A WINDED SPRINT PORTENDS CONSOLIDATION

Sprint's decision to kill its ION project and halt growth in its multichannel multipoint distribution service (MMDS) venture staunched the bleeding in the company's latest local access endeavors but may be a precursor to a larger effort that would lead to a merger with a Bell company.

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ION and Sprint Broadband Direct (the MMDS project) were local access projects that failed for many reasons—technical and otherwise.

“Given the difficulty in getting effective and efficient last-mile connections, along with regulatory uncertainty over continuing access to local facilities, the financial and implementation risk proved greater than the potential long-term reward,” said Ron LeMay, Sprint's president and chief operating officer.

However, the company has yet to secure its market position going forward. And the only way it may be able to do that is through a merger, potentially with a Bell company. Sprint denies it is looking for suitors and says it is focused on operating its business. But for the big three long-distance carriers, business has changed.

Although Sprint owns dispersed local exchanges mostly in rural markets, it—along with other interexchange carriers (IXCs) with deteriorating long-distance revenues —has not shown that it can effectively crack the last-mile nut.

“Eventually, Sprint will be marginalized if they don't make an aggressive move,” said Robert A. Saunders, senior analyst for The Eastern Management Group.

Brave new strategies on the product front don't seem likely.

“They haven't been going out on a limb by making huge commitments to new product sets and new approaches to delivering broadband on a large scale,” Saunders said.

Sprint is limiting systems development to its highest-priority projects, namely its IP services suite and enterprise data products — the same avenues most carriers are focusing on. Bleeding-edge initiatives such as voice over DSL will be “stretched out,” said Michael Fuller, president and chief operating officer of Sprint's local telecommunications division.

In a consolidation play, Sprint's last-mile problem could be solved. It also offers an acquirer some solid assets. The company boasts a high-quality network, scattered local exchanges and a powerhouse wireless arm in Sprint PCS that an incumbent could absorb or sell as needed. And its customer satisfaction ratings are traditionally high.

“Sprint has a purely digital network; it's got customers that like it,” said Rudy Baca, global telecom strategist for The Precursor Group. “[AT&T] has the customers nobody else wants; everybody hates them.”

Sprint boasts a dedicated IP service that makes money and grew 48% this quarter. It also has E|Solutions, hosting and managed services products with an excellent portfolio of customers, said Sandra Palumbo, analyst for The Yankee Group. Less attractive would be Sprint's international network capabilities, which pale in comparison to those of WorldCom and AT&T. “They are still behind in some of their service offerings because they have been playing catch-up,” Palumbo said.

Even at current share prices, a package deal for Sprint and Sprint PCS would be steep — about $65 billion, including the company's debt, said Patrick Comack, senior analyst for Guzman & Co.

About $40 billion of that would be the value of the prosperous Sprint PCS. Getting Sprint to split its wireline and wireless businesses wouldn't be easy coming from either direction, however. “I have not really thought of Sprint [PCS] as an imminent consolidation play vs. AT&T Wireless and Nextel. Those are cleaner acquisitions,” said Jason Bell, wireless analyst for SunTrust Robinson Humphrey. “Sprint wants to sell all or nothing.”

For a Bell company whose share price is outperforming the sector, a deal might be hard to resist. As Bell companies move out of region for data and long distance, owning a network will let them cut future operating costs when compared with leasing capacity, said Dana Tardelli, research analyst of carrier and enterprise communications for the Aberdeen Group.

The prime suspect to acquire Sprint is BellSouth, which bid for Sprint more than two years ago but was outmaneuvered by WorldCom in a deal nixed by European regulators and the Department of Justice. BellSouth still has the financial wherewithal to do the deal, but it would have to clear regulators, and BellSouth probably would have to sell its stake in Cingular Wireless.

Cingular customer adds fall well short of projections Oct 19, 2001, 02:57 p.m. ET, TelephonyOnline.com

As hard as BellSouth has been pushing Cingular, it may not be averse to saying goodbye. Cingular recently posted anemic subscriber adds for the third quarter—95,000, compared with 701,000 in the second quarter. At the same time, Sprint PCS added 1.2 million customers.

In addition, Sprint PCS uses CDMA technology at one unified frequency, making expansion simpler because it doesn't have to engineer around legacy analog networks. While other carriers are heavily lobbying the federal government to release more frequencies for 3G services, Sprint says it has enough spectrum to last for 10 years.

The wireless industry has waited months for Cingular to announce a new technology path away from TDMA technology. But BellSouth and SBC continually debate the issue, according to sources close to both companies. BellSouth favors CDMA; SBC favors GSM.

“Sprint is a great acquisition target for BellSouth,” said Timothy O'Neil, wireless analyst for SoundView Technology Group. “BellSouth has always been predisposed to go CDMA.”

Whatever it does, Sprint needs to act while its stock price is at respectable levels and before its core businesses erode further. Besides the blemish of long distance (60% of Sprint's revenues), Sprint's local access line business, which generates 70% of its profit, is being cannibalized by wireless and broadband technology replacement. In addition, as of the third quarter, even Sprint's growth drivers—data and Internet—experienced sequential quarterly dropoffs.

“The IXCs' options are getting smaller and smaller — why would you want to be in this business?” said Gartner Dataquest analyst Ron Cowles.
With additional reporting by Glenn Bischoff and Donny Jackson in Chicago and Lynnette Luna in Denver.