Sprint Nextel announced another disastrous quarter, its problems only highlighted by the strength of Verizon and AT&T, and appears to be in real danger of sacrificing its only routes out of its ‘also-ran’ rut, as a peace offering to understandably angry but short termist investors. The carrier is pulling back on Pivot, the important joint venture with four major cablecos that gives it a shot at powering a converged operation; and is once again weighing up the options for its Xohm WiMAX division, with a deeper relationship with Clearwire and possible total spin-off two possibilities.
Sprint is suffering badly from a poorly executed merger, and the huge mistake of letting its balance of revenues slide so far from high margin, low churn offerings (notably in its mishandling of Nextel customers), to lower value services and customers in the prepaid sector. CEO Gary Forsee rightly took the fall for his operational gaffes.
But now that times are hard again, there is only way for Sprint Nextel to avoid being stuck forever as a poor third behind AT&T and Verizon, increasingly losing value and market weight, and probably becoming an acquisition target down the track. That is to repeat the Forsee trick of adopting a radical new plan that takes Sprint into a shiny market ahead of its rivals, and in fact, before his departure, he had come up with two ‘ Pivot and Xohm.
This is just one factor behind its latest disappointments, and the fact that the company is warning of an even worse fourth quarter. Third quarter profit fell 77% year-on-year to $64m, on revenue down 4.2% to $10.04bn. The operator admitted it still needed to fix customer service problems, and that it had lost 337,000 postpaid, high value monthly subscribers as well as even more prepaid customers ‘ and that churn would be worse in Q4. By contrast, AT&T added 2m net new subscribers in the quarter, while Verizon Wireless gained 1.6m.
But merely putting the ship back on an even keel will not be enough to enable Sprint to fulfil its potential in the US market. Sprint Nextel acting CEO Paul Saleh’s statements on the announcement of Q3 figures were predictable and hollow. “We are operating with a renewed sense of urgency and are committed to take dramatic action to fix our business,” he said, but with no idea of what those actions might be, and more than a hint that Sprint is actually backing away from the options that have the greatest dramatic potential.
Saleh admitted that Pivot, the $200 million cable joint venture, which aims to offer a quad play nationwide, will not be expanded beyond its current base of 33 markets and 20% of Sprint retail stores. He said Pivot has suffered provisioning issues and, since Sprint is focusing on simplifying its business, it has decided not to expand Pivot. There have been predictable problems with integrating billing, but also the service has certainly not yet delivered on its vision of integrating TV, video and DVR functions across fixed and mobile platforms.
Saleh said the relationship with the cablecos remains strong, and they will work together on a future, simplified service for other markets. This sounds like the first nail in the coffin for a venture that held such promise of making Sprint into the key partner in a converged partnership that could be a realistic quad play alternative to the big two telcos.
It was also probable that the cable venture was to make use of the Xohm WiMAX network, but for this to happen, the initial, relatively simple Pivot services had to be successful and well delivered, and that hasn’t happened.
Investors have consistently failed to get the Xohm vision, and will only tolerate it if the company is delivering strong performance in its core businesses. Otherwise, Xohm is looking like a high risk way to spend $5bn and get very little back.
Therefore, although it may lose its best chance of medium term recovery, Sprint may well defocus on WiMAX. The most likely option is to merge the Xohm with Clearwire, already its close partner in building out the operators’ mutual 2.5GHz spectrum holdings, and try to IPO the merged entity.
Other possibilities are for Sprint to buy Clearwire, though it would be unlikely to be able to pay McCaw the money he would be looking for in the current climate; or to attract a new investor in Xohm with Intel an obvious candidate.