Sprint Nextel's struggle continues

Samsung's Instinct didn't save Sprint Nextel's quarter, but the company has taken a few baby steps toward recovery.

Despite strong sales of the hot new touch-screen phone, Sprint Nextel reported yet another quarter of losses on Wednesday when it posted second quarter earnings. The Instinct went on sale in June a few weeks before Apple's much lauded iPhone 3G hit store shelves. And it was deemed an immediate success for Sprint as the phone hit record sales within the first week and has sold out of many Sprint locations.

Even though the hot selling product helped spur hope that Sprint was on the comeback trail, the second quarter results and projections of more tough times ahead for the carrier, dashed any hopes that the ship would turn quickly.

Still, Sprint's results didn't suck. And that's an improvement. The company has made significant spending cuts, and some of its other efforts to retain customers seem to be working. The result was the company didn't lose as much money as it had in the first quarter nor did it lose as many subscribers. But management's projections that the third quarter will see more customer losses, dashed any hopes that Sprint might make a quick comeback in the second half of the year.

For the second quarter, Sprint reported it lost a total of 901,000 customers. This is an improvement over the 1.1 million it lost during the first quarter. Its churn rate also fell to 2 percent. The churn rate or the rate at which people leave its service was 2.45 percent in the first quarter.

Sprint also improved its financials, cutting it loss to $344 million compared to a loss of $505 million the previous quarter. That said, Sprint still struggled to generate revenue, which was down 11 percent to $9.06 billion.

While these results mark an improvement over the previous month, investors were spooked by management's projections that subscriber losses and the company's churn rate will likely get worse in the third quarter.

Sprint's biggest challenge is keeping its most valuable post-paid customers. These have been the customers that Sprint is losing in droves to its competitors. For the second quarter AT&T said it had added 1.3 million total subscribers, while Verizon Wireless added 1.5 million customers.

It's clear that these carriers have benefited from Sprint's troubles. But the fact that more than 80 percent of Americans subscribe to cell phone service means that Sprint must win back these customers as well as steal other from its competitors. And this will be no easy task.

So how will Sprint attract new customers and keep existing customers from fleeing?

It's a tough question to answer, but it seems to me that Sprint will have to do three things.

First, it has to improve its basic voice network. Verizon, which is consistently praised for its reliable network, has proven that people will stay with a carrier and pay slightly more for a service if it's reliable. Even though wireless data is the future, people still buy and use a cell phone to make phone calls. And if that doesn't work, the phone and it's service are pretty useless. Sprint seems to have already recognized this point, which is why it spun off its WiMax data assets into the Clearwire venture.

Second, Sprint will have to create more value in its services. The company doesn't necessarily have to slash prices, but it could offer more functionality for less. The $99 Everything Plan is a good start. But Sprint needs more plans like this to appeal to a wide range of customer needs. T-Mobile has executed on this strategy well. It's MyFavs offering, Wi-Fi HotSpot@Home service, and $10 a month VoIP offering, make it an appealing alternative to the other three big carriers.

Finally, Sprint needs more hit phones. The Samsung Instinct is a step in the right direction, but Sprint can't rely on one cool phone to drive demand for its service. AT&T, which has the exclusive rights to the iPhone, also carries a cadre of other cool devices, which can make it more attractive to certain customers looking for cool phones.

The challenge for Sprint, in my mind, is that the company needs to be at least be No.2 in each of these three areas. Verizon may have a great network but it lacks cool phones and its service is expensive. AT&T might have the cool phones, but it lacks a rock solid network and its service is also expensive. T-Mobile's service might offer the best value, but it lacks compelling handsets and its network coverage is far behind its competitors.

If Sprint could improve its standing in all three areas or at least two out of three areas, it could start to win back its former customers and even attract new ones. Of course, the problem is that Sprint's competition isn't sitting still either. Verizon's new open network promises to allow it to offer more compelling handsets, and T-Mobile is building out its footprint and adding 3G.

In the meantime, Sprint is continuing to get its financials in order. The company also announced Wednesday that it intends to make an offering of $3 billion in cumulative perpetual convertible preferred stock. The company ended the quarter with $3.5 billion in cash and $1.2 billion of borrowing capacity under its revolving-credit facility.