How to Save Sprint: Analyst Q&A

When Sprint recently announced that it lost nearly 1.1 million customers in the first quarter, things seemed to go from bad to worse for the No. 3 wireless carrier. Many reasons are cited for Sprint’s troubles, ranging from the botched integration with Nextel (which many believe is a dead technology) and poor customer service to the failed Pivot venture with cable providers and a lackluster handset lineup. But if CEO Dan Hesse is able to execute his turnaround plans, Sprint could be a legitimate threat to both AT&T and Verizon Wireless as the world moves to 4G. We asked Berge Ayvazian, chief strategy office of the Yankee Group, to give us a more clear understanding of what went wrong with Sprint and how he would fix things if he was in charge. Is losing more than a million customers in a quarter as bad as it sounds? Dan Hesse has moved the company to stratify their customer base by the desirability for profits, and they are trying to maintain and secure customers that have high value, and they don’t mind losing customers that they believe have low value. I think there are separate issues [with those customers], certainly credit issues, but they were customers that didn’t generate sufficient revenue and profit that didn’t justify the level of service that would be necessary to retain. He’s looking to move the company toward higher-value customers in general. How can Sprint be fixed? Almost inherently as a result of the merger, there was a real internal focus on alignment and organizational change. They need to put all that aside and get back to being one company focused on the customer and focused on the marketplace, not on their own internal merger activities. They’re going to go through a process now as they merge with Clearwire. They can’t afford to let that set of changes take their eye off the customers and the marketplace. Second, they need to fix this [customer] care problem—this retention and churn problem. What’s your general understanding of Sprint’s customer service issues and how should the carrier improve things? They went through this whole billing mess with a transition to a whole new billing system, and people couldn’t understand whether bills were being done correctly, they were being mischarged, the care rep could have been a Nextel rep taking calls for Sprint. The whole care problem was a mess. They’ve got to fix it all and simplify it. Too many different products, pricing plans; too much legacy. They never retired pricing plans. They added more and added to the complexity. That’s why this new pricing scheme, all you can eat, is critical. Should Sprint be more aggressive with its Simply Everything pricing plans to win back customers? I think ultimately they’re moving Simply Everything to be the scheme for pricing. It will be a variety of all-you-can-eat bundles. They’re doing more profitability analysis to ensure that they don’t secure customers with pricing offers that aren’t profitable or sustainable. People can run up their bill, which ultimately doesn’t get paid for in an all-you-can eat plan. They need to incent customers to use their phones responsibly or data responsibly. Do you believe Spint’s current partnership with Google to offer Google services on handsets and WiMAX devices could be a segue to subsidizing data or voice with advertising? The relationship that Google will have with Sprint going forward hasn’t been clarified by the Clearwire deal. We need to ask questions about Google’s role in the 3G business and the relationship they’ll have to mobile advertising and mobile search outside Clearwire where it’s an investor and its function has been clarified. They’re doing the interface, the inherent linking between content and applications. What we don’t know is how that applies to the core Sprint 3G businesses. With the exception of the Palm Centro and HTC Touch, Sprint hasn’t had many exciting exclusive handsets in recent memory. How can Sprint generate more buzz with new devices? With suppliers like Samsung, they’ve got to become a strategic channel that brings the newest and most attractive devices to market, and I think they need to use the leverage they have both in size and strategically on the WiMAX side. Samsung needs to place the bet with Sprint and say, Let me do this both on the CDMA side as well as on the WiMAX side and give you the best handsets and give them to you first. What should Sprint take away from the failed Pivot venture with the cable operators? I think the failure of Pivot is a big burden for Sprint. It obviously was a wasted effort in the sense it didn’t result in anything positive in the first round. It has a foretelling effect on the success of the Clearwire venture. It’s not just about Clearwire. It’s really about the role of companies securing and attracting the next round of growth for mobile services. Sprint is in an all-out war with AT&T and Verizon, and the only allies it has are cable companies. They need to partner with cable companies in effective ways to secure their base and acquire new customers and take market share from competitors. They need execution, and they need to incent each other properly so it’s not a money loser for either side. Cable companies make money by securing Sprint Wireless customers and vice versa. Is it your understanding that the cable companies are going to be offering voice as well as Mobile WiMAX as part of this Clearwire agreement? Absolutely. They’re replacing Pivot with a new plan. That plan is between Sprint and the cable partners. It will carry forward into Clearwire but it’s not identical. It’s a three-way deal where Clearwire gets to sell and Sprint gets to sell and cable companies all get to sell 3G and 4G. How important will dual-mode CDMA/WiMAX devices be in order for Clearwire and Sprint to succeed with 4G? It’s critical from our perspective. They have to be critical from Sprint’s perspective, because coverage-wise, they’re not going to be able to roll out Xohm or Clearwire fast enough to create a coverage footprint geographically or for the purpose of mobile. It’s one thing to sell fixed WiMAX broadband; it’s another to sell a mobile service that has to have metro coverage and ultimately a national or regional coverage. They have to be able to deliver a combination of 3G and 4G for purposes of coverage. Do you think Sprint has the latitude to go with another 4G technology should Mobile WIMAX not take off? Yes, but they will not say today that they’re hedging their bets and keeping their options open. Sprint made the right decision to take the 2.5-GHz spectrum and use that for WiMAX, and get to the front of the pack in terms of being able to roll out mobile broadband service. They put tremendous pressure on their competitors to invest capital in spectrum and equipment to do 4G as fast as Sprint is. Even if they try, [the others] will be one year or two years behind. So is Sprint heading in the right direction? In the end, Sprint is the third-largest but ultimately the only pure-play champs to succeed against Verizon and AT&T in the U.S. market. T-Mobile and Deutsche Telecom are subscale to the U.S. market in mobile. They are an outlier in trying to be a true player without any wireline offers to bundle against and no cable partners. When Dan Hesse clears the decks on WiMAX, on Clearwire, when he fixes his customer care problem, when he proves to the market that he can transition push-to-talk to Q-chat—if he solves all of those problems by the end of this year, he either becomes an attractive candidate to be acquired by T-Mobile or Deutsche Telecom or vice versa. You could argue the Vodafone model makes the most sense. They don’t control Verizon Wireless. It’s their play in the U.S. Neither T-Mobile nor Sprint on its own is sufficient to compete against Verizon. Sprint has put together the partnerships that would make it possible to create a viable competitor against AT&T and Verizon.