Sprint’s Subscriber Woes Deepen
It wasn’t the first time Sprint Nextel CEO Gary Forsee hit investors with a negative surprise. Ever since Sprint acquired Nextel in 2004 in a $35 billion deal designed to help the company compete against larger rivals Cingular (http://host.businessweek.com/businessweek/Corporate_Snapshot.html?Symbol=T) and Verizon Wireless, the merged giant has struggled with spikes in customer defections and drops in per-user revenue.
But the telco’s Jan. 8 preannouncement stood out as perhaps the worst since the 2004 merger was announced. Sprint Nextel (http://host.businessweek.com/businessweek/Corporate_Snapshot.html?Symbol=S) announced it actually lost 306,000 postpaid customers in the fourth quarter of 2006, seasonally the year’s strongest period. And, citing problems with subscribers who wouldn’t pay up, Forsee expects to lose customers again in the first quarter of 2007. He expects Sprint to return to growth after that. But many on Wall Street aren’t so sure the company is close to hitting the proverbial bottom, which is why Sprint shares fell 11%, to $17.45, on Jan. 9. In fact, the stock is now nearing its 52-week low of $15.92, hit in August.
Analysts blame some of Sprint’s problems on Nextel’s habit of signing up many nonpaying consumers compared with the high-end business customers Sprint hoped to acquire. Other woes, such as the network quality problems Nextel subscribers have experienced and the lack of a strong corporate advertising message, can be traced to Forsee and his team’s execution missteps since the merger. Rivals Are Getting Stronger
What’s becoming increasingly clear is that the troubles at Sprint could, potentially, continue for months to come. And that’s revving up speculation that Sprint could become an acquisition target of Verizon (http://host.businessweek.com/businessweek/Corporate_Snapshot.html?Symbol=VZ) or a cable company sooner rather than later.
Here’s why: Sprint is trying to digest its 2004 acquisition of Nextel just as competition from rivals, which have grown bigger and stronger, is intensifying. With AT&T’s deal for BellSouth completed, competitor Cingular is now backed by a company whose sales are more than twice those of Sprint’s. And these larger rivals are increasingly forced to pursue competitors’ customers.
With the wireless market saturated, this year U.S. wireless service providers such as Cingular, Verizon Wireless, Sprint, and T-Mobile will collectively add only about 16.1 million new users, 17.4% fewer than last year, figures Mark Winther, an analyst with consultancy IDC. To avoid drops in the crucial metric of net subscriber additions—and, unlike Sprint, both Verizon Wireless and Cingular have been adding more than a million subscribers per quarter—the rivals are converging on Sprint’s customers like a pack of hungry wolves. “Every misstep of Sprint is magnified several times by extraordinary execution of Verizon and Cingular,” Winther says. Management Turnover
These competitors have greater resources, and they are not hampered by Sprint’s costly integration missteps and the massive spending needed to bring Nextel into the fold. They are ramping up their advertising, forcing Sprint, whose latest marketing campaign hasn’t been as effective as hoped, to follow suit. This year, to stem customer losses, Sprint will also raise its handset subsidies, according to the company. An ugly price war on wireless plans could ensue as well. Clearly, for Sprint, 2007 won’t be pretty. Already, the company is signaling flat revenues and an operating income before amortization and depreciation that’s down 12% year over year. Sprint’s equity cash flows, a measure of its ability to generate cash, should fall 40% vs. 2006, according to UBS (http://host.businessweek.com/businessweek/Corporate_Snapshot.html?Symbol=UBS) estimates.
