Sprint CEO: Customer losses aren't as scary as they look

There's no denying that Sprint Nextel is losing customers, but the company's CEO says it's all part of a natural, if painful, transition that he hopes will put Sprint in a much stronger position to take on rivals AT&T and Verizon Wireless.

Sprint CEO Dan Hesse emphasized on the company's conference call -- and again in an interview with CNET -- that the loss of 459,000 contract customers sounds worse than it really is. He explained that these losses have been expected as the company goes through a massive network overhaul that will result in the retirement of its older 2G iDEN network inherited from its 2005 acquisition of Nextel. And he pointed out that the company has been beating analyst expectations for subscriber growth on its Sprint network.

"We know we have to go through this," he said in an interview. "And it's a balancing act. We have beaten Street estimates on earnings. And we're being disciplined in terms of going after customers to maximize profitability now. We know we can't wait until the network phase is over to do that. But then we can come out and make a much larger difference."

Painful migration

The shutdown of the Nextel network, which is part of Sprint's broader Network Vision program, is expected to be concluded in 2013. In order to eliminate that network, Sprint is moving customers off that network. It's doing this to free up the valuable lower 800MHz spectrum used for the iDEN service for 3G and new 4G LTE services.

While some customers are leaving the Sprint Nextel network altogether as part of this transition, Sprint is spending a significant amount of energy and money to get the old Nextel customers to stick around and migrate to the Sprint's 3G EV-DO and 4G LTE networks.

"Right now, we're focused on recapturing as many Nextel and iDEN subscribers as we can," Hesse said. "Because of the deactivation of this network, we saw 30 percent of the customers leaving the iDEN platform this quarter."

Because of the emphasis to get customers off this platform to make room for new services like LTE, Hesse explained there would be something wrong if the total number of subscribers didn't go down in the quarter as a result of this move.

But the good news is that Sprint has seen big success in moving those old Nextel customers to the Sprint network. About 59 percent of the customers leaving Nextel this quarter migrated to Sprint's existing networks. This helped boost the total number of gross additions to 900,000 on the Sprint infrastructure. But since roughly 40 percent of the Nextel customers did leave the Sprint brand, it resulted in negative subscriber growth for the company.

But Hesse emphasized that this has been factored into the company's plans.

"These customer losses have been expected. It's by design," Hesse explained. "Because of the value of this spectrum we have to move people off it, and re-purpose that spectrum, so it can be used for Network Vision."

Hesse also explained that the company has been careful not to spend too much money or effort recruiting new customers to the Sprint network this quarter, because it wants to get further in its Network Vision migration. He said that it's important for Sprint to be able to digest the customers it is adding from Nextel as it accelerates its efforts to move customers away from the iDEN network.

"We are being very disciplined in how we do this," he said. "The additional customers we add, also adds capacity requirements to the existing network. And as we put new equipment in the network, we'd much rather put those customers on Network Vision infrastructure than on the legacy networks."

The focus on migrating Nextel customers has another benefit for the company, Hesse said on the call with analysts. It's also less expensive to market and recruit customers it already has a relationship with to the Sprint Network than it is for the company to go out and acquire new customers from rivals.

"It's much more economically beneficial for us to recapture iDEN customers at a lower cost per add than to acquire customers through usual channels," he said.

Hesse acknowledged that the transition has been a painful one. And he noted that the company will continue to see customer losses due to the Nextel migration for the next few quarters. But he said that it is necessary in order for the company to eventually compete with bigger companies, such as AT&T and Verizon Wireless, which right now have more resources and better scale.

A stronger Sprint

The deal that Sprint made earlier this month with Japanese carrier Softbank, should help the company launch an aggressive attack against competitors once the Network Vision infrastructure is in place. Softbank is investing $20 billion in Sprint and gaining a 70 percent stake in the company.

Hesse wouldn't talk specifically about the deal, but he noted that the its relationship with Softbank will give the company more resources to invest in the network and catch up with its competitors. Hesse admitted that Verizon has an advantage today with its LTE network, which currently covers some 400 markets nationwide. But he said that this advantage is only temporary.

Sprint has been busy deploying networks, too. It now has 32 LTE markets deployed, and it's already begun construction in another 200 markets. Even though he said the company has faced some delays with some network equipment vendors, he doesn't expect the majority of the LTE deployments to be pushed back. And those that are delayed are not expected to be delayed more than a quarter, he said. CNET reported Wednesday that some large cities may not see LTE service until March.

As Sprint builds up its LTE network, the one major competitive advantage Sprint offers is its unlimited data plans. Verizon and AT&T have eliminated these plans for new subscribers. And Verizon has recently made it harder for existing customers to keep those plans. Hesse said he expects to continue offering Sprint's unlimited data plans to consumers old and new.

As for the new shared data plans that its competitors have introduced, Hesse noted that the company has no plans to offer its own share plans. He said the company's consumer research shows that customers don't want to have to worry about how much data someone else on the family plan is using.

But AT&T and Verizon have also been using these data share plans as a way to entice subscribers to add other connected devices, such as tablets, to their monthly plans. In an effort to offer more flexibility for tablet users, Sprint made a separate announcement Thursday that it will offer new data plans for tablet owners, including iPad and iPad Mini owners. (This is the first time Sprint will be offering wireless connectivity for Apple iPads.)

As a limited-time promotion Sprint is offering existing customers a 1GB tablet data plan on its 3G EV-DO and 4G LTE network for $15 a month. Users can get a 100MB data plan for $10 a month. The company also offers its traditional plans, which start at $15 a month for 300MB of data up to $80 a month for 12GB. The company claims its tablet data plans offer customers 20 percent more capacity for the same price as AT&T and Verizon.

Sprint also offers month-to-month prepaid plans, which are priced in a similar way.

As far as gaining new customers as a result of AT&T's and Verizon's shift toward shared plans, Hesse said he hasn't seen that as a driver for any network additions on Sprint.

"We are seeing nothing in any of the channels that suggests that the new rate plans are either helping or hurting them," he said.