Hesse on the Hot Seat at Sprint

Investors may pout. But the new CEO, and former Embarq chief, may have what it takes to get the wireless provider back on track

A little more than two months after Sprint Nextel (S) booted former Chief Executive Officer Gary Forsee amid declining subscriber rolls and flat revenue, the company announced on Dec. 18 that Daniel Hesse would take over immediately as its new chief. For a company so down on its luck as Sprint, having lost market share and customer goodwill in recent months, officials might have thought the news would be a pre-holiday gift for shareholders.

Wishful thinking. Hesse's appointment hit like a thud on Wall Street, with shares slipping about 1% to 13.76. What gives? Investors may have been hoping that the board would simply sell the company instead of hiring someone to tackle the long, arduous task of getting it back on track. And if the board was going to hire a new chief, shareholders may have been wishing for a big-name executive instead of Hesse, formerly CEO of the little-known Sprint spin-off Embarq (EQ). "He has a decent track record, but he is not a rock star," says Shahid Khan, partner at IBB Consulting.

Not that Sprint didn't try. Wall Street insiders say Sprint's board of directors approached at least four other telecom executives before offering the job to Hesse. They included Ralph de la Vega, chief executive of AT&T's (T) wireless business, and Dennis Strigl, chief operating officer of Verizon Communciatons (VZ) and former CEO of Verizon Wireless. Both declined to pursue the position. Neither could Sprint lure top managers or former execs at European standouts Orange Group and Vodafone (VOD), according to executive recruiters.

A spokesperson for Sprint declined to comment specifically on who was considered for the post. "We aren't commenting on the selection process but our Board believes they have the right person to lead this business," said the spokesperson, in an e-mail. "Dan has a proven track record in successful operational execution with deep wireless experience and a familiarity of the company that allows him to hit the ground running."

Many Challenges Ahead

Sprint is hardly a glamorous company nowadays. The beleaguered wireless service provider has seen its stock cut in half in the last 18 months, as its merger with one-time wireless rival Nextel has turned into a marketing and operational disaster. The company is expected to report a loss of an additional 200,000 postpaid customers in the fourth quarter, says Thomas Watts, an analyst with Cowen & Co. Even its future bets, on the emerging broadband technology WiMAX and collaboration with cable companies, are uncertain at best. "It's a huge challenge," says Lisa Pierce, a Forrester analyst who specializes in U.S. telecommunications services. "This is not an opportunity for slackers."

But investors may be selling Hesse a little short. In 2005 he was chief of Sprint's local, wireline phone division, and then became chairman and CEO of that business when Sprint spun it off as Embarq in order to focus on wireless. Under Hesse, Embarq was a leader in innnovation. Embarq was the first to tie together basic cellular service with voice service over WiFi in the home. Now, more than a year later, carriers such as T-Mobile USA (DT) are making similar moves with great fanfare. "It demonstrates that he understood the technology's capabilities early," says Pierce.

And Hesse is much more than a local telephone guy. He spent 23 years at AT&T manning several different areas.

In the early 1990s he ran the network equipment division that later became Lucent technologies and now Alcatel Lucent (ALU). He was also a main player in AT&T's enterprise services, a unit that catered to the communications needs of large corporations.

A "Straight Shooter"

It was as the head of AT&T's wireless operation that Hesse made his mark. As CEO of the business from 1997 to 2000, he helped institute an innovative, flat-rate pricing plan throughout the nation so that customers could call anywhere in the country for the same rate. The plan, called Digital One Rate, became a huge hit. He also oversaw the creation of bundles of service, a rarity at the time. With long-distance minutes on the decline, Hesse created a bundle of long-distance and wireless services in an effort to suspend the long-distance losses. "That was first time anybody created a bundle, even though there were regulatory hurdles," says Berge Ayvazian, chief strategy officer at researcher Yankee Group.

Colleagues and peers describe Hesse as a straight shooter who is calm under fire. Always seeking new challenges, Hesse left AT&T in 2000 for a telecom startup called Terabeam. With the collapse of tech and telecom stocks, Terabeam struggled but Hesse didn't panic. In 2004 he and the Terabeam team sought out potential suitors for the struggling firm. They found a buyer in a Seattle's Proxim Wireless. Robert Fitzgerald, Proxim's CEO, and Hesse negotiated the deal for weeks. "I'd spend many nights pacing my home office talking to Dan," recalls Fitzgerald. "I'd get exasperated, and he'd say, 'Let's slow down, step back.' He was the rock, the force of solidarity that got the transaction done."

There's no question Hesse will have to be a formidable leader at Sprint. Tough decisions await. For starters, he may need to put an end to several of Sprint's ambitious projects and focus on the basics to get the company back on track. That includes improving Sprint's marketing message. A string of unsuccessful marketing campaigns over the past several years have left the company with customers shifting in droves to AT&T and Verizon Wireless. Those rivals have managed to differentiate their offerings by marketing new blockbuster products such as Apple's (AAPL) iPhone at AT&T and the LG Voyager at Verizon.

Cutting Initiatives

Analysts say Hesse is an analytical but decisive operator, skills he'll need on the new job. A focus on operations might mean axing initiatives started by his predecessor. One victim could be Sprint's plan to build a new network based on WiMAX, a wireless technology used to deliver speedy Internet connections. Sprint is alone among the nation's major wireless carriers in embracing WiMAX. The rest of the industry seems to be moving toward a competing technology, called Long Term Evolution (LTE). By switching to LTE, analysts say, Sprint may be able to build a new network cheaper, and to enjoy economies of scale when purchasing new handsets. "Sprint can't afford the luxury of pursuing [WiMAX]," says Michael Mahoney, managing director at Falcon Point Capital.

The other strategic initiative in question is Sprint's joint venture with the cable operators such as Comcast (CMCSA). They resell Sprint's wireless service, but analysts suggest that deal could easily fall apart. The cable companies may decide to build their own wireless network or to team up with a different service provider.

Whatever improvement happens at Sprint will take time. The turnaround job is so big, the ground to be made up so great, that it will take at least two years for any notable progress to occur, analysts believe. "Anyone expecting a short-term miracle needs to go get a strong cup of coffee" says Forrester's Pierce.

Indeed, Sprint's stock has likely failed to rally because many investors have expected that Sprint's board will simply throw in the towel and opt to sell the company. That could still happen. Otherwise, patience is the virtue investors should adopt. Says Forrester's Pierce: "Anyone expecting a short-term miracle needs to go get a strong cup of coffee."

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