news, Charter Communications emerged the victor for the Bresnan cable systems (no surprise given the immense insight Charter executives had about the asset). On the labor front, AT&T continued to make progress in its labor contract negotiations, cementing a deal with approximately 20,000 wireline employees in the former Southwestern Bell Telephone operating region and extending current terms for an equal number in their AT&T Mobility unit. On the shareholder activist front, David Einhorn moved to sue Apple over their plans to eliminate a class of preferred equity, prompting a larger discussion over Apple’s giant cash balance.
But the moving parts in this week’s Reality Check have nothing to do with the steady stream of headlines described above. They have to do with Sprint Nextel and a comment made by CFO Joe Enteneuer on their latest earnings call:
“We have a lot of moving parts with the pending Softbank and Clearwire transactions, but our core business is growing well and we’ll continue with our balanced approach to customer acquisition and profitability as we go through the Network Vision build.”
Call this the understatement of the year, and perhaps the decade. You get tired just reading the release, and get the sense that Sprint Nextel is more than busy, they are overwhelmed.
What’s on Sprint Nextel’s 2013 “to do” List? There’s plenty:
1. Turn up 4,000 cell sites on the new Network Vision platform by end of March and approximately 16,000 total sites by the end of 2013 (24,000 total sites by end of 2013 covering more than 200 million potential customers). There is a high dependency on their network providers (Ericsson, Samsung and Alcatel-Lucent), their backhaul providers (several dozen alternative access vendors) and other parties to make this happen. The good news is that Sprint Nextel knows what needs to be done. As a long-time management team member of the company, I can speak first hand to their project know-how (3G EV-DO deployment, cable rate center deployment, metropolitan area network deployment and backhaul grooming, etc.). However, they are operating in an environment where others are demanding the same resources that Sprint Nextelneeds to be successful. Specifically, AT&T is in the way of Sprint Nextel’s success, particularly in the backhaul and network deployment arenas.
Corresponding to the Network Vision deployment is the “phase two” deployment for existing markets. This includes network/access augments to the existing deployments (which will need to occur if Sprint Nextel sees the same amount of growth Verizon Wireless has seen in the first year of deployed networks), as well as additional radio capacity. While they were hamstrung from discussing growth plans using 2.5 GHz capacity, it was clearly evident from comments made on the earnings call that Sprint Nextel was ready to use Clearwire to meet increased demands from wireless data users.
2. Turn down the iDEN network by the end of 2013 and reap demonstrable profit improvement as a result. Sprint Nextel introduced the concept of network “thinning” in their second quarter results last year which resulted in some unexpected profitability improvements. As of the end of 2012, Sprint Nextel had 2.1 million subscribers remaining on the Nextel network. Sprint Nextel has to increase the rate of postpaid customer transition (to Network Vision or a competitive carrier’s network) from the 644,000 sequential reduction (Q3 2012 to Q4 2012) to 816,000 in the first half of 2013 to completely clear the network. While a 27% improvement in transition might not be a large task, taken in tandem with the rest of Sprint Nextel’s activities, it deserves mention. Not completing the Nextel turn down by end of Q2 would have disproportionately negative financial implications to Sprint Nextel’s 2013 earnings. See the chart below for Sprint Nextel’s overall cost of service improvements.
3. Convert retail postpaid “lookers” to customers. Sprint Nextel has a competitive advantage here with unlimited plan simplicity, but this is somewhat muted by competitors’ shared data plans. One of the surprises in the quarter was Sprint Nextel’s sequential postpaid retail churn increase. On the Sprint CDMA platform, churn rose from 1.88% to 1.98%, and this increase was due to voluntary churn. While this may come across as a small number, every .1% represents 90,000 Sprint CDMA platform net additions. Said another way, had the Sprint CDMA platform churn been 1.71% or less, the total retail postpaid base would have grown. This seems like a small step to achieve, but it’s the difference between proving whether Q4 2011 (the last quarter Sprint Nextel grew overall postpaid retail subscribers) was an anomaly or their new net additions (and sequential revenue growth) standard. As Sprint Nextel admitted on the call, the pool of customers who upgraded their devices prior to the $10 per month smartphone premium is shrinking every day. Something must take its place, and it is volume growth. This could be from more tablets (Sprint Nextel shrunk and their competitors grew), or from family plan or small business additions. In the revenue growth analysis, volume and rate need to grow for Sprint Nextel.
Localized advertising and promotion (particularly with tablets or other connected devices) should be able to help the first half 2013 net add picture. Sprint Nextel has slowly been moving their distribution capabilities to company-owned stores, and should continue to accelerate these efforts in converted markets. Accelerating in-building coverage efforts and repurposing 800 MHz channels for voice would also help reduce the “signal strength gap” between 700 MHz and 1900 MHz spectrum bands for businesses. Or, Sprint Nextel could get really creative and have unlimited data/text with metered voice. That would definitely hit a chord with the under-30 crowd.
Sprint Nextel’s postpaid net addition picture has been worsening and is still negative (see chart below). The first and second quarters of 2013 will be particularly hard on the Nextel postpaid base with recapture/conversion rates in the 30% to 40% range. That equates to 1.1 million Nextel customers leaving for other networks in the first half of 2013. Being able to keep net losses comparable to those in 2012 would be good, and achieving 2011 net loss levels would be astounding.
4. Get the mergers done and integrated as quickly as possible. This includes Clearwire, Softbank and the Chicago/St. Louis spectrum purchases from U.S. Cellular. This clearly involves a level of leadership and management that is a “once in a decade” experience. Fortunately for Sprint Nextel, they had the Nextel merger that will serve as case study for practices to avoid. I anticipate that Dan Hesse’s management team will be swift and bold in their actions, driven by a Softbank culture that was described by a Sprint Nextel associate as “the opposite of Sprint nice.”
Sprint Nextel has not historically had a good M&A history. On top of the Nextel debacle, Sprint Nextel has lost market share in every PCS affiliate region they acquired over the past decade. Their only accretive acquisition in recent memory has been Virgin Mobile USA in 2009, which required minimal network integration.
If the theme is not apparent by this point, let’s make it clear: Sprint Nextel has a lot on their plate and network organization is driving the bus. This is a good sign because a competitive network cost and coverage structure are the primary things that keep Sprint Nextel from growing their retail postpaid base (note: there was little discussion of calls to care or net promoter scores or handset/product gaps on this call – all of these elements remain strong). Understanding what combination of coverage, usage and yield is needed to acquire customers from AT&T Mobility and Verizon Wireless in an LTE-centric/LTE-only world will make Sprint Nextel a winner. If the multitude of today’s tasks prevents this strategy from being implemented, Sprint Nextel will remain a perennial challenger.
Jim Patterson is CEO of Patterson Advisory Group, a tactical consulting and advisory services firm dedicated to the telecommunications industry. Previously, he was EVP – Business Development for Infotel Broadband Services Ltd., the 4G service provider for Reliance Industries Ltd. Patterson also co-founded Mobile Symmetry, an identity-focused applications platform for wireless broadband carriers that was acquired by Infotel in 2011. Prior to Mobile Symmetry, Patterson was President – Wholesale Services for Sprint and has a career that spans over twenty years in telecom and technology. Patterson welcomes your comments at jim@pattersonadvice.com and you can follow him on Twitter @pattersonadvice.
