LAUER BEGINS SPRINT PCS REIGN LOOKING FOR A LITTLE CLASS

Len Lauer, the new president of Sprint PCS, is surprisingly candid when talking about his overhaul of a business that took such a disastrous dive in the third quarter.

Lauer, who replaced the ousted Chuck Levine at the end of September, already has essentially said goodnight to the high-risk ClearPay pricing program, introduced new competitive pricing plans designed to drive wireless data and announced a renewed focus on customer care.

He has his work is cut out for him. Much of Sprint PCS' subscriber growth over the last several quarters consisted of low-end customers who signed up for the pay-upfront ClearPay program. But those subscribers stung the company in the third quarter, and it reported for the first time that it had negative net additions. The 1.6 million new customers Sprint PCS added were offset by the nearly 1.7 million subscribers who either canceled service or didn't pay their bills. Meanwhile, the carrier's churn rate has reached 3.8% while gross additions fell 27% year over year.

As a first step in cleaning up its act, Sprint PCS soon will require customers who sign up for its ClearPay service to pay hefty deposits.

“Once you add deposits, you're not different from the rest of the industry,” Lauer said. “Wall Street was happy, but now it's concerned about our sales going down. We have to make sure that operational things are in place. We are focused on adds, but the right mix of adds so that we don't degrade on gross adds. We want higher-value customers.”

Morningstar analyst Todd Bernier said Sprint PCS stock is one to avoid because of the poor subscriber growth and its miserable balance sheet, which includes $18 billion in debt.

According to Lauer, Sprint PCS will be able to attract a better class of customers through a simplified pricing structure the company instituted earlier this month.

Sprint PCS's new rate plans increase the number of anytime voice minutes, allow unlimited night and weekend calling, and enable customers to add unlimited data transmission for an extra $10 on plans of less than $60 per month. In addition, laptop users can pay $100 for unlimited data.

Previous plans included up to 2 MB of data, but that model no longer makes sense, according to Lauer.

“Although we were making some progress about educating customers about megabytes, we decided we are not in the education business,” Lauer said. “We are committed to unlimited data for the handset going forward. We want to drive mass market adoption.”

About 120,000, or 10%, of Sprint PCS's customers have signed up for the company's PCS Vision offering, which runs on the high-speed CDMA 1X network. With the new pricing, Lauer believes it can significantly ramp up subscriber numbers.

Analysts, however, worry that unlimited data pricing plans similar to the one T-Mobile introduced this fall, could lead to a devaluation of data too soon. Carriers may eventually have a harder time charging for applications that drive their bottom lines. Lauer, though, said the extra $10 per month for the plans will driver higher revenue and lower churn because customers with PCS Vision will be able to customize their portals, making it more difficult to leave the carrier. In the first quarter of 2003, the company may increase that $10 fee, he added.

Still, Sprint PCS's move to more aggressive pricing for both voice and data doesn't sit well with many analysts who say the market is becoming saturated and that consolidation is required. Yet merger rumors in the industry have cooled while aggressive pricing has heated up, noted William Benton, wireless analyst with William Blair & Co. who says that consolidation is needed.

“In our view, the industry structure is the problem,” Benton said in a research report. “There are simply too many operators chasing a [resized] smaller pie, trying to get a larger share to leverage fixed costs. Each is acting in its own best interest, but collectively, they are destroying the economics of the business.”

Industry executives either don't want to admit the wireless market is saturated or they simply don't believe it.

“We have to bring operational excellence,” Lauer said. “We can do better at customer service and a second piece is differentiation. I believe that wireless has phenomenal growth ahead, especially for substitution of wireline services.”

That was a sentiment echoed by AT&T Wireless CEO John Zeglis during the company's third-quarter conference call last week. Although the company struggled with a high number of customer disconnects associated with WorldCom exiting the reseller business, it added 201,000 high-quality customers. Zeglis stressed that the carrier didn't add those customers by lowering credit ratings or ramping up prepaid customers.

“We will take our share of profitable revenue in this industry,” Zeglis predicted. “There is still too much growth in front of us.”