CARRIERS EYE NEXT GENERATION AT MORGAN STANLEY GATHERING

Top-ranking executives from several of the nation's largest telecom service providers descended on Washington, D.C., last week to address Morgan Stanley's ninth annual Media and Communications Conference, seizing the opportunity to update the assembled financial analyst community on their companies' ongoing evolutions from traditional long-distance carriers to integrated providers of next-generation services — particularly wireless data and voice over IP.

“Many people think of us as a long-distance company, but that's living in the past,” Sprint President and Chief Operating Officer Len Lauer told conference attendees. The numbers back his assertion: According to Lauer, while long-distance service made up 27% of Sprint's second-quarter revenue and local service comprised just 22%, wireless services contributed 51%.

“We still want to be in long-distance, but it doesn't make sense to go after standalone long-distance customers,” Lauer said. “If a customer wants to put out a large RFP for long-distance, you probably won't see us compete. It's more strategic for us to market bundles to business customers, and you'll see us migrate long-distance in that direction.”

Sprint's transformation includes a plan to reorganize the company into divisions focusing on business or residential customers as opposed to divisions based on service types, Lauer said. He also cited recent alliances with cable providers Time Warner and Mediacom, part of the carrier's ongoing push into cable telephony, as well as its mobile virtual network operator partnerships with youth-focused prepaid carrier Virgin Mobile USA and traditional rivals Qwest and AT&T.

“We enable MVNOs we believe don't have overlap with us,” Lauer said. “Qwest has a loyal customer base, and their customers wouldn't be attracted to offers from us or other wireless carriers.”

Nor does most of AT&T's core customer base fall within Sprint's target market, Lauer added, although in cases where the carriers' subscriber bases do overlap, he said he fully expects Sprint to come out on top. “When we go head-to-head with AT&T, if the Sprint salesperson can't win that race, then we need to find another Sprint salesperson,” Lauer said, citing the company's advantage in areas including its wireless service portfolio and handset selection.

Qwest Chairman and CEO Richard Notebaert also outlined his company's wireless business, saying the process of transitioning Qwest's subscribers from its proprietary wireless network to Sprint's network is about 60% complete and on track to meet projected costs of $55 million. Still, the migration has had hiccups — specifically, the customer churn Notebaert said is endemic during such a dramatic shift in business operations.

“We had a decent quarter last time, but it was masked by migration,” Notebaert said. “Until we finish the migration, we're going to have abnormally high churn.”

Still, Notebaert said that Qwest's transformation to the role of integrated service provider is making progress, pointing to the company's increasing DSL penetration rates as one significant milestone. “We still have a lot of opportunity,” he said. “We're a year or so behind in a lot of areas, but we have a lot we're catching up on.”

Notebaert also addressed the steep decline in leasing new residential lines to competitors, a sag brought on by AT&T's announced exit from the residential service business. Notebaert said Qwest experienced a roughly 50% month-to-month residential lease drop-off between July and August. BellSouth Chief Financial Officer Ron Dykes said BellSouth also was impacted by AT&T, “with their visible withdrawal, as well as MCI with their less visible withdrawal.”

While Dykes said BellSouth has yet to see a significant change in the number of customers served by competitor-leased lines, he is confident some will return to BellSouth. “I think we'll get the bulk of those customers back,” he said.