Lessons in local focus

Sprint PCS' affiliate program relies on companies with a flair for smaller cities and a desire to be a part of the nationwide wireless revolution

Getting rich quick may not have been on the minds of Sprint executives after having shelled out $2.1 billion for spectrum by December 1996, knowing that they might not turn a profit for 18 months. Regardless, they wanted to build an all-digital, PCS nationwide network - a sizable challenge, considering the company hadn't established its switches or fully considered how it would knit together a nation full of large and small cities.

"The undertaking we were looking at was like building pyramids in Egypt," says Tom Mateer, vice president of affiliations for Sprint PCS. "And we wanted to do it within 18 months."

About one year later, realizing capital and management focus could spread only so far, Sprint formed an affiliation program with smaller, established providers or entities that had gained spectrum licenses that they could not afford to operate.

For the affiliates, the Sprint brand name and its access to nationwide coverage were the main drivers toward aligning with the operator. But Sprint also would benefit from the affiliate relationships, as it could maintain a local focus on smaller populations - places it would not have targeted on its own.

"The affiliate concept evolved. We would use our brand and try to partner with local companies with a local focus," Mateer says.

Birth of a program The affiliate program did not kick into high gear until January 1998. From that time until about June 1998, the growing Sprint PCS kept its focus on areas in which it could not build out on its own.

Four months later, the carrier began striking agreements with its affiliates, some of which had acquired spectrum during the C Block auction. These affiliates were given the opportunity to return the spectrum to the FCC upon becoming an affiliate of Sprint PCS. The carrier was adamant for potential affiliates to understand that Sprint PCS did not want to use them to get where it wanted to be and then move in for the acquisition, Mateer says.

To clarify this, the initial affiliation contracts stated that the affiliations would be legally valid for 20 years from the contract date, with three-to 10-year renewals thereafter. As of January, Sprint PCS had 18 affiliates. Since then, there has been consolidation among some of the affiliates.

Unlike AT&T Wireless, which also has an affiliate program, Sprint PCS does not seek large local carriers as partners. Instead, it favors those that have between 2 million and 6 million pops.

"We are not interested in seeing them get huge," Mateer says. "We want them to have a local focus. If they get too big, they will not pay attention to the small areas."

Affiliates compensate Sprint PCS to use its brand name and spectrum, while Sprint PCS takes a percentage of the affiliates' gross revenue. In addition, affiliates pay a per-subscriber fee to Sprint PCS if it provides billing and customer care services. Benefits include taking advantage of any vendor relationships that Sprint established for network equipment or handsets. The benefits are twofold, with Sprint PCS getting as much out of the affiliations as the affiliates.

Locals help steer nationwide network Striking relationships with smaller, regional providers was necessary for Sprint PCS to gain a reputation of being a nationwide carrier. Its affiliates might range from small to large and have knowledge of different parts of the county, but they each could provide the same thing - local flavor on a national level.

Alamosa PCS is Sprint PCS' largest affiliate, covering the Southwest. Alamosa has more than 50,000 customers in New Mexico and Texas and plans to expand into Arizona, Colorado and Wisconsin.

Alamosa's relationship with Sprint PCS is more interesting than the usual affiliate bond.

"Alamosa was formed in response to the Sprint affiliation being available in that [Southwest] area," says David Sharbutt, CEO of Alamosa. "We negotiated a contract with Sprint and then formed the company to fulfill the contract."

Alamosa signed its contract with Sprint PCS in June 1998, gaining a coverage area of 5 million pops. It later renegotiated to have up to 8.5 million pops. Its first market was launched in July 1999, and by the end of the year, it had 13 markets.

"What we bring to Sprint is that we deployed the network more rapidly in areas they would not have considered viable," Shar-butt says."We focus on local markets."

Although affiliates operate their individual franchises as if they were Sprint PCS, most agree that swapping their local expertise for Sprint PCS' national reach is a fair trade-off for them and their customers.

"When in a Starbucks, you don't wonder who owns it," Sharbutt says. "I liked that it was a franchise where we would have the exclusive right to use their brand and the right to offer their products and services."

Alamosa was named the Sprint PCS Affiliate of the Year in 1999 because it worked the hardest to emulate Sprint, Sharbutt says. "We caught the vision to succeed in our area and become Sprint PCS."

