Original URL: http://www.theregister.co.uk/2007/11/08/sprint_cold_feet/

Is Sprint getting cold feet about Pivot and Xohm?

As another bad quarter bites

By Wireless Watch

Posted in Broadband, 8th November 2007 14:27 GMT

Comment Sprint Nextel announced another disastrous quarter, its problems only highlighted by the strength of Verizon and AT&T, and appears to be in danger of sacrificing its only routes out of its "also-ran" rut, as a peace offering to understandably angry but short termist investors.

The carrier is pulling back on Pivot, the important joint venture with four major cablecos that gives it a shot at powering a converged operation; and is once again weighing up the options for its Xohm WiMAX division, with a deeper relationship with Clearwire and possible total spin-off two possibilities.

Sprint is suffering badly from a poorly executed merger, and the huge mistake of letting its balance of revenues slide so far from high margin, low churn offerings (notably in its mishandling of how Nextel customers were handled), to lower value services and customers in the prepaid sector.

CEO Gary Forsee rightly took the fall for his operational gaffes, but the danger for Sprint is that, in getting rid of a poor operational CEO, it will also lose the vision that enabled Forsee to turn the company around once before, pre-merger with Nextel.

Much of that was achieved by adopting a new and, at the time, radical business, which was the strong move into supporting MVNOs. This rescued Sprint from a slump and put it back on the US telecoms map, along with some other good moves like spinning off the Embarq local lines unit.

Now that times are hard again, there is only way for Sprint Nextel to avoid being stuck forever as a poor third behind AT&T and Verizon, increasingly losing value and market weight, and probably becoming an acquisition target down the track.

That is to repeat the Forsee trick of adopting a radical new plan that takes Sprint into a shiny market ahead of its rivals, and in fact, before his departure, he had come up with two – Pivot and Xohm.

It is also vital that these are twinned with a strong operational head, as Forsee had before well regarded Sprint COO Len Lauer fell on his sword after the first sets of poor post-merger financials. The failure to replace Lauer was disastrous, and the board of Sprint Nextel is now looking increasingly feeble on the question of company leadership, with interim CEO Paul Saleh ineffectual and very restricted in his freedom to move, and still no sign of a COO despite 15 months of searching (see Wireless Watch August 28 2006).

This is just one factor behind its latest disappointments, and the fact that the company is warning of an even worse fourth quarter. Third quarter profit fell 77 per cent year-on-year to $64m, on revenue down 4.2 per cent to $10.04bn. The operator admitted it still needed to fix customer service problems, and that it had lost 337,000 postpaid, high value monthly subscribers as well as even more prepaid customers – and that churn would be worse in Q4. By contrast, AT&T added two million net new subscribers in the quarter, while Verizon Wireless gained 1.6 million.

But merely putting the ship back on an even keel will not be enough to enable Sprint to fulfil its potential in the US market. Saleh's statements on the announcement of Q3 figures were predictable and hollow.

"We are operating with a renewed sense of urgency and are committed to take dramatic action to fix our business," he said, but with no idea of what those actions might be, and more than a hint that Sprint is actually backing away from the options that have the greatest dramatic potential.

Pivot

Saleh admitted that Pivot, the $200m cable joint venture, which aims to offer a quad play offering nationwide, will not be expanded beyond its current base of 33 markets and 20 per cent of Sprint retail stores.

He said Pivot has suffered provisioning issues and, since Sprint is focusing on simplifying its business, it has decided not to expand Pivot. There have been predictable problems with integrating billing systems, but also the service has certainly not yet delivered on its vision of integrating TV, video and DVR functions across fixed and mobile platforms.

Although Saleh said the relationship with the cablecos remains strong, and they will work together on a future, simplified service for other markets, this sounds like the first nail in the coffin for a venture that held such promise of making Sprint into the key partner in a converged partnership that could be a realistic quad play alternative to the big two telcos – extending Sprint's successful MVNO model well beyond the realms of cellular voice and data.

It seemed likely at first that Pivot would also work on new spectrum and networks – something Sprint pulled back from when it exited a separate venture with its cable allies, SpectrumCo, which was set up to bid in auctions starting with last year's AWS. It was also probable that the venture would make use of the Xohm WiMAX network, since this could bring a powerful wireless element to the quad play and would benefit from the cablecos market reach – such an agreement would also take out potential conflicts of interest between Pivot and Xohm.

But for this to happen, the initial, relatively simple Pivot services had to be successful and well delivered, and this was not the case. In August, Forsee admitted Pivot's progress had been "disappointing" and it already seemed that the partners had fatally underestimated the complexity of, as he put it, "weaving the service into the cable fabric".

Fulfillment of the true quad play potential of Pivot also depended on the cablecos feeling sufficiently confident in Sprint's future networks to build a next generation strategy around them.

Xohm's future?

Xohm was the best weapon, but so far it has done little to generate the market confidence it badly needs. This is unsurprising, when Sprint is trying to do something so new and radical – create the first genuine mobile broadband, quad play, open access service in the west.

But the market does not see it that way. Investors have consistently failed to get the vision, and will only tolerate it if the company is delivering strong performance in its core businesses. Otherwise, Xohm is looking like a high risk way to spend $5bn and get very little back.

Therefore, although it may lose its best chance of medium term recovery, Sprint may well defocus on WiMAX. The most likely option is probably to merge the Xohm operation with Clearwire, already its close partner in building out the operators' mutual 2.5GHz spectrum holdings, and try to IPO the merged entity.

Clearwire would gain a greater stake in a merged national network for, in current conditions, a good price – an outcome that would be vintage for its founder Craig McCaw (who at least knows how to roll out and run a disruptive new wireless service). It would also serve to placate nervous Sprint shareholders, while allowing those that are supportive of the mobile broadband vision to take a position in the new entity.

Other possibilities are for Sprint to buy Clearwire, though it would be unlikely to be able to pay McCaw the money he would be looking for in the current climate; or to attract a new investor in Xohm.

Intel would be an obvious candidate, given its need to make WiMAX work in the US, and Google would also be a possibility, given its close partnership with Sprint – it is designing a software platform for Xohm with the operator, and the companies are likely to merge this effort with an expected partnership for Google's new Linux environment.

Any decision will almost certainly have to wait for a new CEO, creating more months of uncertainty over Xohm and US WiMAX in general.

Copyright © 2007, Wireless Watch

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