Stakes High For Sprint Nextel in Wireless Gamble
Published on: 30th Sep 2007
Note -- this news article is more than a year old.
WASHINGTON (Dow Jones) Seeking an edge over its larger rivals, Sprint Nextel Corp. plans to spend up to $5 billion by 2010 to create a network with the U.S.'s fastest wireless connections to the Internet.
The expensive project, first unveiled in August 2006, is part of a risky strategy to trump market leaders AT&T and Verizon Wireless. Both carriers are growing significantly faster and even taking customers away from Sprint.
Sprint's line of attack centers on an emerging mobile standard known as WiMax, which has the potential to carry more Internet traffic at faster speeds and lower costs than existing networks. The company has lined up a number of allies, such as Intel, Motorola and Samsung, all of which plan to incorporate WiMax technology into their chips and handsets.
If the gamble on Wimax pays off, Sprint believes it can regain market share, boost profits and re-energize the company's stock. Executives say their strategy gives them at least a two-year head start on rivals.
Chief Executive Gary Foresee told investors at a conference in New York last week that "WiMax is certainly one of the centerpieces" of Sprint's effort "to create long-term shareholder value."
Despite global support for Wimax, Sprint faces a chorus of skeptics. Many say the company's cash would be better spent on fixing its ailing wireless business first.
Sprint, for example, lost 698,000 postpaid subscribers over the past four quarters and may have shed an additional 200,000 in the third quarter, according to the brokerage UBS. Postpaid customers, who sign annual contracts and pay bills at the end of each month, are most valuable to the wireless industry.
Much of Sprint's trouble stems from problems in the company's Nextel business, which was acquired in mid-2005. The integration of Nextel has not gone smoothly, and many customers defected after an increase in service disruptions.
Regular subscribers have also complained of poor service, and Sprint has the lowest customer-satisfaction ratings of all the major mobile carriers. Muddled ad campaigns haven't helped. The Sprint brand lacks a clear identify among consumers, analysts say.
"They need to fix their marketing and customer service or it won't matter how fast their mobile network is," said Todd Rethemeier of SurTerre Research.
Ready or not
As for WiMax itself, industry analysts and executives believe it will work. Yet some question whether the technology is ready for prime time and suggest that Sprint's goals are overly ambitious.
In August, Sprint executives told analysts at a company "summit" that they plan to start service in 2008 and expect to generate as much as $5 billion annually in WiMax-related revenue by 2011.
Paul Jacobs, chief executive of Qualcomm and an engineer by training, said in an interview last week that WiMax needs significant upgrades to become a "world-class technology." Qualcomm offers a competing mobile technology.
He argued that WiMax, originally a fixed-wireless technology, does not handle mobility or real-time streaming well and noted that it cannot transit regular phone calls. "There's so much hype and misinformation about its capabilities," he said.
Executives at Sprint, Intel and Motorola disagree. They have said the primary obstacles in the development of WiMax have been overcome. And the fact that it wasn't designed for voice is a big plus, they say.
"WiMax was built from the ground up for data speed and isn't encumbered by technology compromises for backward compatibility [and did not begin its] life as a voice network that had data grafted on," Sprint spokesman John Polivka said.
In choosing WiMax, Sprint passed over the technology Qualcomm believes is better suited for quickly delivering video and other services over mobile networks. Qualcomm has championed MediaFlo, which uses broadcast airwaves as a fast, reliable and cost-effective solution. Verizon already offers mobile-video service to customers over the MediaFlo network, and AT&T has also signed on.
What's more, Qualcomm has patented the wireless technology known as CDMA that Sprint, Verizon and other carriers already use to carry voice traffic and enable subscribers to access the Internet, albeit at relatively slow speeds. If WiMax proves to be a good alternative for future networks, Qualcomm could lose out.
That's' why Qualcomm is exploring WiMax's potential, too. And, just to be on the safe side, AT&T and Verizon Wireless also are looking at WiMax. They have not as yet been won over, though, and continue to experiment with less costly alternatives.
"They're both being very careful about spending billions of dollars on unproven technology," Rethemeier said.
Another monthly bill?
Perhaps a larger question is how much demand exists for superfast mobile Internet connections. Certainly business customers would show an interest, and some consumers might as well.
Yet most Americans already have high-speed access in their homes through a cable or phone company. And a growing number already pay for voice calling and data services such as email on their mobile devices. Do a large number also want to pay another monthly fee so they can watch movies or sports on their wireless phones?
That's what Sprint is trying to find out. The future of Sprint would be a lot brighter if its WiMax plan succeeds. The carrier would also become a more formidable challenger to AT&T and Verizon.
"Customers want the Internet experience wherever they are and don't want to have to be limited to a home, office or coffee shop to get it," Sprint's Polivka said. "This is the beginning of the end of 'place-based' communications."
If the strategy fails, however, current management would likely be shown the door. It's not just Sprint's investors who have a lot riding on the WiMax bet.
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