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A Qwest for survival

Phone company's CEO says new partnerships are intended to help it fill holes in its business, develop its wireless service. Qwest in talks with Verizon about wireless deal

Qwest Communications International is looking for new partners to help it plug the hole the company has in wireless, according to Edward Mueller, the company's CEO.

Mueller, who took the reigns at Qwest only about six months ago, addressed a packed house of analysts and journalists in New York on Monday at an event hosted by the company to provide a glimpse at its strategy for the next year. He told the crowd that he recognized that Qwest has some --and he said he's ready to start plugging those holes.

He said he sees wireless becoming a big part of the company's strategy going forward. Not only will wireless broadband be important, Mueller said, but offering some kind of wireless service to bundle with Qwest's other services will become crucial as the company competes head-to-head with cable operators.

But Denver-based Qwest, the third-largest phone company in the U.S., is not going to spend millions of dollars acquiring wireless spectrum and building a new network. Instead, Qwest is on the hunt for partners.

Qwest already resells wireless service from Sprint Nextel. But Mueller said this partnership is not working well for Qwest, and the company is looking to either renegotiate its deal with Sprint or find another company with which to partner in wireless.

I like our position (regarding new wireless technologies) because it really isn't out there yet. We get to play at the front end of this and not the back end.

Mueller pointed to Qwest's partnership with satellite TV provider DirecTV as an example of a partnership that is working well. And he said he hopes that the company could replicate that relationship and expand it in wireless.

CNET News.com sat down with Mueller and two other Qwest executives--Dan Yost, executive vice president of product and IT, and John Richardson, CFO--after the analyst conference on Monday to drill down on how they think these partnerships can help Qwest grow.

You talked earlier today about Qwest striking better partnerships. But it's hard to make money from partnerships, so how does this work for Qwest?
Mueller: We make some money on the partnership. So today, we have an MVNO (mobile virtual network operator) relationship with Sprint. And we lease the network. We also have a partnership with DirecTV where we take some of the revenue.

But can you really make money in a wireless partnership where you don't own any of the assets?
Mueller: For wireless, making money with partners is one part, but getting a bundled product with a full set of products that we can (use to) keep stickiness with the rest of our product set is just as important and very powerful for us.

You also mentioned forming deeper, more integrated partnerships. What does this mean?
Mueller: Let's take DirecTV as an example. Today, we market their product and put it on our bill. It's conceivable that down the road, they might provide video-on-demand service. They could go over our high-speed Internet link. We would then not only provide the transport for that service, but maybe we'd also be integrated into their set-top boxes. That would be an example.

How would you form it in wireless?
Mueller: In wireless, we would be able to bring our customers those services immediately, which is deeper than we do today. We would have high-speed broadband wireless products that would be jointly marketed and come to the marketplace together.

We may also have a product on a wireless device that may have an application for us, like in your home. Take an iPhone, for example--they have an application that might integrate with our voice service or e-mail and voice mail. Those kinds of things that would be unique to our partnership and our region.

This kind of integration between wireline and wireless services sounds great. But AT&T and Verizon (Wireless), which own their own wireless infrastructure, haven't been able to do this fully yet. It's also proven difficult for Sprint and the cable operators, which are in a partnership somewhat similar to what you are suggesting, to really achieve tight integration between wireline services and wireless services. So why do you think that Qwest can do it?
Mueller: First, we are good partners. Second, I think it's way too early to say it can't be done. Just because others have not done it doesn't mean it's something we shouldn't look at. I think it's something yet to come.

I'm not saying that because others haven't done it, it's impossible. But it's proven to be a difficult task for even one company that owns both wireless and wireline assets. So why would Qwest, which doesn't own any wireless infrastructure and will have to rely entirely on a partner for that piece of the service, be able to deliver this better or quicker than the others?
Mueller: I think there is more to come. Broadband wireless is going to change the face of the way we do business. We haven't even seen the applications to come. We don't even have the bandwidth in wireless yet to have a significant go at it.

I think that's coming. It's within our eyesight. You've got the 700MHz auction. You've got WiMax--Sprint and Clearwire, whatever they decide to do, if they do it together or on their own. That is going to enable a lot.

I like our position there because it really isn't out there yet. We get to play at the front end of this and not the back end.

Qwest sold the last of its wireless assets in 2004. Looking back, was that a mistake? You say you like your position, and yet your position is that you don't own any of your own infrastructure.
Mueller: I like our position in the market. But one is an economic choice, and one is a market choice, OK? Now, I can't comment on whether it was a mistake. I wasn't here when the assets were sold.

Richardson: The assets had such limited coverage and didn't meet the needs of the marketplace because it didn't have nationwide coverage.

You mentioned Sprint and Clearwire, and their efforts to build nationwide WiMax networks. Would you be willing to invest in helping them build a nationwide WiMax network?
Mueller: I doubt it. I mean, it would have to be powerful economics for us.

You also mentioned earlier today wanting to partner with whoever wins spectrum in the Federal Communications Commission's 700MHz spectrum auction. What kind of partnership would Qwest have with a company that wins this spectrum? Would Qwest lease the capacity and put together its own network?
Mueller: All I meant by that is that there could possibly be another wholesale network that comes out of that auction. We obviously aren't bidding on the spectrum, so we aren't looking to be an investor in the spectrum or the build-out.

We just think there are going to be more big wireless-broadband networks. It won't be just Sprint or Clearwire and WiMax. Possibly, it could be AT&T and Verizon, or a third party that comes out of this. So we would look for anybody that we could be partners with and retail off their network.

Let's shift gears here for a minute to broadband. You talked about Qwest's commitment to upgrading its network by taking fiber to the node or fiber to the neighborhood. Why doesn't Qwest follow Verizon's lead and just take fiber to the home?
Mueller: It's too expensive. We don't see the return.

But Wall Street seems to have looked favorably on Verizon's strategy, and it's starting to pay off. They seem to have a long-term vision.
Mueller: We don't have the resources.

Aren't you worried about commoditizing your network by not offering services like TV?
Mueller: No, that is what we have DirecTV for.

Yes, but you are relying on another company to offer a service to your customers. And you are just providing the transport.
Mueller: We like them.

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