Sprint Nextel's Last-Ditch Weapon

CEO Hesse introduces a new iPhone rival, packaged with unlimited data and calling services, to help reverse the wireless carrier's decline. Is he too late?

Sprint Nextel Chief Executive Dan Hesse is becoming his company's biggest pitch man. First he kicked off a $100 million marketing campaign in mid-March to promote new wares and service plans. And on Apr. 1 he took to the stage in Las Vegas to give attendees of the industry's largest trade show the hard sell on Sprint Nextel's latest efforts to compete with rivals Verizon Wireless, AT&T (T) and, more recently, Apple (AAPL) and its blockbuster iPhone.

The new weapon is called the Instinct, a handset made by Samsung that boasts a 3.1-in. touch screen and is slated to go on sale in June. Sprint Nextel (S) will sell the device with recently introduced service plans that feature all-you-can-eat calling and data use, part of an effort to lure high-paying customers back into the fold. "People want the whole package," Hesse said during a keynote address at an annual conference held by CTIA-The Wireless Assn. "They're saying, who's going to give me what I want, when I want, and make it easy to use. They're all the building blocks of the wireless company of the future."

Hesse's remarks echo the sentiment he's trying to convey in the company's new ad campaign. In black-and-white television ads that began airing nationally, the CEO walks down a New York street talking about the company's new "Simply Everything" data plan that provides unlimited voice, texting, and Web surfing. "Use your phone for all the great things it can do without worrying about the meter running. How's that for a wireless revolution?" he asks.

Looking for a Miracle

Sprint Nextel may need nothing short of a wireless miracle. The company is reeling from subscriber losses and operational missteps that forced it to write down almost the entire value of its acquisition of rival Nextel in 2004. Sprint Nextel said in January that it lost 700,000 subscribers in the fourth quarter, and Hesse is bracing investors for the defection of at least 1 million more in the first half of 2008. Subscriber beefs include subpar customer service and network performance. The company's stock lost more than half its value in the first quarter, closing at 6.69 on Mar. 31. The shares rose 3¢, to 6.72, on Apr. 1 in the hours after Hesse's remarks.

Some analysts say Sprint Nextel's best option is to sell out to the highest bidder. "The most likely scenario for Sprint going forward is a long twilight where the company's inferior network, ambiguous brand message, and quality of service results in a continuing [if slowing] attrition of subscribers, revenues, and margins," Craig Moffett, a Sanford C. Bernstein & Co. senior analyst, told investors in March.

Tough Competition

Internal problems aside, Sprint Nextel also must contend with increasingly formidable rivals in a shrinking market. As the U.S. market matures and the pool of new customers dwindles, wireless carriers are increasingly looking for innovative ways to retain the customers they have, and poach from rivals.

As a wireless-only company, Sprint has been at a disadvantage compared with AT&T and Verizon Communications, owner with Vodafone of Verizon Wireless. Both competitors not only offer wireless calling but can also provide landline service, high-speed Internet access and, in many cases, TV. "Right now, it's about trying to stop people from leaving, then trying to win some other customers from their competitors," says Charles Golvin, a telecom analyst with Forrester Research (FORR).

House Calls in the Southeast

That means taking potentially costly risks and launching innovative programs. Sprint on Mar. 31 announced it would expand in its Southeast region a pilot program with Next Star Communications to bring service and repair teams directly to customers.

The yellow and black Sprint service and repair van offers phone repair, answers technical questions, and lets consumers purchase accessories and new handsets. Customers using the service will also be able to move their existing phone books from their previous wireless phone to their new one. "Providing our customers with convenient and superior customer service is a priority for Sprint," says Jeff Bennett, area vice-president for Sprint in the Southeast.

The company is trying to eliminate the reasons for customers to call Sprint in the first place. To achieve a consistent level of quality service in its call centers, the company is standardizing its contracts with call center outsourcers and putting a new emphasis on resolving customer problems on the first call. "They're doing the right set of things," says Jupiter Research wireless analyst Julie Ask. "Consumers are choosing based on the quality of the network, better handsets, and better customer service."

Nationally, Sprint is giving customers the ability to change their rate plans without having to renew contracts, and offering a 30-day ability to drop a new contract without penalty.

Spinning Off WiMax

The Samsung Instinct and other handsets announced at the wireless show are part of a slate of products Hesse hopes will get customers back into its stores. To lure young customers, the company last September was the first to launch Palm's (PALM) hit consumer-centric Centro smartphone.

To satisfy investors, Hesse could soon be giving up its biggest differentiating product: WiMax. The company has been negotiating with cable providers Comcast and Time-Warner, Google, and Clearwire to spin off its Xohm WiMax subsidiary (BusinessWeek.com, 3/27/08) in return for additional funding to build out a nationwide network.

The spin-off could hurt Sprint over the long term, but Hesse has no choice. If his pitch to customers—and by extension, investors—falls on deaf ears, there won't be a long term to worry about.

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