Sprint PCS is attempting to change the way the industry does business with affiliate companies, but
the task has not been without its difficulties as some affiliate companies struggle to obtain financing.
To date, Sprint
PCS has signed on 16 affiliate companies that will work to quickly expand the carrier’s Code Division Multiple Access
service nationwide in smaller markets using the Sprint PCS brand name and adhering to company and network
performance standards. Many of these affiliates will use Sprint PCS’ wireless licenses to construct their own networks.
And to keep its business structure simple, Sprint PCS has maintained it does not want an equity interest in these
companies. That has scared investors.
“The structure is different, and that has taken some time for the capital
community to get used to,” said Tom Mateer, vice president of affiliations with Sprint PCS. “We’ve been
making steady progress, but have not announced any official financing. We are supporting our affiliates in every way,
including raising money.”
Nationwide player AT&T Wireless Services Inc.’s personal communications
services affiliates have had little trouble raising financing, say analysts, since AT&T Wireless owns a stake in each
company and the affiliate owns part of the license. Earlier this month, TeleCorp PCS Inc. rolled out service from New
Orleans to Baton Rouge, La., and later in the quarter the affiliate plans to roll out service in Memphis, Tenn., and Little
Rock, Ark. Other affiliates include Triton PCS and Tritel Communications.
“AT&T affiliate agreements have
been easier to stomach than the first round of Sprint affiliate agreements,” said one analyst who declined to be
named. “Part of the deal that makes it difficult is the fact that Sprint owns the license, and the affiliate leases the
license from Sprint for 20 years. A key concern is that if the entity has issues financially down the road, what do
creditors have to go against? And if Sprint owns the license, the answer is the network, but the network doesn’t have a
license to go with it.”
Sprint PCS’ Mateer said his company is working out deals to help investors’ comfort
levels by making spectrum a secured asset for creditors. He declined to provide details, but analysts say Sprint is
developing deals that would require the carrier to sell part of its spectrum to the affiliate if the business relationship
goes sour.
“Sprint has come a long way,” said one affiliate. “It has made certain agreements to
obligate itself to sell spectrum if the deal were to go bad. That has given lenders some comfort level.”
And in
most cases, Sprint would have the first right to purchase the entire entity if the company goes under. The risk, say
analysts, is a credibility problem for Sprint PCS if companies fold.
“There are pluses and minuses,” said
one analyst. “From an investor’s point of view, you have to look at these case by case.”
“We feel
like we’re breaking the paradigm of wireless relationships and transactions by doing something the industry has not
seen,” said Mateer. “Over time, this will be a better approach.”
The financing, complexity,
expense and risk of affiliate agreements is likely why regional personal communications services carriers have not
aggressively pursued these agreements. Regional player PrimeCo Personal Communications Services L.P. once had
planned to sign on affiliates to fill out its footprint in various markets, but now has scrapped the plan. Its co-branding
agreement with Chase Telecommunications Inc., a C-block PCS operator in Tennessee, ended when Leap Wireless
International Inc. agreed to purchase the company, and a deal it was working on with a company to fill out its footprint
in Texas folded when the affiliate could not find financing. The affiliate was to use PrimeCo’s licensed
spectrum.
Regional players also could have difficulty operating with the amount of revenue they would receive
from affiliates. Analysts say Sprint PCS and AT&T Wireless will receive about 8 percent of affiliate revenues. These
nationwide operators have better economies of scale and make up for lowered revenues in their larger markets. Having
affiliates build out their footprints also reduces the heavy capital expenditures both companies are carrying. The biggest
value for them is getting digital coverage in place to provide seamless nationwide service. Sprint PCS says it is looking
to sign on as many affiliate companies as possible.
“We don’t have to get some large cash flow from the
affiliates,” said Mateer. “Our main interest is to get expanded coverage so we have customers in expanded
markets … We’ve been very honest with the affiliates that this allows us to focus our capital dollars and management
time and talent to be as successful as we can.”
For the affiliates, many of whom own basic-trading-area
licenses or have returned spectrum to the Federal Communications Commission, such arrangements with larger
companies will give them a chance to become operators. The financing markets have been brutal with smaller players,
and all realize the wireless business is moving toward a national scale.
“We shed $55 million in debt to the
FCC, and we gained access to [Sprint’s] infrastructure and handset pricing, which was better than what we were paying.
We could have been a strong regional player, but we at some point would have gone to a nationwide network. We
would have had to compete with Sprint PCS and PrimeCo,” said Bill Coker, vice president and general manager
of U.S. Unwired, which earlier this month became Sprint PCS’ largest affiliate. The carrier already had its own
financing and was operating in some markets and now has changed its name to Sprint PCS and is offering the same
pricing plans. Coker estimates the company is saving on average $40,000 per base station now that it has access to
Sprint PCS’s pricing for infrastructure.
Though these companies must give up part of their revenues, most do it in
exchange for hooking into the company’s customer service operations and back-office solutions as well as gaining
access to nationwide advertising, distribution networks and roaming agreements.