In contrast to Alamosa, Swiftel is the smallest affiliate and was operating before becoming part of the affiliation program. Swiftel ran a wireline telephony operation, so the wireless business was completely new for the company. Its people had to learn about RF propagation, service activation, billing and retailing.

"We are the smallest affiliate, but we were able to do this because we had been an established utility," says Craig Osvog, executive vice president and general manager of Swiftel, which serves Brookings, Watertown and Sioux Falls, S.D.

Size could been an issue for the company if it went into wireless alone because of the fixed costs companies have to absorb, but joining Sprint PCS gave the operator a chance to prove it could contribute its knowledge of its local scene.

"We are an entity with presence in this region, and they did not have presence.We were best able to execute a program in our area," Osvog says. "To pay attention to secondary markets becomes a real chore for Sprint."

As part of Sprint's affiliation program, participants must offer Sprint's national program to ensure that the carrier has a seamless national offering. For Swiftel, this meant upgrading its local equipment and integrating it with Sprint's network in Kansas City, Mo. It also means deploying the equipment necessary to deliver other services such as wireless Web.

Swiftel, which currently has 4600 subscribers and a total service area of 300,000 pops, expects to expand its service area to more than 600,000 by the second quarter of next year.

Another Sprint PCS affiliate, AirGate PCS, which provides coverage from the coast of Virginia to southern Georgia, joined in July 1998, with 11 employees at the time. The company now has 315 employees and has spent $150 million on its network, which has coverage area of about 5.4 million pops. The company went public in September 1999 and announced its first markets for roaming the following November. The company began selling phones in January.

Perhaps the fact that Tom Dougherty, CEO of AirGate, was with Sprint before taking his current position made him more partial to the carrier's affiliate program than AT&T Wireless'. However, he maintains it was more than that.

"We looked at the AT&T model and said it wouldn't get us where Sprint wanted to be," Dougherty says. The major difference between the two affiliate programs is that if AT&T had 30 MHz of spectrum, AT&T might let an affiliate use 20 and keep 10 for itself, he continues. In addition, AT&T affiliates do not have the benefit of the name brand and only have a five-year agreement, he says.

"Becoming a [Sprint] affiliate took major operational challenges off AirGate's plate, Dougherty says."We were able to concentrate on building a network quickly and concentrate on selling phones." Now AirGate and the other affiliates are taking some of the challenges off of Sprint PCS' plate so that it can offer nationwide service.

Knitting coverage across the nation Sprint PCS' affiliate program gives affiliates spectrum; distribution; brand name; national advertising; access to purchase contracts with vendors such as Lucent Technologies, Nortel Networks and Motorola; a billing and customer care platform; and a set of specifications for building a network and opening stores. For Sprint PCS, the payoff is having a nationwide network that, with the help of its affiliates, pays attention to the smaller locales.

Most of Sprint PCS' affiliates do not handle their own customer care and billing, instead using Sprint's system, which helps the nationwide network achieve seamless coverage. Only two affiliates have retained their own systems. In these situations, it is a challenge for those companies to offer advanced services and ensure that network-based service interface throughout all the affiliates, Mateer says. "Network-based services cannot inter-face with these affiliates."

This has been an issue because the carrier's main goal is to deliver a product and service to each customer in each of its markets seamlessly and on a nationwide basis, he says. (see sidebar on page 64)

The idea of having a large carrier such as Sprint PCS focus more on the large cities while smaller carriers look out for the smaller interests is not revolutionary.

"It is not different than in the beginning of the telephone industry when there was the Bell Co. focusing on large cities and smaller operators [focusing on] rural areas," Alamosa's Sharbutt says."This really is a consistent theme of how telecom business is established through symbiotic relationships."

Sharbutt's right-hand man, Jerry Brantley, chief operating officer of Alamosa, was instrumental in launching Alamosa's markets and executing the company's sales and marketing plans throughout the southeastern portion of the Sprint PCS network.

"Sprint did give us the opportunity to form the company. In the initial stages, we probably did not realize what a great opportunity it would have turned out to be," Brant-ley says. "It was hard to see the potential power of Sprint's national program two years ago because they didn't have the footprint established."

Brantley and Sharbutt first considered whether they could reach a sizable portion of the nation on their own. They looked at the suite of services Sprint PCS offered, as well as what Sprint PCS was charging for them. The two then considered whether they could do everything without outside assistance, Brant-ley says.

