Ovum Comment on Sprint Recovery

• Posted: Saturday, May 10, 2008
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• Author: pradhana
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• Filed under: Business Analysis

By Jaw Dawson, Ovum VP US Enterprise Practice

This is a further step in Sprint’s recovery from its dismal recent history. While attempting to dig its way out of its current crisis, WiMAX has been both a potential help and a huge distraction. It wants to maintain the potential opportunity that could come from WiMAX, but needs to separate those activities from its core activities, and share the risk and investment with other interested parties.

The spin-off into Clearwire is a logical step that secures both shared risk and considerable additional investment from other parties, which should speed up rollout, especially since the company will be able to take advantage of Clearwire’s existing rollout.

Sprint will have 51% ownership of the new company, and its head of 4G initiatives, Barry West, will become President of Clearwire (under its current Chairman and its current CEO). The 51% ownership will give it significant control, but because of the structure of the new firm, Sprint will not be able to consolidate the results of the company, meaning it will only be able to report 51% rather than 100% of the company’s results in its own.

Since Sprint has thrown both all its existing investment and its 2.5GHz spectrum into this initiative, this is a big gamble. In addition, in the long term Sprint’s current customers will migrate to 4G, and it will lose some of the associated revenue to its partners in the process.

The deal also throws Sprint back into a relationship with several of the cable companies that were formerly part of its failed Pivot initiative, which sought to bundle Sprint’s mobile services with a triple play from the cable companies.

However, that venture secured a relatively modest $100 million each from Sprint and the cable companies, and none of the partners ever seemed really committed to making it work. Not only have Sprint and the cable companies put much more into this project, but the funding from Intel and Google will also be massively helpful and put additional pressure on producing concrete outcomes.

In addition, the cable companies have MVNO agreements this time around rather than a joint-branding approach, which gives them more control and reduces Sprint’s involvement a great deal.

Just as this particular rumour is confirmed, there are (at least) two more still swirling around Sprint. First is that it is considering spinning off Nextel, which seems a sensible move if a painful one for Sprint and its shareholders. The Nextel deal, and especially the price paid, has been the single biggest reason for Sprint’s recent struggles, and continues to drag it down. Spinning it off would be difficult in the short term but beneficial in the longer term.”

The second rumour is that Deutsche Telekom is interested in acquiring Sprint Nextel, but this makes very little sense at all. Deutsche Telekom’s existing US arm, T-Mobile USA, grew revenues by $543 million from Q4 2006 to Q4 2007. Sprint’s wireless arm, meanwhile, saw revenues shrink by $504 million in the same period, which would virtually cancel out growth at T-Mobile.

In addition, Deutsche Telekom would be taking on Sprint’s existing three networks (CDMA, iDEN and WiMAX) and adding a third (T-Mobile’s GSM network), which would only exacerbate the nightmare. Deutsche Telekom would probably do much better to continue with its current strategy of organic growth for T-Mobile USA, at least until any spinoff of the WiMAX and Nextel operations is complete. /PR

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