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Sprint's Bold Play on a 4G Network

Sprint Nextel (S), the nation's third-largest cell-phone carrier, is betting big on 4G. The company has spent several billion dollars in recent years to build wireless broadband service capacity to try to leapfrog larger rivals by offering consumers and businesses fast connections for smartphones, laptops, and other devices.

The advent of 4G networks could present a do-or-die situation for Sprint. Investors are pessimistic about the company's long-term prospects. Sprint is losing more than 2% of its highest-paying wireless subscribers each year, nearly double the rate of competitors AT&T (T) and Verizon Wireless, according to a Mar. 21 report from Barclays Capital analyst James M. Ratcliffe, who has a "neutral" rating on Sprint's shares.

Sprint bet on Palm's (PALM) Pre smartphone, which launched to great fanfare in 2009, but which hasn't come close to matching AT&T's sales of Apple's (AAPL) iPhone. Verizon, T-Mobile USA, and AT&T are taking steps to blunt any advantage Sprint might gain as it rolls out its faster network.

As a result, Sprint's stock performance has badly trailed those of its peers since July 2006, when its shares began sliding in value. On Mar. 29, Sprint's shares closed down 1¢, or 0.26%, at 3.79.

To lure customers while keeping current ones loyal, Sprint has recently issued a flurry of announcements about its 4G capabilities. On Mar. 23 at the wireless trade show in Las Vegas, Sprint unveiled the EVO, a smartphone made by Taiwanese manufacturer HTC that will be the first in the U.S. to access a 4G network. It will be capable of dishing up thousands of videos from Web sites such as Hulu, Google's (GOOG) YouTube, and Blockbuster (BBI) without straining the network.

carriers look to big 4G pipelines

The device joins Sprint's well-received Overdrive 4G mobile data hotspot introduced in January, which lets users connect up to five high-speed devices wirelessly. By the end of 2010, Sprint hopes to build a network covering 120 million potential customers. Matt Carter, president of Sprint's 4G division, says the faster network bandwidth will pave the way for Sprint to introduce new phones and other products that spark consumers' interest. "The customer is not going to really give a hoot about the technology," he says. "What they're going to care about is: Are we filling their needs and wants?"

Carriers hope the answer is affirmative. The companies are building capacity for 4G networks that use Internet technology to deliver data to users quickly and efficiently. The rapid proliferation of smartphones has created bottlenecks on 3G networks as many users try to get online at the same time. With 4G, operators are creating pipelines for data, based on newer Internet technology that can handle greater information volume.

Sprint's moves could give it as much as a year's lead over Verizon and other rivals in delivering wireless products capable of using super-fast data connections once confined to DSL and cable broadband services, analysts say. "Sprint 4G speeds will take mobile multimedia—including live video streaming, gaming, and picture downloads—to a whole new level," CEO Dan Hesse said in a statement announcing the EVO.

Sprint's rivals are moving quickly to close ground. Verizon has said that by the end of the year it will complete building a 4G network based on a technology called Long-Term Evolution, which will compete with the Sprint network based on the WiMAX standard. Verizon is conducting LTE trials in Boston and Seattle.

While Verizon won't have 4G handsets available until early 2011, the new network's existence will signal that the company is committed to offer some of the industry's fastest data connections, says Chief Technology Officer Dick Lynch. "They know it's going to be high-performance Verizon service that they come to trust," he says.

AT&T: biding its time on 4G

T-Mobile, the U.S.'s fourth-largest carrier, says it will be able to match Sprint's speed advantage. Owned by Deutsche Telekom, T-Mobile says it will upgrade its 3G network to a technology called HSPA+, which can eke more speed out of the network. As network upgrades happen this year, users will experience "a phenomenal difference," says Dave Mayo, vice-president of engineering and operations at T-Mobile USA.

AT&T, which for three years has sold the hit iPhone and which has exclusive access to the coming iPad tablet computer, has largely chosen to sit out the rush to 4G. Last year, the company said it would spend up to $18 billion on network upgrades, in part to resolve data network congestion in cities, including San Francisco and New York.

AT&T executives have said that until there are more 4G devices available to take advantage of the faster network speeds, it will let competitors duke it out alone. "You have to move at the pace of the ecosystem or the consumers will see nothing," says AT&T CTO John Donovan. "What we're trying to do is not get ahead of the ecosystem." AT&T has also been testing HSPA+ in its labs, and says it can roll the technology out quickly when needed, at little or no expense.

Complicating life for Sprint is competition from unconventional quarters. On Mar. 26 private equity firm Harbinger Capital Partners filed plans with the Federal Communications Commission to use spectrum owned by satellite companies in its investment portfolio to build an LTE network by 2015. And Clearwire (CLWR), the wireless company in which Sprint holds a 56.5% stake, is selling service to Comcast (CMCSA), Time-Warner (TWX), and other cable operators.

Nearly all these competitors stand to gain from an eventual move to 4G. The switch to Internet protocol technology will over time let service providers offer data far more cheaply and reliably than on today's 3G networks, analysts say. Sprint, for instance, is offering unlimited 4G data service for its Overdrive hotspot at $60 a month. Verizon charges $60 for a single mobile-laptop connection, with data usage capped at 5 Gigabytes per month—a limit quickly reached by consumers downloading video off the Web, says analyst Jonathan Feske at Miller Tabak Roberts Securities.

Expect big, bold marketing claims

Robert Syputa, principal analyst at market researcher Maravedis, says Sprint, Verizon, and AT&T will likely generate billions of dollars in revenues by selling data connections on devices such as digital cameras, electronic book readers, and netbooks in addition to smartphones and PCs. "Sprint may still be fighting this uphill battle for dominance of the market," he says. "Each [company] will benefit since the overall pie will grow" as 4G usage spreads.

One of the biggest uncertainties facing carriers that back 4G is how to market their technologies. Wireless carriers are already jockeying to claim that their networks will offer the fastest, broadest coverage. It's a tried-and-true strategy: AT&T and Verizon sued one another in late 2009 over what each says were deceptive ads about whose 3G network is most reliable. "With the explosion of data, the network matters again in terms of differentiation," says Godfrey Chua, an analyst at market research IDC.

Flashy new computing devices such as the EVO and Overdrive have generated plenty of buzz for Sprint's developing 4G network. But with deep-pocketed competitors determined to keep Sprint from stealing their customers, the company will have to put forth a stream of hit products at attractive prices to keep customers in its fold.

Sprint's embrace of WiMAX could also introduce greater complexity. With LTE poised to become the most dominant 4G standard, analysts say Sprint may be forced to embrace LTE, possibly by providing phones that can switch between the technologies.

It may be a tough sell. But after years of rallying support for 3G, that's a challenge Sprint CEO Hesse knows well.

Edwards is a reporter for Bloomberg News and Bloomberg Businessweek in San Francisco.

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