Sprint and the Wall Street/Main Street disconnect

One of the things about being on the user side of the telecom business is that the statements the carriers make to Wall Street can come across as funny or ironic. They have to brag and spin to financial analysts about what gobs of money they're going to make, all the while poor-mouthing themselves to you and us until they finally realize they have to cut prices in a competitive bid.

But I get all that as part of the game, so I let the financial facts speak for themselves (such as the outsize operating margins that Verizon Wireless, in particular, is currently posting). Meanwhile, there's a qualitative as opposed to quantitative aspect of the Wall Street vs. marketplace divide that's potentially even more telling about a carrier's suitability as a supplier going forward.

You want to be able to tell from a company's Wall Street presentations and statements that their C-level folks are at least living in the same world as their own customers. On this score, Sprint Nextel Corporation, even though it's hardly the financially weakest carrier compared to other, smaller U.S. players, seems to have a particular disconnect with its historic installed base.

This difficulty with Sprint is, to some extent, simply inherent in its business model. As an overwhelmingly wireless carrier in terms of both revenue and corporate identity, Sprint isn't in much of a position to be pressed by Wall Street to obtain core, mission-critical enterprise network wins. But odd disconnects occur even in the discussion of their wireless financials.

In one recent note from a top Wall Street analyst following his meeting with Sprint CFO Bob Brust, Sprint was quoted as determined to improve its revenue even at the expense of further deterioration of its wireless profit margins. That actually sounds pretty good for customers, right? More effort to win business with lower profits?

Not really. The problem is that Sprint tends to get its revenue fixes largely by boosting its share of point-of-sale, prepaid wireless plans, which is far from the world of corporate wireless (whether on pooled or pay-as-you-go plans) and has little or nothing to do with its Nextel Direct Connect base. That's largely what the analyst was referring to here.

The analyst, who is one I've known and respected for a pretty good record on telecom stock calls for most of a decade, noted that Sprint's "postpaid" base -- what most of think as simply normal wireless monthly subscription plans -- has been declining. And even the way that Sprint goes about getting its revenue up on the postpaid side has an uncomfortable side-effect, he explained. On consumer sales as well as in good business deals, they do provide subsidies for new devices compared to their manufacturers' costs, but given Sprint's cost structure (including debt), that invariably must be offset with operating cost cuts.

And it's on the corporate spending -- both operating expenses and capital expenditures -- that Sprint especially risks falling behind the competition. Although Sprint is officially planning a slight increase in capex this year, this analyst noted that in the end, capital spending may be flat given Sprint's statements to him about its requirements abating on mature buildouts.

Well, any time a carrier makes statements to the effect that it doesn't have to spend as much on existing networks, a red flag goes up. I first began hearing this line from troubled carriers in the bankruptcy era in the early part of last decade. It invariably coincides with that carrier's stagnating in the marketplace. Telecom is a capital-intensive business, period. Time marches on, and whether it's bandwidth or spectrum upgrades, network maintenance, or generational technology migrations, capital needs cannot be easily foregone.

Sprint is a complex story. Some of its capital requirements are in effect assumed by Ericsson (through its Network Advantage program) or 4G WiMax carrier Clearwire (in which it holds 51% of the stock). Sprint wireline customers who've stuck with them by and large like them. Even when Sprint is second banana to AT&T or Verizon in an enterprise, relations generally remain good. On the wireless CDMA side, Sprint is relatively good to negotiate with, and the Nextel base is, up to now, largely loyal.

But telecom managers have increasing difficulty thinking of Sprint as a long-term partner when they know their senior managements increasingly have the image of AT&T and Verizon as the only two full-fledged carriers based in the U.S. Capital restraints, endless talk of prepaid wireless for the lowest rung of the consumer "cell phone" market, and the apparent invisibility of the enterprise wireline market to its executives are taking its toll on Sprint's corporate market image.

If Sprint appears to drift away from the center of corporate telecommunications culture, we will continue to see users hesitate about including them strategically. We hope that Sprint senior management takes note, and that potential acquirers of part or all of the business are factoring this into their plans.