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Tuesday, January 09, 2007

Sprint: Roadkill

Sprint revealed late last night the most well-known secret on Wall Street – it is performing appallingly and predicts 2007 is going to be even worse. Revenues in 2007 will be flat and OIBDA will be around US$1.5bn lower than 2006. In fact, I can quite envisage Sprints problems becoming even larger and the forecast OIBDA of US$11-US$11.5bn dropping even further.

The headline figure is a lost post-paid client base of 306k in Q4, but there is also a subtle change in the definition of customers which means that Sprint has restated its post-paid base inflating the figures by 450k of “cancellers in progress” at the beginning of 2006. How, this will filter through into Q4 figures is currently not known. I think this type of short term accounting gaming signifies the desperation of the management team.

The heart of its problem is the post-paid Nextel business: once the star of the mobile sector with its higher than average ARPUs and lower than average churn, now is a shadow of its former self being severely technologically challenged with no future roadmap and a distinct second class line up of handsets. To add to the woes, there seems to be capacity problems as well. Sprint have spent a long time trying to fix the capacity problems and plough through the re-banding efforts (in which it plans to spend US$800m of extremely short life capex in 2007), but the undeniable fact is that it is a dying technology with a very desirable customer base.

The other major league problem is that the traditional Long Distance business is in terminal decline. In 2006Q3 revenues were US$1,626m and OIDBA of US$206m – these represented y-o-y declines of 6% and 27%. The update seemed to indicate that things were going to get worse for the LD business in 2007. The LD business in the USA is not a very good place to be in at the moment.

At the end of 2005, it seemed that the Cable Industry would play the role of White Knight and rescue Sprint. The much mooted Cable VOIP replacement traffic does not seem to offsetting the decline in the traditional voice business: in 2006 Cable VOIP revenues were only US$300m and these are forecast to double in 2007. I’m not sure what the problems are in the MVNO business, which seems to have had the largest gestation period in the worldwide history of cellular MVNOs and the broader launch is now pushed out into 2007. In fact, the whole of this MVNO operation is under a cloud with the recent acquisition of spectrum by Cable companies.

It seems the plan for 2007 is to increase marketing spend, although not to the levels of Verizon and Cingular, increase third party dealer commissions and increase handset subsidies. The interesting part is that Sprint plan to launch a fixed calling rate plan on the Boost brand on the CDMA network – this is a direct attack on the Leap and MetroPCS business model and slips Sprint another couple of rungs in the market ladder, just above prepaid and well below the positioning of Verizon and Cingular. I see nothing in Sprints plans which will cause the slightest concern for Verizon or Cingular, in fact I think they will attack the lucractive iDen post-paid base with renewed vigour throughout 2007.

Sprint also plan to push forward with the much hyped potential technology saviour, Wimax, spending US$800m of Capex and US$300m of Opex in 2007. To say it is a risky strategy to bet the company on an untried technology is probably the understatement of the year, but the good news is that as time goes by Sprint has less and less postpaid customers to convert.

I personally always saw the Wimax move as a way for Sprint to differentiate itself in the eyes of the only potential strategic buyer – the Cable Industry – and add a little gloss to a severely tarnished position. Unfortunately, the Cable Industry is full of executives who still bear the scars of the move to digital and know how difficult it is introduce revolutionary rather than evolutionary technologies. In fact, they also remember the John Malone brilliant manoeuvre of selling TCI to AT&T and letting the bigger company with deeper pockets sort out the mess. I don’t think that the Cable companies are stupid enough to fall for that trick themselves.

The even worse scenario for Sprint is that the Cable Industry has now a much cheaper option ready to roll – it could buy someone like Level3 for the national network, who doesn’t have anywhere near the LD voice problems of Sprint and can use their own spectrum to launch mobile services, if the experiment of Quad Play (adding the mobile element to TV, Internet & Home voice) appears to be working out.

The future looks really bleak for Sprint.