Sprint Nextel: The Canary in Wireless's Coal Mine?

The wireless carrier's fourth-quarter challenges may be shared by the rest of the industry in the coming months

"Economic uncertainty" was the phrase of the day for Sprint Nextel (S). During a Feb. 19 conference call, executives of the No. 3 U.S. wireless service provider used the two words liberally to describe the company's fourth-quarter results. In the three months ended in December, sales fell, losses ballooned, and customers jumped ship. There was so little visibility into the future that the company declined to make a forecast for the current quarter.

Usually when Sprint reports a bad quarter, it's easy to blame challenges specific to the company, including subpar customer service and network performance. But this time around, Sprint's woes augur a rough year for the entire industry.

Sprint Nextel's results are an early indication that the tough economic times engulfing construction, banking, and other industries are catching up with wireless carriers. Already, the downturn has pushed equipment maker Nortel (NT) into bankruptcy and ravaged sales of phone manufacturers like Motorola (MOT). Now it's the service providers' turn. "I don't think there's any sector that's been untouched," says Brent Iadarola, a global research director for consultant Frost & Sullivan. "The wireless sector is not immune."

Business Customer Exodus

Sprint Nextel may be feeling the pinch from businesses earliest because, among the top wireless carriers, it has the largest proportion of corporate customers. Sprint reported a "sizable" increase in turnover among corporate customers, which account for more than 25% of its user base. Companies are eliminating employees and canceling contracts for Research In Motion (RIMM) BlackBerrys and other business-friendly devices that run on the Sprint Nextel network. "We can watch unemployment [rise] and see a direct impact on our enterprise business," Sprint Nextel CEO Dan Hesse says in an interview with BusinessWeek.

Though Sprint is the largest national provider of wireless service to businesses, the enterprise exodus may also affect the top two mobile-phone service providers: AT&T (T) and Verizon Wireless, which is owned by Verizon Communications (VZ) and Vodafone Group (VOD). Businesses are cutting back on air cards that connect laptops to the Web via wireless networks, as well as related data plans, says consultant Chetan Sharma. One maker of air cards, Sierra Wireless (SW), on Jan. 29 announced it would lay off 10% of its workforce amid a drop in fourth-quarter revenue. About 12% of carriers' data revenues come from data cards, Sharma estimates. While Hesse says Sprint isn't feeling an impact yet, its rivals are. In a recent note, UBS (UBS) estimated that AT&T's net air card additions fell 121,000 in the fourth quarter, from 186,000 in the third quarter and 166,000 in the second.

Consumers are starting to curtail wireless service purchases, too. Of 2,151 U.S. online cell-phone users surveyed by JupiterResearch in November, one-third were considering cutting back on wireless spending and the number of minutes and texts they use per month. In the fourth quarter, sales of downloadable content like ringtones and games declined 4% to 5%, Sharma estimates. "People are just buying less than they used to," Sharma says. "That's discretionary spending, and it's going away." Only last July, researcher Gartner (IT) said it expected mobile gaming, one of the most popular forms of downloadable content, to surge 40% to $6.3 billion in 2011, from $4.5 billion in 2008.

At Handango, an online provider of mobile applications, sales directly to consumers have declined in the past year, and the average order value fell 10%, says CEO Alex Bloom. High-priced productivity and utility applications have been hit the hardest, as consumers cut back and developers began offering similar apps for less or free through rival stores, like the Apple (AAPL) App Store and Android Market. Some mobile games outfits are struggling as well: On Feb. 4, THQ (THQI) laid off 100 staffers from its mobile gaming division, citing "continued economic weakness and uncertainty in the market." For now, the pain is not universal: Mobile content providers MobiTV and PopCap Games say they are doing well.

Prepaid Mobile Services Benefit

Analysts are also concerned as consumers migrate away from traditional service plans—where users sign up for one- or multiyear contracts—and opt for lower-priced, more flexible prepaid services such as Leap (LEAP), MetroPCS (PCS), and Sprint's own Boost Mobile. On Jan. 22, Boost introduced Boost Unlimited, offering unlimited anytime calling, text messaging, wireless Web, and walkie-talkie services for $50 a month, drawing a slew of postpaid users from carriers like T-Mobile USA. "The macroeconomic conditions are certainly having an impact on people's pocketbook," says Matt Carter, president of Boost Mobile. "They want things that are affordable, and people are looking for more predictability."

John Hodulik, an analyst at UBS, expects the unlimited prepaid segment to garner 36% of the wireless industry's total new subscribers in 2009, from 18% in 2008. That means "postpaid subscriber growth will likely slow more than the overall market," Hodulik wrote in a recent note. That blow to postpaid subscriber growth comes at a bad time. The industry's overall growth has already slowed to a crawl, and carriers are expected to add only about 10 million new subscribers to their current stable of 272 million users this year.

Price competition is yet another concern. There are rumors that T-Mobile USA is about to start offering low-cost voice plans to existing customers who've used the service for more than 22 months. The plans are likely designed to slow customer exodus to prepaid offerings from rivals. "T-Mobile won't comment on test market activities," the company said in a statement. But if made nationwide, the offering could potentially push down other carriers' prices.

There may be a thin silver lining for wireless carriers in the current dismal climate. As consumers try to cut costs, many are dropping their landlines and office lines and going completely wireless. Gartner recently forecast that cell phones will replace many office phones in North America by 2011. "Even though we are feeling some impact, we are still a necessity," Sprint Nextel's Hesse says.

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