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Broken connection for Sprint Nextel

Merger challenges and dropped calls for consumers are taking a toll as Sprint aims to expand and upgrade.

Broken connection for Sprint NextelAfter Sprint merged with Nextel Communications, Leigh Elliott noticed that her Nextel phone started dropping calls in places where it used to get coverage just fine.

"On my 20-minute drive to and from work everyday, I'd lose a call up to five times," the 35-year-old New Hampshire resident said. "This never happened before the Sprint-Nextel merger."

In September, after more than a year of poor service, Elliott canceled her monthly contract and switched to Verizon Wireless.

Elliott isn't the only former Nextel customer to get frustrated with poor service quality and cancel her subscription. According to Sprint's latest earnings report, about 300,000 customers dropped their service in the fourth quarter of 2006, most blaming the poor service quality on the Nextel network.

Problems with the Nextel network and with integrating the two companies' networks and technologies have come just as Sprint is trying to expand and upgrade its 3G wireless network, deliver new services--like over-the air music downloads and mobile TV--and build a new 4G network based on a technology called WiMax.

While its main rivals, Cingular Wireless and Verizon Communications, are generating huge profits, Sprint projects flat revenue growth this year, according to a warning issued this month. Executives said the company generated about $41 billion in revenue in 2006 and warned that revenues would be about the same for 2007. They also said they expected profits to be $11 billion to $11.5 billion in 2007, compared with earlier estimates of $12.6 billion to $12.9 billion. To keep costs under control, executives announced Sprint Nextel would lay off 5,000 employees.

Meanwhile Cingular Wireless, which is now owned entirely by AT&T, reported last week that it had the best quarter ever in terms of new subscribers. It added 2.4 million new subscribers for a total of 61 million. Sprint reported only 742,000 net additions for the fourth quarter of 2006, for a total of 53.1 million subscribers. Cingular also reported it almost quadrupled profits, gaining $782 million on $9.76 billion in revenue.

"Sprint Nextel has so many plates spinning in the air at the same time, it's not surprising there would be some breakage along the way," said Andrei Jezierski, a partner at the consultancy i2 Partners.

The problems Sprint faces by accommodating Nextel subscribers comes as little surprise. When Sprint closed the $35 billion purchase of Nextel in August 2005, it inherited a customer base that uses a totally separate network based on technology called iDEN (integrated Digital Enhanced Network). Sprint's own network uses a different wireless standard, called CDMA (code division multiple access).

A Boost to network congestion
Maintaining incompatible networks that use iDEN and CDMA technologies has meant that Sprint must invest separately in each network to keep things running smoothly. The company says that it added 1,800 iDEN cell sites throughout the country to keep up with capacity. But this was about 400 fewer cell sites than the company added for its CDMA service in 2006.

Sprint executives have acknowledged that capacity on the iDEN network has been problematic, especially right after the merger, when Sprint was also adding customers from its prepaid service, called Boost, which also uses iDEN.

"We found a high volume of calls going through that network right after the merger," said Roni Singleton, a spokeswoman for Sprint Nextel. "A lot of this was coming from thousands of our prepaid customers. And that caused congestion on the network, which ultimately led to some customer defection."

To remedy these issues, the company recently introduced two CDMA-iDEN handsets made by Motorola to enable Sprint customers to use both networks. With these handsets, customers use the iDEN network for the popular walkie-talkie Nextel service, which will work in the United States and five other countries: Argentina, Brazil, Canada, Mexico and Peru.

Sprint Nextel has so many plates spinning in the air at the same time, it's not surprising there would be some breakage along the way.
--Andrei Jezierski, partner, i2 Partners

Standard voice and data services will be delivered over Sprint's CDMA network. But even though subscribers will be able to use SMS text messaging and GPS navigation, they will not have access to any of Sprint's 3G services, such as mobile video and music downloading.

It's important for Sprint to migrate these Nextel customers away from the iDEN network to keep operational costs under control, but analysts say the bungled migration is coming at a hefty price.

"The Nextel customer base is a highly valuable one because they generated a lot of revenue per user--in the neighborhood of $60 per subscriber," Jezierski said. "Nextel was very good at targeting small businesses and fleet field workers. These customers were loyal and paid a lot for the service."

Meanwhile, other wireless service providers, such as Cingular, recently reported average revenue per user of only $49.

Sprint's troubles with the Nextel migration could have been exacerbated by the fact that the company is trying to juggle several large initiatives at once. At the end of 2005, after finalizing the merger with Nextel, Sprint entered into a joint venture with four cable operators to develop integrated wireless broadband services.

It also launched its over-the-air music service and began promoting its data services to entice customers to subscribe to its new 3G services. In 2006, Sprint started upgrading its existing 3G network to the next version of technology known as EV-DO (Evolution Data Optimized) Revision A. And in August of 2006, Sprint announced it would invest $3 billion to build a new fourth-generation, or 4G, wireless network over the next two years by using Wimax technology.

"The company totally lacks focus," said Albert Lin, an analyst with American Technology Research. "Trying to create grandiose visionary initiatives, like a 4G network or a converged cable and wireless service, sounds good, but it's difficult to implement."

What's more, the company has been without a chief operational officer since August, when Len Lauer, who had handled day-to-day management of the company, was forced out. Sprint executives had said they wouldn't replace Lauer, but this month CEO Gary Forsee said the company would start a search for a replacement.

"Sprint has definitely been experiencing some operational difficulties," said Michael Nelson, an equities analyst at Stanford Group. "But management has recognized that there are problems and they're trying to right the ship."

In the meantime, investors and subscribers not willing to switch providers will have to wait to see if Sprint's management team can turn the situation around. At a market valuation of about $50 billion, plus the $20 billion in debt the company is carrying, Nelson said it would be difficult to imagine a takeover anytime soon. But judging from the other megamergers in the telecommunications market, such as the $86 billion takeover of BellSouth by AT&T, anything is possible.

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