Did You Say Sprint Was No. 1?
So you thought AT&T was the brand to beat in the telecom wars? Think again. In a customer satisfaction survey released on Aug. 23 by consumer polling company J.D. Power & Associates, AT&T came in second. The No.1 spot went to Sprint Corp., though it commands only 9% of the long-distance market, vs. AT&T's 55%. MCI Communications Corp. came in third. In 1995, the first year of the survey, Sprint had been No.1 with high-volume users, but AT&T was favored by the 80% of callers who spend less than $50 a month on calls--the ones that make up the bulk of AT&T's calling base. Now, Sprint is No.1 overall.
Why the switch? Chalk it up to the Dime Lady--consumers seem to love Sprint's offer of a flat rate of 10 cents a minute, no matter what time of the day or how far you call. "Sprint is seen as doing a much better job of delivering better value and simpler rates," says Zaiba Nanji, director of telecommunication services for J.D. Power.
The Power survey is the latest in a string of wins for the little phone company that would be bigger. The carrier, based in Westwood, Kan., sparkled in the second quarter: Net income surged 29%, to $317 million, while revenues grew 12%, to $3.5 billion. Long-distance calling volume rose a stellar 19% over the year-ago period, compared with 15% for MCI and a dismal 5% for AT&T. Sprint was the only one of the Big Three whose calling volumes grew more in the second quarter than in the first.
BIG JUMP. No question, Sprint is on a hot streak. Sprint Spectrum, the first Personal Communications Services (PCS) wireless system in the U.S., has snagged 100,000 subscribers in Washington, D.C., since April. The company's local phone business, which serves communities in 19 states and accounts for 57% of profits, earned $328 million in operating income in the second quarter--a 20% jump over the prior year. Global One, Sprint's international venture with France Telecom and Deutsche Telekom, has won 30,000 business customers since its Feb. 1 launch. On Aug. 20, Sprint added a consumer Internet service featuring its signature flat-rate pricing.
Wall Street is taking heed. Sprint's stock is up more than 40% in the past year, from 28 to around 40. Analysts see more growth potential in Sprint because it is already in local, long-distance, and wireless services, so it may be able to beat its rivals to market with "bundles" of telecom services. "Sprint is the perfect model for the industry going forward," says Prudential Securities analyst Michael Elling.
Not that there aren't hurdles ahead. Deregulation will bring unprecedented competition in all of Sprint's businesses, squeezing profits just when the company is chewing up capital with expansion. Indeed, until lately Sprint seemed the most vulnerable of the Big Three. Its ambitious local-calling alliance with three cable-TV companies fell apart. The multibillion-dollar bet on PCS looked iffy, and, worst, the company lagged behind competitors in volume growth through most of 1995.
That was before the Dime Lady ads. The Sprint Sense spots, featuring Candice Bergen, began early this year and hammered home the simple proposition of 10 cents a minute--no matter what. Other calling plans may be cheaper, but none is easier to understand. "I think we've hit on a successful formula," says William T. Esrey, chairman and CEO. "The key is that simplicity, that direct approach." Sprint's promotion has even won kudos from rivals. "Customers like simplicity, and they like offers that are very understandable," concedes outgoing AT&T President Alex J. Mandl.
Sprint Sense was followed by a slew of other simple promotions. There is Fridays Free: Small businesses can call all they want on Fridays for no charge. Despite some initial snafus--thousands of residential consumers managed to get in on the deal--Fridays Free has boosted call volumes and reversed Sprint's poor showing in small-business markets. A year-old cash-back program, which offers customers a 10% refund if they stay with the company 12 months, also appears to be working. In the first half of this year, while AT&T's churn rate--the number of customers it loses--jumped 117% over the prior six months, according to market researcher NPD Group Inc., Sprint's churn rose 27%. MCI's rate rose 79%.
Esrey, a hard-charging former investment banker who has headed the company since 1985, has no illusions about how transient a victory in such a volatile market can be. "We could still screw it up," he acknowledges bluntly.
Sprint's long-distance success, in particular, could turn on a dime. Smaller "second-tier" carriers have been gaining, and soon the Baby Bells will offer long-distance service within their regions. They aim to get 15% to 25% of the long-distance market in three years. So the contest for long-distance subscribers is escalating. Analysts estimate that AT&T sent $1.5 billion in $50 and $100 checks to lure customers in the second quarter, for instance.
Sprint may be in a better position than AT&T and MCI, though. The Bells are focusing on residential customers, who account for only a third of Sprint's business. And Sprint has cut deals with Nynex, Bell Atlantic, SBC Communications, and Pacific Bell--which are loath to give business to giant AT&T--to carry their long-distance calls. This wholesale business doesn't command as high a price as retail calling but requires no advertising or customer support, so profit margins are still healthy. "We actually could come out ahead," says Esrey.
Gaining local business may be harder. Sprint has 6.9 million access lines from suburban Las Vegas to Florida and hoped to expand quickly by aligning with Cox Communications, Comcast, and Tele-Communications. That 1994 plan to offer local service over cable systems collapsed this year when the parties differed on splitting costs and revenues and how to brand the service. Esrey would still like a cable link so he doesn't wind up reselling Baby Bell service, and he hasn't given up on individual deals with cable companies.
With pressure building in long-distance and local, Sprint's bet on PCS becomes more important. PCS, an all-digital system, provides better quality, more capacity, and more features than conventional cellular, but it's enormously costly. Sprint Spectrum, the PCS partnership with the cable companies in which Sprint owns 40%, bid $2.5 billion for licenses that will cover 190 million potential users, making it by far the largest player. Some $5.5 billion in equipment and start-up costs will bring the tab to $8 billion by 1999. "It is a huge investment, and one that we didn't think made particular sense for us," says Gerald H. Taylor, president of MCI, which sat out the PCS auctions.
Esrey likens Sprint's PCS bet to the one in 1988 that transformed a rural phone company called United Telecommunications Inc. into Sprint. Then, Sprint was the first long-distance carrier to invest in a nationwide fiber-optic network.
BIGGEST THREAT. The payback from fiber was easier to see, however. For one thing, the technology Sprint chose for its PCS network--called CDMA--is far from proven. Some experts still doubt that CDMA handsets, made by Sony Corp. and Qualcomm Inc., will be available in large quantities by the end of this year, which could hinder Sprint's plans to be in 15 markets by then. Sprint also needs to maintain relations with its cable partners--the same ones it already fell out with over a local telephone effort.
Perhaps most threatening is the potential for an immediate price war in PCS. The Federal Communications Commission auctioned off three PCS licenses in each city, and the new wireless services will be fighting with the two cellular operators already there. Sprint's success in Washington has come mainly from undercutting cellular competitors by as much as 15% and offering special promotions, such as no charge for the first minute of incoming calls.
Esrey says that Sprint will thrive, not only in PCS but in long-distance and local calling. "It's all about marketing, and there are only three national brand names," he says. Lately, with above-average growth, the Power survey win, and the hit Dime Lady campaign, Sprint is outmarketing the other two. That means a lot more dimes will roll in.