Headaches pile up for Sprint Nextel

Apr 1, 2008 12:00 PM, By Donny Jackson

In addition to continued subscriber losses on its iDEN network, layoffs and a rapidly falling stock price, Sprint Nextel last month revealed that 800 MHz rebanding almost certainly will cost more than the $2.8 billion the company is scheduled to pay under the FCC's original 2004 order.

In its 10-K SEC filing, the carrier stated it already has spent $1.1 billion to pay for rebanding through the end of 2007 and projected its total cost for the massive project to be between $2.7 billion and $3.4 billion in a best-case scenario. Sprint Nextel is obligated to pay at least $2.8 billion in cash to fund rebanding, but most officials expected the amount to be less, with the difference going into the U.S. Treasury.

But Sprint Nextel said it is “unlikely” to make such a payment to the U.S. Treasury in its first public projection on the matter. In addition, the company revealed that its rebanding costs would increase considerably if it loses its appeal of an FCC decision that requires the carrier to vacate its 800 MHz interleaved spectrum in June — something Sprint Nextel believed it was not required to do until rebanding is finished, which now likely won't occur until 2012 or later. Oral arguments in the case began March 18.

While some industry analysts have expressed the belief that the FCC decision will be overturned or a settlement reached, wireless industry consultant Andrew Seybold was not as hopeful.

“Unless they know something I don't, I'm not sure they have a shot at that,” Seybold said of Sprint Nextel's appeal.

If the appeals court does not agree with Sprint Nextel that the FCC inappropriately changed the terms of its rebanding order, Sprint Nextel believes its rebanding costs “could exceed $3.4 billion by an amount that would likely be material,” according to the company's 10-K filing.

Seybold said a “material” amount for Sprint Nextel would be at least an additional $1 billion. Roger Entner, vice president of communications for IAG Research, said a material increase “possibly” would represent a doubling of the $2.8 billion cash obligation for rebanding.

The rebanding revelations were just one of many discouraging pieces of news released by Sprint Nextel during the past month. The company announced plans to reduce its work force by 4000 people and reported continued losses of post-paid subscribers on its iDEN network — 683,000 during the fourth quarter of 2007 and a projected 1.2 million during the first quarter this year. In the past year, the number of subscribers on Sprint Nextel's iDEN network has decreased by 25%.

In his first quarterly conference call as Sprint Nextel CEO on Feb. 28, Dan Hesse called the iDEN subscriber losses “unacceptable” and stated that the carrier's first priority is to reduce its churn rate. However, Hesse acknowledged that the projected 1.2 million reduction in iDEN subscriber losses “is unlikely to improve in the second quarter” despite the fact that the network is performing well, in part because it has fewer customers.

Hesse said Sprint Nextel hopes to revitalize the iDEN customer base by improving customer care and introducing a new handset from Motorola and an iDEN/Wi-Fi dual-mode Blackberry device.

On the CDMA side, Sprint Nextel announced that it is beta-testing its Qchat push-to-talk technology, which is expected to be rolled out commercially during the second quarter in the first of 20 markets.

But the carrier's 10-K report also revealed a risk associated with that service. Qchat was developed by Qualcomm, which is embroiled in litigation with Broadcom regarding intellectual-property rights on several items, including some that are used in the Qchat technology. If Qualcomm does not resolve the dispute by the end of January 2009, it would no longer be allowed to license Qchat.

A similar scenario played out last year when a decision in favor of Broadcom prevented Qualcomm from selling its new chipsets in the U.S. Verizon Wireless began selling phones with the chipsets last year after reaching a separate royalty agreement with Broadcom.

“Verizon cut their own deal with Broadcom, but that cost them a lot of money,” Seybold said. “I don't know that [Sprint Nextel is] financially in a position to do that, but you do what you have to do, and Qchat is vitally important to them.”

Hesse said Sprint Nextel officials believe they can lead a turnaround of the company but acknowledge that it would take “several quarters” before that occurs.

“To be perfectly frank, the issues that we face are more difficult than what I expected to find,” Hesse said during the quarterly conference call.

Such sentiments have not been received well on the stock market, where Sprint Nextel's per-share price has decreased more than 70% since June 2007.

Industry speculation regarding the company's future has been rampant, with rumors focusing on the possibility of Sprint Nextel spinning off its iDEN network assets or the company being bought by one of several companies that might want to enhance their wireless service offerings in the U.S.