Days after it emerged that Sprint Nextel’s board was looking for a replacement for chairman and CEO Gary Forsee, he has stepped down, taking the rap for disappointing performance post-merger, but leaving renewed insecurities over whether, without him, the telco will execute on its visionary 4G strategy, or will end up throwing the baby out with the bathwater.
A CEO is only as good as his last decision, and the major contributions that Forsee made at Sprint before the Nextel merger were largely glossed over in the epitaphs today, with most of the focus on the problems that have beset the merger process and the undeniable operational mistakes that have led to a slide in the value of the company and a string of financial setbacks ‘ culminating in a new statement yesterday that, once again, Sprint would fail to meet its current quarter targets.
Perhaps Forsee’s greatest recent mistake has been the failure to recruit a strong COO in the wake of the departure of Len Lauer, the well respected executive who was widely thought to have been scapegoated for the last round of Sprint Nextel disappointments, when he fell on his sword a year ago. Forsee and Lauer were an effective team at Sprint because they had complementary capabilities. Although key operational errors were made post-merger – notably the slide towards a lower value customer profile and some problems with integrating the Nextel network and services ‘ it is arguable that Forsee, rather than Lauer, should have taken the fall for those at the time. Having gained a respite, the CEO certainly needed to replace Lauer with someone equally pragmatic, to balance the fact that Forsee’s own strengths lie in vision and strategy more than execution and detail. This became even more urgent in October 2006 when former Nextel CEO Tim Donahue quit as chairman of Sprint Nextel, to have this role added to Forsee’s remit. But Forsee failed to keep a pledge to the board to find a COO by the summer, after talks with former Vodafone executive Bill Morrow collapsed, apparently because Morrow wanted a guaranteed succession path to the top job.
The danger now is that the board will be so preoccupied with the need to get the Sprint Nextel operational machine back on track for short term revival, that it will forget the strategic contributions that Forsee has made and fail to ensure these bear full fruit. Yet he has masterminded a complete reinvention of the once creaking telco, with four key decisions in recent years, at least two of them yet to make their full impact felt. These are the early recognition of the US MVNO market, which led to Sprint becoming dominant as a wholesaler of spectrum and turning around its fortunes in the early years of the decade; the aggressive move towards wireless ‘ something only just being emulated effectively by AT&T ‘ which led to the spin-off of the local lines business, now called Embarq; the merger with Nextel, which gained Sprint greater scale and a high margin customer base, but also, perhaps most importantly, a wealth of 4G-capable 2.5GHz spectrum; and the plan to leapfrog the other carriers by creating the US’ first true mobile broadband network in that spectrum, using WiMAX.
Of these critical decisions, Embarq was almost a no-brainer once Sprint had taken the wireless route, and the company remains an MVNO client. The MVNO strategy has taken some blows recently with the failure of several high profile virtual network operators, some of them Sprint customers, although Verizon Wireless has been worst affected, by the collapse of Amp’d. In general, getting into MVNOs so early, and supporting some of the major players like Virgin Mobile and Qwest, has stood Sprint in good stead, and in some quarters its partners have attracted around 65% of its new subscribers. Most significant in this context has been the creation of the Pivot joint venture with four major cablecos ‘ Comcast, Time Warner, Cox and Advance/Newhouse. Although this has, in common with most of Forsee’s grand plans, suffered teething trouble in terms of actual delivery, it represents a major rebalancing of the US telecoms and media industry, and is likely to be the core of a far more wide ranging collective move by the cable giants to gain ground against the two telco incumbents, and Echostar/DirecTV, in the emerging quad play.
This deal, then, has given Sprint Nextel strategic positioning and power, and huge future potential, but limited short term financial gain. The same can be said, to an even greater extent, of the WiMAX project, which is now housed in a business unit called Xohm and has a close roll-out and marketing alliance with the other major 2.5GHz spectrum holder, Clearwire, itself tied in with Echostar and DirecTV. The pooling of capex, opex and marketing resources with Clearwire to effect a national network more quickly, and at lower risk, was a logical move but also a direct response to intense shareholder nervousness about the cost of WiMAX build-out at a time of poor performance in the core business. This, in turn, allowed activist shareholders, whose primary focus is on immediate shareholder value, to gain a strong voice ‘ notably Ralph Whitworth, whose calls for a change of leadership last month sparked the current management changes.