"We realized with Sprint we could get to market faster and the pricing was reasonable, so we did not have to expand and gain additional capital to institute those services ourselves," he says.

Swiftel, which also saw the upward swing of the wireless industry and decided it wanted to take a stab at offering untethered services, knew it could not do it alone. Swiftel anticipated that there might be a trend in landline service, where access charges would take a downward turn. Revenue from traditional telephony would flatten. "We recognized that it would be beneficial if we acquired another revenue stream," Osvog says.

Instead of going to spectrum auctions, Swiftel actually attempted to strike an affiliation with Sprint. In the spring of 1995, the company met with Mateer to discuss the idea. A bit prematurely at that time, considering Sprint had not been ready to discuss the idea, the company entered the C Block auction and acquired one license. In 1997, the company again went to Sprint. "Our game plan was to affiliate with a national brand-name carrier because we felt it was necessary, because in our locale, we needed a brand name to attract some attention," Osvog says.

Swiftel became an affiliate in June 1998. "We never began service on our own and instead became part of a national program," Osvog says."We had to become well-versed to Sprint's corporate culture, which has been a growing, learning process for us." This process has helped the company grow internally and extend its own footprint. While Sprint PCS has helped the affiliates become part of a national program, it also is helping them keep their individual operations in mind so that they do not miss potential growth opportunities.

Consolidation comes to all Although the number of pops covered by Sprint PCS' affiliates is growing, the actual number of affiliates is shrinking, due in part to consolidation.

Alamosa has been at the forefront of consolidations among the affiliates. It recently merged with fellow Sprint PCS affiliate Roberts Wireless Communications and Washington Oregon Wireless in late July. The combined company will be called Alamosa Holdings. Once the deal is finalized by the end of December, Alamosa will have increased its licensed population by 47%, from 8.5 million residents to 12.5 million residents.

Roberts Wireless had coverage of approximately 2.5 million people, primarily in Missouri, and WOW served about 1.4 million people, primarily in Washington and Oregon.

Consolidation might be encouraged among the affiliates, but it is not something Sprint PCS currently considers between itself and any affiliates.

"We are serious about long-term agreements, and unlike AT&T [we do not have] minority investments in our affiliates with the option to buy out the majority interest," Mateer says.

Although the operator is fixated on never losing focus in the local markets, the company cannot be sure what the future might hold, Mateer says. "We have no agenda to swoop in and steal away a company from someone after they have done all of the work," he says.

The size of Alamosa's coverage area and the fact that it is building out according to its affiliation agreement is what propelled the service provider to consolidate. In fact, the operator expects more consolidation to follow among the affiliates because of the benefits that consolidation can bring them, Shar-butt says.

"The capital markets are confused by the number of different markets covered [by various carriers] and prefer larger affiliates," Sharbutt says. "There is pressure for all of them to get larger. We need to get larger to gain additional scope."

"It is important that all affiliates are well-capitalized because it affects them and Sprint," he adds. However, he reaffirms that Sprint is neutral on consolidation among its affiliates but also does not try to prevent them from doing so.

Horizon PCS is another affiliate that joined in consolidation. When the carrier began operating, it had less than 1 million pops and now has 10.2 million. "There is no way we would have grown to this size. We probably would have half the subscribers and a tenth of the territory if we were not with Sprint," says Bill McKell, CEO of Horizon PCS.

In May, Horizon PCS merged with Sprint PCS affiliate Bright Personal Communications Services, a consortium of Ohio independent telecommunications providers. As part of the merger, Horizon PCS now has a total population of more than 10.2 million in portions of 12 contiguous states, including Indiana, Ohio, Pennsylvania, Tennessee, Virginia and West Virginia, and smaller portions of Kentucky, Maryland, Michigan, New Jersey, New York, and North Carolina.

"Sprint enables affiliates to operate efficiently at a smaller size, unlike AT&T, which goes after bigger affiliates," McKell says. "Sprint wanted one national brand to work the same for everyone; it did not have a reason to have affiliates come together, become bigger and acquire them." Despite the chance that a shift in this line of thinking is possible in the future, Sprint PCS seems content to support its affiliation program and take advantage of the nationwide network the program has enabled it to have.

