What’s next for Sprint Nextel?: With plenty of issues on its plate, No. 3 carrier has work cut out

SPRINT NEXTEL CORP. JUST CAN’T get itself out of the spotlight. And if any of the tier-one carriers needs a time out right now, Sprint Nextel is certainly the most likely candidate.
The company’s stock continued falling to record lows after it reported massive customer losses, sagging financial performance and said it expected even more customers to leave this year. The No. 3 carrier’s stock hit a new low of $5.85 last week and the company’s market cap is now below $17 billion, a mere 24% of the $70 billion it enjoyed following Sprint Corp.’s 2005 acquisition of Nextel Communications Inc.
Wall Street jitters have brought on a flurry of speculation and rumors. By week’s end there was word that Sprint Nextel might be looking to sell off its Nextel iDEN or Xohm WiMAX businesses all while rumors surfaced hinting that German telecom giant Deutsche Telekom AG or Mexican telecommunications magnate Carlos Slim might be looking to acquire the company.
Changes needed
Acquisition chatter is to be expected when a company’s value drops significantly while spinoffs
are typically viewed as a way for a struggling outfit to cut costs as it tries to recover. One thing most analysts and financial firms agree on is that the company needs to make drastic changes sooner rather than later.
Still, some ideas are better received than others.
Keith Mallinson, an analyst at WiseHarbor, calls the possible sale of the company’s Nextel business the daftest of all. Mallinson believes the company’s more than 15 million iDEN customers are among its most valuable assets.
“They’ve made their bed and they have to lie in it,” Mallinson said.
To close down or sell off that business would be “suicidal,” Mallinson added. “It’s generating a substantial cash stream.”
Indeed, the company recently wrote down the bulk of Nextel’s value, but Mallinson points out that was more of an accounting issue than an admission the business is worthless.
“I think Sprint neglected its franchise too much,” Mallinson said, adding that it failed to put the right investment and commitment into the iDEN network, which supports the company’s popular push-to-talk service.
It’s unclear when the company plans to launch the service on its CDMA network and migrate iDEN customers over to that network.
“It’s not good having two technologies,” Mallinson said. “I would think that you would want to migrate as quickly as you can. Having two technologies – two networks – is inherently costly in terms of operations.”
PTT push
“What Sprint Nextel urgently needs to do is get this migration going to get this push-to-talk going on the CDMA network,” Mallinson said. “That in my mind should be a much higher priority.”
The company message seems to fall in line with that to some measure. It expects a 40% growth in push-to-talk services through the next three years.
With the bulk of U.S. push-to-talk customers on Sprint Nextel’s iDEN network, it’s been difficult for the other major carriers to compete.
“Push-to-talk is essentially an island in the United States of Sprint Nextel,” Mallinson said.
WiMAX to the max
Philip Solis, an analyst at ABI Research, said Sprint Nextel needs to move forward full steam ahead on its WiMAX plans. The carrier has an incredible opportunity to be first to market with a next-generation network, he said.
Solis argues that the company needs to put resources and investment into its iDEN and burgeoning WiMAX network simultaneously.
“You have to keep moving forward. You have to,” he said, adding that while iDEN is an existing business it’s also a “slowly dying business.”
“It might make sense (to focus on iDEN) in the short run, but you can’t play quarter to quarter,” Solis said.
The company’s WiMAX business is in a “very good position, it’s just that the rest of the company is in a bad state,” he added. “If they did sell it off I think the Xohm company would work closely with Sprint anyway.”
An idea not shared by Mallinson.
“There’s a major difference between the iDEN business and the WiMAX business. WiMAX is a startup,” Mallinson said. “If you spun the iDEN business off, then what do you do? Do you just drive it into the ground?”
Calling WiMAX technology an “unproven thing for the future that would be a sort of nice thing to have,” Mallinson said he’s still not convinced about its chances for success.
“WiMAX is all cost and hope,” he said. “You have to get the house in order first . I think they overstepped the line on that. The 4G thing is just not that pressing.”
The company has already committed a swath of spectrum to the Xohm venture, and should now be looking to wind down to a minority ownership position on Xohm, he said.
“They should be reducing the number of networks that they have, not increasing them,” Mallinson concludes.
Sprint Nextel is expected to make some announcements about its WiMAX plans in Las Vegas at CTIA Wireless 2008 next month. The carrier has said it will commercially launch its first commercial WiMAX markets in April.