In June, it emerged that Sprint Nextel was considering various options to increase funding for its $3 billion WiMAX roll-out, including partnerships or even spin-off. The Clearwire deal resulted, but a new CEO will have to revisit the issue of whether to sell or spin off Xohm. It is essential for the future of Sprint Nextel as a force in US telecoms that it sticks with its WiMAX plan. It has unparalleled advantages in terms of 4G-ready spectrum holdings ‘ which, notwithstanding the 700MHz auction and other potential allocations in the coming years, its rivals will be unable to match. Therefore, it starts with a serious headstart over AT&T and Verizon in mobile broadband, both in spectrum and build-out terms; it is genuinely positioning itself to adopt the internet model proactively rather than having it forced upon it, therefore attracting a host of valuable allies; and it has the chance to provide the network for the cable and satellite businesses of the US.
A new chief needs to find a way to exploit these short term advantages at least cost and risk, and while improving day-to-day performance on the CDMA and long lines businesses. But it is certainly not inconceivable that a new broom will look to stamp his or her mark by reversing the mobile broadband policy and selling off Xohm, or at least putting it into a joint venture. This would bring a swathe of valuable spectrum ‘ virtually unencumbered by FCC rules, except in terms of build-out deadlines ‘ into play, and could provide a short cut for Intel, Google, Microsoft or any combination of companies that wish to drive and dominate the mobile internet, avoiding the byzantine politics of the 700MHz auctions. If Intel, in particular, saw the world’s flagship WiMAX project in any real danger of failing or being frozen, it would almost certainly step in, directly or indirectly, to avoid this outcome. Sprint could also lure the cablecos, collectively or (less likely) individually to make a play to control a wireless network directly.
Of course, if the appointment of a new CEO does not boost Sprint’s value significantly, it could itself become a takeover target, something that has been much rumoured in recent months, with Comcast and Liberty Media mentioned among the possible bidders. However, there are few really obvious candidates. It is unlikely that even the current FCC regime would allow AT&T or Verizon to take Sprint, and Deutsche Telekom’s shareholders would certainly revolt if it tried to add the telco to its T-Mobile USA holding, while Vodafone seems to have accepted that its US future lies, for the time being, with its Verizon Wireless joint venture.
Sprint can certainly boost its worth enormously in the medium term with Xohm, the Clearwire and cableco partnerships and its increasingly well valued spectrum assets, which will enable it to extend its MVNO and wholesale operations and potentially become the controller of a national network used by all the major US quad play providers except the two top telcos. And spin-off would not necessarily bring huge short term gains. Judging by reaction to the IPOs of Clearwire (and, less indicatively, of the smaller WiMAX ISP Towerstream), Sprint could not hope for a runaway valuation. Hype about WiMAX notwithstanding, this market has suffered none of the bubble mentality of the last broadband wireless boom at the turn of the decade, which saw off the likes of NextLink. And part of the efficiency of its build-out plans will rely on keeping its two wireless operations close, in order to leverage synergies such as shared sites.
In other words, whoever is appointed to replace Forsee needs to focus on fixing the immediate operational problems, not try to cause a major stir with a reverse of strategic direction or a back-off from Xohm. This would be more than a psychological and financial disaster for the WiMAX community, it would almost certainly condemn Sprint to life as a slow growth, second rate cellco, collecting an unexciting acquisition price somewhere down the line.
Some of Sprint’s recent problems have certainly come from a difficult merger, in technological and cultural terms, but there have also been worrying signs that some of these woes are ones that have historically beset Sprint (though not Nextel), and that the company, despite its transformation of recent years under Forsee’s direction, has not learned from all its mistakes. In particular, failing to keep an optimal balance between lower value prepaid subscribers and higher spending contract users is a recurrent problem, and while a difficult challenge for all operators, it is one that Sprint has particularly allowed to slide.
Although Sprint’s second quarter saw some noticeable improvements and signs that Forsee might have begun his promised turnaround, apparently this proved a shortlived recovery, and the company confirmed yesterday that the third quarter will be tough. It pre-announced ‘ prior to full results disclosure on November 1 ‘ that Sprint Nextel had lost about 337,000 subscribers in the period, in the important postpaid segment where the operator has been trying to regain ground. The company also lowered its guidance for annual revenue and adjusted operating profit in 2007.
