Sprint Head to Keep Nextel Network to `Plug the Hole' (Update2)

April 3 (Bloomberg) -- Sprint Nextel Corp., the wireless carrier that lost more than a million contract customers in 2007, will keep running the Nextel Communications Inc. network whose dropped calls and poor service drove users away.

Nextel, which Sprint acquired for $36 billion in 2005, can still attract enough users to become profitable, Chief Executive Officer Dan Hesse said in an interview in Las Vegas. The strategy is a shift from former CEO Gary Forsee's plan to move Nextel clients to Sprint's network starting this year.

Sprint had a $29.5 billion fourth-quarter loss from writing down the value of Nextel after 25 percent of the network's subscribers fled in 2007. Having two networks has forced Sprint to spend more on equipment and maintenance than AT&T Inc. and Verizon Wireless, preventing the carrier from matching its rivals' profits, Sanford C. Bernstein & Co.'s Craig Moffett said.

``Investors are impatient to see a transition strategy from two networks down to one,'' said the New York-based analyst, who expects Sprint shares to perform in-line with the broader market. ``It's tough to compete with Verizon and AT&T when Sprint is operating two separate cost structures.''

Sprint rose 4 cents to $6.64 at 4 p.m. in New York Stock Exchange composite trading. The stock has dropped 49 percent this year, compared with a 12 percent decline in the Standard & Poor's 500 Telecommunication Services Index.

Keeping Customers

Hesse said yesterday that he wants to keep customers on the Nextel network ``as long as they'll stay.'' Some subscribers may switch to the other network when walkie-talkie functions become available, he said. Others may prefer Nextel because of the size of groups they can communicate with using its walkie-talkie technology and its rugged, industrial phones, he said.

Hesse said shutting down the Nextel network would cost too much and might make customers consider switching to a rival from Sprint, which acquired the company for $36 billion. The network's quality has gotten better, and the company is making progress on improving customer service, he said.

Sprint plans to introduce a new walkie-talkie service on its original network in two cities this month. Nextel already has one, and not all customers will want to switch from it, Hesse said. He's also introducing new phones and services for both networks to help stanch customer defections.

``When you're losing customers, my God, it's basically like being in a boat and there's a hole, and there's water coming in,'' Hesse said. ``You just want to plug the hole in that boat. So there's tremendous urgency around that.''

Rivals' Margins

The cost to operate Sprint's network services rose 2 percent last year to $12.1 billion, while revenue fell 2 percent to $40 billion. Overland Park, Kansas-based Sprint's wireless profit margin in the fourth quarter was 29 percent, compared with 38 percent at AT&T and 45 percent at Verizon Wireless. The figures exclude expenses such as depreciation and interest.

Hesse said there are no changes to Sprint's forecasts from February, which included the prediction of a loss of as many as 1.2 million contract subscribers in the first quarter. He took over in December, two months after Forsee's ouster.

``The plan all along was to be able to move millions of customers in 2008 onto that common platform,'' Forsee said at an investor conference in September. ``I think that bodes well for our cost structure going forward, because today we carry that second network and that has operating expense and capital expenses associated with that.''

Former Chief Financial Officer Paul Saleh, who left in January, told analysts on a conference call in December that switching customers from the Nextel network would be a ``multi-year process.''

Nextel's Appeal

The Nextel network appeals to customers in industries that require speedy communication without waiting for a phone to ring, said Nirav Parikh, who follows phone companies and chipmakers as an equity analyst at TCW Group Inc., which manages about $147.2 billion in assets.

``All the construction workers, realtors, emergency workers, they all have a reason to stay on this network,'' said Parikh, who is based in Los Angeles. By retaining the Nextel network's value, Sprint could one day sell it, he said.

About 19 million of Sprint's 54 million customers used the former Nextel network at the end of last year, including 1.4 million with phones on both networks.

About 2.8 million Nextel customers dropped their service contracts last year, while Sprint's network added 1.6 million. Sprint can't merge the two because they use different wireless standards.

Big Spenders

Clients on Nextel's system are some of Sprint's biggest spenders, such as businesses, said Michael Nelson, an analyst at Stanford Group Co. in New York.

``I fully believe in what Hesse is saying,'' said the analyst, who advises holding Sprint shares. ``There's a disconnect between what investors believe and what the company's likely to do.''

``If you have enough customers on it, they cover the costs of running the network like they did two years ago,'' Hesse said. ``No one was really complaining about the expense of the network then.''

The company's new walkie-talkie service on its traditional Sprint network, developed with Qualcomm Inc., is called QChat. After its debut in two cities this month, the feature will expand to other locations later this year, Hesse said. He declined to name the cities.

Some customers on the Nextel network will prefer QChat phones that can also download Web sites and music, Hesse said. Others don't need those extras, he said.

``The last thing we're trying to do is push customers from one to the other,'' he said.

To contact the reporter on this story: Crayton Harrison in Las Vegas at tharrison5@bloomberg.net.

To contact the editor responsible for this story: Cesca Antonelli at fantonelli@bloomberg.net.