A nationwide footprint is etched In a little more than three years, Sprint PCS created a wireless network that covers about 205 million people in about 4000 cities and communities across the country. Pyramids of Egypt this is not, but it is a lot of ground covered in a short amount of time.

The company could not have done it alone, and those affiliates with which it has teamed could not have achieved as much wireless success without access to the Sprint PCS name. Achieving local focus and having presence in smaller cities are two main ingredients for any wireless player to win nationwide presence.

Spectrum and name brand can do a lot for a wireless carrier. They can even win consumers. However, that will not mean a thing without coverage. While many large companies like to do everything themselves, Sprint PCS' affiliation program has allowed everyone involved to maintain a hands-on approach in the evolving wireless industry while also sharing the benefits of being a part of a nationwide network.

Most Sprint PCS affiliates have never operated on any other technology platforms besides Sprint's. For those that have, though, most moved to the Sprint PCS platform because a truly national network requires all the different facets to come together as one.

Sprint PCS affiliates US Unwired and Horizon PCS both operated separate networks before graduating to affiliate-hood. While Sprint PCS considered them Type 3 affiliates because they had their own billing and customer care platforms, they launched in new markets as Type 2 affiliates, says Tom Mateer, vice president of affiliations with Sprint PCS. Type 2 affiliates use Sprint's billing and customer care platforms, which is essential for giving customers the feel of being a part of a nationwide network, he says.

"To take full advantage, carriers need to be part of the process, totally integrated with billing and customer care," he says."Each should be able to offer the same services with the same quality. It is impossible to compete without being a national carrier."

Horizon PCS launched service three years ago. With a 105-year history in telecom behind it as Chillicothe Telephone, Horizon PCS came out of the cellular lotteries without any licenses before finally landing five C Block licenses, which cover southern Ohio and parts of West Virginia.

"We knew wireless would have an impact, and our best opportunity was to leverage our position by getting into the wireless business," says Bill McKell, CEO of Horizon PCS. The company operated as an independent company for one year and then entered into discussions with Sprint PCS about becoming an affiliate in November 1997. It became an affiliate in June 1998.

Horizon PCS realized that operating its own systems might take away its opportunity to offer Sprint PCS' services. Though it has taken time to migrate from its operation to one that is seamless with Sprint PCS, the benefits have outweighed the challenges, McKell says.

"We recognized after one year that doing so kept us out of step with Sprint," he says."It is difficult for the affiliates to mirror what Sprint offers without going to their platform."

By September or October, Horizon PCS expects to migrate its customers to Sprint's billing and customer care systems. The change will allow the company to offer new services such as voice recognition. Currently, Horizon PCS offers a limited set of Web services but hopes after the transition to offer a full suite of services.

"We have been significantly more successful since becoming an affiliate," McKell says."We had success before, but most of our customers, almost 100%, moved over to the Sprint PCS plan." The biggest advantage of being an affiliate has been the ability to offer services at the moment Sprint does, he adds.

However, he says it is a give-and-take relationship."We fill non-metropolitan areas surrounded by metro areas... areas that are important for Sprint customers that want to travel to and from [cities]," he says."It is a symbiotic relationship."

US Unwired, which was one of the first affiliates to sign with Sprint PCS, also won C Block licenses and decided to turn them back in, get rid of debt and piggyback off of Sprint PCS' spectrum.

"We were one of two that operated as a PCS carrier prior to joining Sprint," says Robert Piper, CEO of US Unwired. The carrier, which also held D, E and F licenses, launched several markets. It eventually recognized that becoming an affiliate of a nationwide carrier would be essential to wireless success."Footprint and the Sprint name mean a lot to get customers into the store," he says.

Unlike Horizon PCS, US Unwired decided to continue to do its own customer care and billing."It is more economical to retain it than to go through Sprint," Piper says."It has allowed us to react to the marketplace better."

This caused some technical problems. Although it has been challenging getting a new services offering up and running, US Unwired will begin testing a wireless Web offering in September on its network. Piper expects data will be a big part of US Unwired's revenues by 2004 and 2005. For now, doing its own customer care and billing is more financially sound than switching over to Sprint's platform, Piper says."It is in line with what we pay internally to do customer care and billing but less than what we would pay Sprint to do it."

US Unwired, which serves areas of Louisiana, Texas, Alabama, Mississippi and Florida, has gone from having 3 million pops to 9.9 million since signing on as an affiliate.