Sprint's independence on trial

It's hard for a $43 billion company to look small and vulnerable, but long distance giant Sprint has succeeded at just that.

John Borland Staff Writer, CNET News.com
John Borland
covers the intersection of digital entertainment and broadband.
John Borland
4 min read
It's hard for a $43 billion company to look small and vulnerable, but long distance giant Sprint has succeeded at just that.

National U.S. rivals like AT&T and MCI WorldCom have spent the last year striking multibillion-dollar mergers to extend their geographical and technological reach. Local phone giants are joining forces as they look ahead to their own entry into national markets.

In the midst of this merger maelstrom, Sprint's independence is looking increasingly fragile.

Reports of weakness in its joint venture with France Telecom and Deutsche Telekom have set off new speculation about pairings in its future.

Meanwhile, several European business publications reported over the weekend that Deutsche Telekom has been negotiating with Sprint for several weeks about a possible takeover.

Sprint declined comment on the reports, although its executives have repeatedly said they are strong enough to operate on their own.

"Sprint has said they do plan on going it alone, but it looks increasingly unlikely as consolidation increases, and the competition gets bigger and bigger," said Mel Martin, an analyst with Edward Jones. "It doesn't have the financial resources to build out its network in a deep way or internationally."

Yet company executives say Sprint's size is strategic, giving them the ability to be "nimble" compared to its larger competitors. Sprint already has a full range of telephone, Internet, and wireless service offerings, and will gain most by focusing on tying them as tightly together as possible, executives say.

But many analysts say the company could still use more scale. While far from small, Sprint's $43 billion market capitalization still trails the $156 billion size of MCI WorldCom.

A few options remain if Sprint is to vault to the size of its biggest rivals. The big local phone companies such as BellSouth and SBC are very interested in becoming national powerhouses, and once they get regulatory approval to offer long distance service, some observers expect them to take a close look at Sprint.

Alternately, large international ventures looking for a stronger U.S. presence could use Sprint as a way in.

Deutsche Telekom and France Telecom were once front-runners in this race, but the difficulty of integrating the GlobalOne operation has likely cooled their interest, analysts said. Other companies, such as the United Kingdom's Cable and Wireless, could still be interested, however.

Meanwhile, analysts say Sprint is well situated to grow inside its chosen markets, as long as it stays focused.

"They're not going to be successful everywhere," said Boyd Peterson, a telecom analyst with The Yankee Group. "The task ahead of them is to pick their spots."

Too well-rounded?
The most recent round of speculation over Sprint's future began a few weeks ago, when a report surfaced saying the company's European GlobalOne alliance was on its last legs.

Sprint and its partners denied the reports, saying they were committed to making the venture work despite difficulties in integrating the companies' international operations. While the venture is still unprofitable, it is on track towards making money by the end of 2000 or 2001, they said.

Analysts pointed to a potential breakup of the alliance as a possible catalyst for a Sprint merger.

"It could free up Sprint to pursue other alliances, or reduce complications for potential acquirers," wrote Timothy Horan, a CIBC Oppenheimer telecommunications analyst, in a research note on the subject. "We continue to believe Sprint would make an attractive acquisition candidate, probably in 2000 or 2001."

Yet some analysts say Sprint's portfolio of services is too full for a successful merger. Where MCI WorldCom might need a wireless component, and AT&T has drifted to cable for its local phone division, Sprint has worked to create these pieces of the puzzle internally.

"There's not that big gaping hole in their strategy," said Peterson. Long
distance leftovers chartRecent mergers, such as AT&T's cable buy and the Baby Bell mergers, "are more like a jigsaw puzzle, where you can understand how the pieces fit together," he added.

Putting the jigsaw together
For the next year, Sprint says it will be focused on putting its own dispersed puzzle pieces together as seamlessly as possible, largely through a high-speed data, voice, and video service it calls ION, or Integrated On-Demand Network.

"They're very good at putting together strong networks," said Peterson. "They just don't look like they're very interoperable."

Although known best for its long distance service, where it pioneered the flat-rate 10-cent-per-minute call, the company has its hands in a number of different business areas.

Long distance voice still accounts for more than 60 percent of its revenues. Although its third-place U.S. market share trails well behind the No. 2 player MCI WorldCom, it has done a good job of selling services to businesses, and analysts say it has a presence in most of the Fortune 500 firms.

This gives the company one advantage over the bigger long distance companies. The local telephone firms such as "="">Bell Atlantic and ""="">BellSouth will be entering the long distance markets over the next year or two, and will provide stiff competition for residential customers. Its heavily business-focused base will help shield Sprint from this new competitive threat, analysts say.

The company has also made good use of its digital network to carry long distance data traffic, and is viewed by some analysts as one of the top three Internet backbones services, alongside MCI WorldCom's UUNet and PSINet.

Less well known has been Sprint's position as the seventh-largest local phone company in the United States.

The company is also trying to expand its international presence, Rural reign chart largely though joint arrangements with other big overseas players. Aside from the GlobalOne venture, Sprint also has arrangements with TeleMex in Mexico and Bell Canada, and is looking to strike arrangements elsewhere.

More than the sum of its pieces
The company has also invested hundreds of millions in building out new kinds of networks in recent years, catapulting it to the top of the wireless and data markets.

One of the most quickly growing pieces of the business is the Sprint PCS wireless phone division. The company is still in the process of building out its expensive national network, and is still losing money.

But the division is adding subscribers quickly, outpacing the growth of rivals like AT&T and AirTouch in recent quarters. Analysts expect the company to capture and hold about 20 percent of the wireless market for the near future.

This division of the company has operated largely on its own, but executives say this will change rapidly as the entire company's offerings move more tightly together.

"You will see from us a bundled service offering on one bill in the not too distant future," said Andrew Sukawaty, chief executive of the Sprint PCS division.

The ION project was announced almost a year ago, with grand promises of integrating voice, high-speed Net access, corporate data services and eventually even video seamlessly into a single service. Since that time, the service has become a core aspiration for the company, though it has yet to roll out to more than a few business customers.

Originally targeted at business already using fiber optic connections to Sprint's network, the service's goals have been expanded to include high-speed DSL telephone lines, and most recently to wireless cable access.

"Basically they've taken a tack that is not unfamiliar with companies like AT&T," said the Yankee Group's Peterson. "They're saying, whatever it takes to get to that last mile, we'll experiment with it."