Few wireless companies over the past five years have provided more fodder for news than Sprint Nextel, a time frame that is also the length in which its current leader, Dan Hesse, has been at the helm. Over those 1,800-plus days, Sprint Nextel has been a harbinger of feast or famine that has kept many entertained.
A root cause for much of that vacillation, according to Hesse, has been the financial straits the carrier has been operating under, which almost led to a bankruptcy filing in 2008.
“Bankruptcy was a very real risk for the company, and we had to take very dramatic action to avoid it,” Hesse said in an interview with RCR Wireless News.
Those dramatic actions included the formation of a partnership with Craig McCaw’s Clearwire operations that also included billions of dollars of investments from the likes of Intel, Google and Comcast. Those funds were combined with the 2.5 GHz spectrum holdings controlled by Clearwire and Sprint Nextel – gleaned from its $35 billion acquisition of Nextel Communications – to form a “new” Clearwire tasked with building out a WiMAX network in order to provide mobile broadband services.
Hesse noted that the venture built on Sprint Nextel’s previous Xohm plans to build out its own WiMAX network that the carrier realized it lacked the funds to accomplish on its own.
“My decision was to whether or not we just mothballed this thing, because we were broke, we were dead broke,” Hesse explained. “And 2008 was a year of avoiding bankruptcy. … So we could not afford to build out a 4G network and keep the existing 4G project going unless we had another solution. So we came up with the partnership with Clearwire. This allowed us to have a nationwide 2.5 GHz footprint and was the lasting legacy from that decision.”
The initial surge surrounding the Clearwire plan quickly soured as early investors refused to further invest and eventually abandoned the partnership, which in turn left the venture short on funds to expand services beyond coverage of roughly 40% of the country’s population. With nowhere to turn, Clearwire this week finally gave in to Sprint Nextel’s $2.2 billion advances and accepted a buyout offer.
Hesse noted that the acquisition of Clearwire was essential for the carrier in order to control its own next-generation destiny as well as would not have been possible, nor will go through, without the $20 billion offer currently on the table by Japan’s Softbank to acquire a 70% stake in Sprint Nextel.
Hesse did add that if Clearwire had not accepted its offer, Sprint Nextel was more than ready to find the spectrum resources it needs somewhere else.
“If it was not with Clearwire, we would have accomplished it another way,” Hesse said. “Our first choice was Clearwire, and Clearwire was always our first choice. But, if we could not have gotten this deal done we would have gone in another direction.”
In addition to the Clearwire situation, Hesse also inherited Sprint Nextel’s ongoing troubles in trying to integrate its iDEN operations. What was once an 18-million strong customer base with the industry’s lowest churn and highest average revenue per user, quickly became an albatross around the neck of the carrier as those customers fled. Sprint Nextel tried to stymie the exodus through different initiatives, including prepaid, but eventually decided to cut the cord on the legacy technology.
While hindsight might claim that the Nextel deal was an unmitigated disaster, Sprint did manage to scrape out a nice chunk of 800 MHz spectrum from the operations that are set to support CDMA voice and potentially LTE data services, as well as the 2.5 GHz spectrum it hopes to unify through the Clearwire deal.
Financial overhang
In speaking with Hesse, it’s apparent that financial uncertainty has been a cloud hanging over just about every decision Sprint Nextel has made over the past five years. Hesse explained that the first year of his tenure was basically reduced to surviving quarter-by-quarter as the carrier’s financial situation sank.
“We could have turned the company around much quicker if we didn’t have this tremendous financial pressure quarter after quarter,” Hesse said. “For example, we wanted to move some of our stores to better locations, but we just couldn’t afford to do that. We had lots of opportunities to buy spectrum or to form partnerships, but we had no money. It has been a big constraint on the company.”
With no money available to sink into operations, Sprint Nextel had to look for inexpensive ways in which to stabilize operations. This led to the carrier’s focus on improving customer service, which had taken a significant hit in the years leading up to Hesse’s appointment as CEO.
“We decided to focus on brand, customer experience and generate cash flow,” Hesse noted. “We focused relentlessly on calls placed into customer care. We knew if we fixed this issue that we could save money. We closed over 30 call centers over the past five years and we provide much better service now. We reduced calls to care by more than half by eliminating pain points. What created the problems for Sprint was that we let customer experience deteriorate. You can attack this with very little investment.”
With finances beginning to stabilize in 2009, and strengthening into early 2011, Hesse noted that the carrier felt it was in a position to start making decisions that might tax some of that momentum, but that were necessary in order to further stabilize the carrier’s fortunes going forward. Those decisions included its Network Vision program, and later in 2011, its ability to begin offering Apple’s iconic iPhone device.
The $5 billion Network Vision program would see the carrier consolidate its dual-network operations (CDMA and iDEN) onto a single platform (CDMA) and allow for the rollout of LTE services. (This wealth of investment made even more necessary as the carrier had dramatically cut capital expenditures over previous years due to budget constraints.) As for the launch of the iPhone, Hesse claimed that being “allowed” to carry that device by Apple would sew up a remaining customer complaint, though the initial investment was substantial.
“Investors were worried that we were taking on too much risk,” Hesse explained. “But, we felt we had to do this. Our goal was not to just survive, but too excel. If we did not have a first-class network we couldn’t excel. If we didn’t have the iPhone we couldn’t excel. We were going to add risk to the balance sheet, but if we executed with discipline in 2012 we would show the street we could do all of these things to win and survive.”
Hesse added that through the first half of this year, Sprint Nextel showed it could indeed survive as its stock price managed to shirk equity concerns and post strong growth. This in turn caught the attention of Softbank, which moved forward with its investment plan that, if approved, would seem to finally lift the cloud of financial uncertainty and could pave the way for clearer weather for Sprint Nextel moving forward.
“Now we can be set up as a true viable No. 3 with control of its own destiny,” Hesse added.
Hesse has an extensive history in the telecom space, including stints at AT&T Wireless where he spearheaded the launch of the carrier’s breakthrough Digital One Rate plan in 1998. Prior to joining Sprint Nextel in late 2007, Hesse was CEO at Embarq, which was a wireline spin-off from Sprint Nextel.
Asked why he decided to take over Sprint Nextel at a time when it appeared the carrier was just beginning a dramatic spiral, Hesse said that he was looking for a challenge and that being from the Kansas City area that Sprint Nextel calls home, he felt that the community would be adversely impacted should one of its largest corporations fail.
While predicting Sprint Nextel’s future has never been for the weak, perhaps news from the past couple of months have finally set the carrier on a more stable path.
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