Partly to address its slide to low value customers, but also reflecting other problems, Sprint has in the past six months reined in the growth of its popular prepaid, youth-oriented Boost Mobile service, after a too rapid shift to prepaid subscribers. This shows Sprint deliberately reducing Boost’s rapid growth in part because the prepaid customers were straining part of the iDEN network. Claims of reduced quality of service on the high margin and low churn iDEN system have been one of the key problems post-merger. Sprint has blamed the rebanding effort it has embarked on to reduce interference between the iDEN network and first responder communications, claiming the fixes are reducing the volume of calls the network can handle, but there have also been accusations of reduced investment in capacity and customer support, and of teething problems with the devices launched to address the problem and start to migrate iDEN users, the dual-mode CDMA/iDEN Motorola handsets.
But there have been more worrying trends. While Sprint spun out its wireline business to focus on its faster growing wireless operations, it currently exhibits the same metrics as a traditional telephone company, with revenue growth patterns similar to AT&T and Verizon. Sprint shares have reflected the company’s ongoing problems and in the second quarter, Sprint’s overall subscriber growth was 373,000, compared with 1.5m net adds at AT&T Mobility, and the smaller carrier’s net income fell to $19m from $370m a year earlier. Meanwhile, there was widespread confusion over the merger of the Sprint and Nextel brands and services, not helped by fights between Sprint and its affiliates, competing against Nextel in certain territories, and by the initial dual-brand approach.
Technical and operational risks remain, especially when compared to the single-network giants. Although Sprint will be supporting three entirely different architectures from late 2007, it says the iDEN system will not be phased out hastily and remains an important asset, in which it will continue to invest for several more years, supporting it at least until 2012 and installing hundreds of additional sites in 2006-8. In 2006, $2bn of the company’s capex budget went on iDEN improvements. Tighter integration between the two networks, particularly through the new phones, will be key to achieving merger cost reductions, boosting company’s profit margins.
News of the hunt to replace Forsee emerged after activist investor Ralph Whitworth told The Wall Street Journal that he had lost confidence in the CEO, and threatened a proxy fight for board seats unless Sprint directors “immediately” dealt with the leadership issue. Whitworth’s Relational Investors owns about 1.9% of the Sprint shares outstanding.
The company’s CFO, Paul Saleh, will be acting CEO while the board continues its search. James Hance, a board member, will take over as non-executive chairman and will take the role of lead independent director, previously held by Irvine Hockaday. Hockaday, who will stay on the board, said in a statement the company’s search for a CEO is focusing on external candidates.
According to insiders, leading contenders include Andrew Sukawaty, who now runs satellite communications provider Inmarsat and was formerly a Sprint executive, and Dan Hesse, CEO of Sprint’s former local lines unit Embarq.
Reportedly, the Sprint board has also already sounded out former Nextel CEO Daniel Akerson, now joint head of the US buyout team at private equity firm Carlyle Group, but he rejected the advances. Other potential candidates mentioned by insiders and analysts include John Stanton, former CEO of Western Wireless, now part of Alltel; Denny Strigl, president of Verizon Communications or Lowell McAdam, his counterpart at Verizon Wireless; or a new approach to Bill Morrow to offer him the top job instead of the COO post. Morrow is currently president and COO of Pacific Gas & Electric.
Faultline Comment
Whatever happens Clearwire has little to lose. The investment in the ground for Xohm is too great to desert it, so it has to be finished or sold, and the part that Clearwire is working on is the trickier of the two implementations. If Google, Microsoft or anybody else bought out the WIMAX network and the 2.5 MHz spectrum, it would still need the Clearwire effort and might rest even more heavily on Craig McCaw and his organization’s expertise.
And while Clearwire is involved with the venture, the two DTH suppliers, EchoStar and DirecTV, which plan to work closely with Clearwire, using its WiMAX as a return path for a triple play, are also on fairly safe ground.
Perhaps Liberty Media’s John Malone, soon to be the owner of DirecTV, would also like to add a US WiMAX network to his pile of possessions, stranger things have happened, but right now he will have his hands full absorbing DirecTV into his empire.