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Sprint Nextel's Watershed Deal

Cable providers began their long march onto the phone companies' turf years ago by offering faster connections to the Internet. They later stepped up the attack by introducing low-cost phone calling (see BW, 11/7/05, "The Call of the Web Phone"). And now, thanks to Sprint Nextel (S), the top U.S. cable-TV operators will push further into the territory long dominated by phone companies such as Verizon (VZ) by adding a crucial fourth missing element in their product lineup of TV, phone, and Internet access: mobile-phone service.

Sprint Nextel, which operates the third-largest wireless service in the U.S., said on Nov. 2 it was starting a joint venture with four of the largest cable companies -- Comcast (CMCSA); Cox Communications; Time Warner Cable, owned by Time Warner (TWX); and Advance/Newhouse Communications, which together serve some 41 million cable customers. The agreement lets the cable companies sell Sprint's wireless service along with their own TV, phone-calling, and high-speed Internet access.

LEVELING THE FIELD. The Sprint-cable agreement, exclusive for three years but expected to last for 20 years, goes well beyond a traditional resale arrangement. Sprint, which has already opened up its network to help cable companies provide low-cost Internet-based calling, will contribute $100 million to the venture. The cable outfits will together cough up the same amount. The money will go toward integrating the companies' back-end systems and existing offerings, as well as toward developing new services.

It comes just in time for the cable companies, which are seeking new revenue sources as they come under attack by satellite-TV providers. Comcast, Time Warner, and the others also face a growing threat from phone companies. Verizon and SBC Communications (SBC), the two biggest carriers (and part-owners of the top two mobile-phone companies), are upgrading networks so they can provide hundreds of TV channels (see BW, 11/7/05, "Rewired and Ready for Combat").

Considering that four of the country's largest cable companies and the telecom stalwarts can duke it out product for product, "it's now 50-50 who's going to win," says independent telecom analyst Jeff Kagan. The Sprint venture partners suggested during a conference call after the announcement Nov. 2 that they would welcome other cable companies, including Cablevision Systems (CVC), to join their ranks.

JUMPING THROUGH HOOPS. If the cable operators can put together attractive product bundles at the right price, they could harness the pact with Sprint to lure customers from traditional phone companies at a faster pace. Currently, 30% to 50% of consumers would be interested in a service package that includes TV, high-speed Internet access, phone service, and wireless, says Roger Entner, an analyst with wireless consultancy Ovum. Yet only about 5% have actually signed up for one with a telecom provider, he says.

Part of the problem: Phone companies that can offer wireless have yet to make it convenient for customers to add mobile-phone calling to existing product bundles. Often, subscribers can't activate wireless service over the phone and instead have to show up in person at a wireless store. "Carriers haven't put that much effort into [making the experience pleasant]," says Entner.

Cable companies have a financial incentive to make signing up for wireless calling as easy as possible. Wireless-customer acquisition costs will be low, since these companies will simply be adding on a product for existing subscribers. And U.S. mobile-phone users rack up an average $55 in monthly bills.

"MORE THAN STAPLING." The joint venture's partners haven't released pricing plans, but they're likely to offer some fairly attractive features. Sprint and its partners intend to develop co-branded services and wireless devices with cool features mostly lacking on today's handsets. They will include a single voice-mail box for cellular and regular phone calls as well as unlimited calling between home and the wireless device. Users will also be able to program their home digital video recorders (DVR) remotely with cell phones.

Plus, the joint-venture companies also hope to standardize their interface, so you could use your cell phone to browse the Web through your familiar cable Internet portal. "This is more than stapling wireless onto a triple play," Gary Forsee, CEO of Sprint Nextel, said during the Nov. 2 conference call related to the announcement.

According to analysts at Jefferies & Co., these companies are expected to offer handsets that work both on traditional cellular networks as well as with Wi-Fi technology, which allows high-speed wireless Web access within cafes, airports, and homes. That would let Wi-Fi users make cell-phone calls without using up their call-plan minutes.

ALL ABOUT FEATURES. It's in providing unique mobile content, however, that cable companies could truly shine, leveraging their ownership of channels such as E! Entertainment Television, analysts say. They might allow you to send a short text message (SMS) from your mobile asking E! for the latest gossip on, say, Brad Pitt and Angelina Jolie. Bam! Two minutes later, the snippet is sitting in your PC's in-box. Or the cable companies might be able to beam an exclusive video to your mobile.

That would put pressure on telecom companies to pick up the pace in offering cutting-edge features. "The battle between telcos and cable companies will refocus on features and being different," says Andrei Jezierski of venture consultancy i2 Partners in New York.

But don't expect an overnight migration to cable providers. The number of U.S. wireless subscribers affiliated with cable companies may rise to 1.5 million by 2008, vs. 800,000 at the end of next year, i2 estimates. Considering that the the U.S. now has 197 million wireless users, that's a pittance. Fewer than 5% of the total may migrate to cable in the next two to three years, says Michael King, an analyst with researcher Gartner.

EARNINGS JUMP? To truly tap the potential of the alliances, cable companies may need to take an ownership stake in the wireless-calling providers, says King. Cox or Time Warner may try to merge with or take a stake in Deutsche Telekom's (DT) T-Mobile USA or Sprint Nextel, he reckons.

However quickly the cable companies advance, it's pretty clear that Sprint Nextel benefits in any event. First, the joint venture should fuel Sprint's subscriber growth. And because customers who buy bundles tend to be less fickle -- essentially, less likely to switch service providers -- that may reduce Sprint's overall customer churn and customer-acquisition costs. In fact, within a few years, Sprint and its affiliates could see their earnings before taxes and other expenses rise by 5% to 10% thanks to the agreement, according to Jefferies & Co.

There's little doubt that the next stage of the cable-telco turf war will be hard fought. And Sprint Nextel has just given the cable operators a much-needed weapon.


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