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Sprint's WiMax dilemma

Sprint Nextel's ousted CEO may not be the only casualty as unhappy investors pressure the company to dump plans for a next-generation network.

If Wall Street pundits get their way, Sprint Nextel's next CEO will put the brakes on plans for a new, high-speed wireless network.

But such a move, while no doubt cutting costs, could condemn the struggling company to also-ran status.

After months of declining subscriber numbers, Sprint Nextel announced Monday that CEO Gary Forsee had stepped down as chairman and chief executive officer. Forsee's departure had been a long time coming, as investors, upset over the company's poor performance, had been pressuring the company's board of directors to make a change at the top.

Among investors' biggest concerns is Sprint's plan to build a next-generation wireless network using a technology called WiMax. The company has committed itself to spending $5 billion in the next three years to build the network, with about $2 billion of that money earmarked to be spent in the next year to get WiMax coverage to about 100 million people by the end of 2008.

Wall Street analysts and investors say Sprint's WiMax dreams are an unnecessary and dangerous diversion for the company, which is still struggling two years after the $36 billion Nextel merger to realize any of the cost savings that had been promised when the merger was announced.

"They need to get back to the basics and learn how to run a wireless company. This means focusing more on the present rather than the future."
--Patrick Comack, equities analyst, Zachary Research

"They should stop the WiMax rollout immediately," said Patrick Comack, an equities analyst with Zachary Research. "They need to get back to the basics and learn how to run a wireless company. This means focusing more on the present rather than the future."

But without an ambitious plan for the future, Sprint's long-term prospects look even more bleak. The reason is simple. Cell phone penetration in the U.S. market is approaching saturation. For Sprint to grow, therefore, it will have to steal customers from competitors.

But Sprint, the third largest operator in the U.S., may face a tough sell trying to entice customers to abandon their existing service for something similar. Unless Sprint wants to launch an all-out price war on its services, the company will need to present new, compelling features that no one else is offering.

"Sprint needs to have something sexy in the marketplace," said Colin Orviss, head of telecommunications strategic consulting for Patni Computer Systems, a global systems integrator. "A new 4G network using WiMax with truly new and differentiated services layered on top would help Sprint stand out from the competition. And that's what is needed to make a service more interesting to customers."

Since Sprint acquired Nextel in 2005, the company's stock has declined roughly 27 percent. And as competitors such as AT&T and Verizon Wireless add revenue and subscribers, Sprint has steadily been losing customers. On Monday, the company said it plans to report that it's lost about 337,000 "post paid" customers in the third quarter of 2007.

Last week, activist investor Ralph Whitworth, who owns about 2 percent of Sprint's outstanding stock, told The Wall Street Journal that he had lost confidence in Forsee and expected the board to take action. Whitworth has been among the loudest critics of Sprint's WiMax strategy.

Sprint's board looks to be heeding this advice with Forsee, one of the fathers of the WiMax strategy. Once a new CEO takes charge, the company's aggressive plans could be tabled indefinitely.

For now, Sprint says it is moving forward with its WiMax plans.

"I can't speculate about what a new CEO will do," said Leigh Horner, spokeswoman for the company. "But for now, we are continuing to build out the WiMax network. We expect a soft launch of the service by the end of this year and a commercial launch in April of next year."

Sprint's plans to build a 4G wireless network took shape about a year ago, only months after the company launched its 3G wireless network based on EV-DO cellular technology. Using a nationwide swath of vacant 2.5GHz spectrum, the company selected WiMax, an IP-based wireless technology, as the basis for the network. Mobile WiMax promises to offer data speeds faster than current 3G wireless networks and over much longer distances than comparably fast Wi-Fi technology, which today is used mostly indoors to provide wireless broadband hot spots.

Technology giants Intel and Motorola jumped onboard as partners. Motorola promised to provide infrastructure equipment and handsets for the network, while Intel promised to seed the market with millions of WiMax-enabled devices.

Sprint said it would spend $5 billion to reach some 185 million people within three years. But many critics have viewed Sprint's decision to use WiMax, which has not been proven as an effective mobile access technology, as risky.

There are other risks to the strategy. Because WiMax is still so new, more devices need to support the technology for it to be appealing to consumers. Intel has already said it will include WiMax technology in its next-generation chipsets sold to laptop makers, but there's a risk consumers won't spend the extra money to add the feature to their computers.

At the same time, Sprint will have to come up with new services that compel consumers to subscribe to its WiMax network over data services offered from competitors, such as Verizon Wireless and AT&T.

Sprint has already announced that it's partnering with Google to provide users of the WiMax network with integrated Web services from the search giant, including e-mail, chat and social-networking tools. The two companies plan to work together to develop a mobile Internet portal over WiMax that will enable access to many of the Google services.

In the meantime, Sprint's aggressive timeline has been costing the company. To help curb some of these construction expenses, the company announced in July that it would partner with Clearwire, a start-up headed by cell phone pioneer Craig McCaw, to collaborate on building the network.

But even with this partnership, Wall Street analysts say Sprint is spending entirely too much on such a risky venture, especially at a time when it really needs to concentrate resources on completing the integration of the Nextel service with its existing Sprint cellular business.

"It makes sense for Sprint to do something with the wireless spectrum assets," said Steve Clement, an equities analyst with research analyst firm Pacific Crest Securities. "But I think the plan is too aggressive. It's just not clear to me what benefit the company will get by spending this kind of capital on this particular technology."

In terms of building a long-term strategy, Sprint may have little other choice. If the company decides to abandon the WiMax network to focus on its core business, it risks losing an opportunity to be the first to offer new and innovative services.

While AT&T and Verizon Wireless have not announced plans to use WiMax to build a next-generation network, the companies are rolling out more network capacity on their cellular networks. As the third largest player in the market, Sprint could find itself competing for new subscribers mostly on price rather than on service features and functionality.

On the flip side, Sprint's current WiMax strategy could disrupt the market with an entirely new business model, since the WiMax network not only promises to provide wireless broadband access to cell phones and PDAs, but also to a whole cadre of portable consumer electronics devices, such as music players and gaming devices.

WiMax would also allow Sprint to offer service in an IP environment, which over time should improve the efficiency and cost of the delivering the service. It should also provide more opportunity to introduce new services much more quickly.

Telecom consultant Orviss believes patience is in order when assessing the merits of WiMax, since it often takes years for networks to reach their full potential.

"Just look at 3G," he said. "We've been waiting for years for 3G to solve all the world's problems. But it has taken five years longer than anyone expected for services to even get rolled out. Operators still aren't getting their return on investment."