Sprint Nextel: Way Off the Hook

The telecom company formed last year has neglected its loyal customer base, and it's behind the pack on music downloads and handsets

Wall Street gave Sprint Nextel (S) a walloping on Aug. 3 after the company reported disappointing financials for the second quarter. Sprint said revenue was $10 billion, below the average analyst estimate of $10.5 billion. Sprint's revenue last year, before it merged with Nextel last August, was $5.7 billion. Earnings were $370 million, while a year ago Sprint earned $600 million, again before the Nextel deal.

The Reston (Va.) telco's numbers were so disappointing that investors sent shares spiraling nearly 12%, to $17.75. "We do have much work to do to improve the recent performance of the wireless business," Sprint Chief Executive Gary Forsee told analysts in a conference call.

Sprint had major problems both adding and holding onto wireless customers. It added 708,000 subscribers in the quarter, woefully short of estimates by analysts and nowhere near the customer gains by Sprint's two closest rivals. Verizon Wireless, which is co-owned by Verizon Communications (VZ) and Vodafone (VOD), netted 1.8 million subscribers during the quarter. Cingular Wireless, a joint venture of AT&T (T) and BellSouth (BLS), added 1.5 million.

Even worse, the vast majority of the customers that Sprint added are prepaid customers, who tend to be much less loyal than customers on monthly plans. Of the 708,000 net additions for the quarter, 498,000 were prepaid customers and only 210,000 agreed to monthly plans.


  What's wrong? For one thing, analysts say, Sprint is having more trouble merging its network with Nextel's than it suggests. Forsee pointed to success at integrating the two companies' back office systems—their billing and customer service systems, for example. But the technology integration has been slow and difficult. "There are some serious issues," says Marty Hyman, an independent consultant and industry veteran who worked at Sprint years ago.

Nextel was famous for its walkie-talkie network. But its technology is completely different from Sprint's. Industry consultants close to Sprint say it's not clear that Sprint has created walkie-talkie technology that's good enough to successfully migrate Nextel customers to the Sprint network.

Sprint also has been working with handset manufacturers to create a dual-mode phone that works with both the Nextel and Sprint technologies. But an elegant solution has been lacking, according to Hyman. "Without that in place," he says, "they had to pull back on marketing."


  The result is that Sprint has had a hard time holding onto what had been an extremely loyal customer base. Before the merger with Sprint, Nextel subscribers were the most loyal in the industry. Nextel had the lowest churn rate (i.e., the percentage of customers that leave for another carrier) in the business. "Sprint took that subscriber base and kind of forgot about them," says Paul Catalano, a wireless expert and partner at RelevantC Business Group. "Now we're seeing much lower growth of the [Nextel] subscriber base."

Sprint execs decided that they should focus on prepaid customers. The bulk of those subscribe to Sprint subsidiary Boost Mobile, a service targeting young wireless users. But this group is far less loyal than Nextel subscribers. They don't have a long-term contract to keep them on board, and they tend to jump to the next cool thing.

So it was no surprise that Sprint's churn rate was flat with the first quarter at 2.1%. And notably, prepaid churn for its Boost brand rose to 6%, from 5.4%. "Our problem has been churn that hasn't improved, while our competitors' churn has improved," Forsee said on a conference call. Verizon Wireless' churn for the most recent quarter hit an all-time low of 1.1% (see BusinessWeek.com, 4/7/06, "Verizon Wireless Doesn't Have to Brag").


  The key to retaining the young and old is cool services and phones, but Sprint appears to have been preoccupied with other initiatives. Executives have been focusing on network integration, the spin-off of its local network called Embarq, and the planning of its next-generation broadband strategy, which is expected to be announced in the next couple of weeks. So it's lagged in the marketing of perhaps the hottest new application on the market: music.

Compare Sprint to Verizon in music, for example. To its credit, Sprint does have a service for downloading music over the air (see BusinessWeek.com, 10/27/05 "Sprint Races Into Mobile Music"). But it hasn't been marketed much. Verizon, meanwhile, has been fiercely pushing its music service. Its Vcast service, which includes ringtones and video content as well as full-track songs, reported 55 million downloads in the second quarter. "They've clearly been well behind the curve in terms of moving to hot applications," Hyman says.

Hot phones, too. Sprint is the only major wireless carrier in the U.S. that doesn't have the popular Motorola RAZR in its lineup. Verizon and Cingular have had phenomenal success with the model (see BusinessWeek.com, 7/20/06, "Does Motorola Have Nokia's Number?"). Furthermore, Verizon just released a new iPod-like music phone from LG, called the Chocolate. "Sprint is selling you some LG brick for music," says Hyman.

Sprint's Forsee knows he's got to get his company moving. To that end Sprint is going to launch a new ad campaign to improve its marketing message and start selling phones from the RAZR family—the SLVR and the Q—in the fourth quarter. Sprint customers—and its investors—can't wait.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE