Sprint Nextel Watch: A Twelve Month Strategic Prognosis (with correction)

Implications: Sprint's current state of the business and challenges combined with externalities will determine the fate of Sprint over the next twelve months.

Analysis:

Correction (June 4, 2008): In the analysis below, the first claim in the "selected Pros" section is wrong.  In taking notes on the Sprint 1Q08 earnings call, I mistakenly heard CEO Dan Hesse say that an iDEN / WiMAX Blackberry device would be delivered this year.  In reality, Hesse said am iDEN / WiFi Blackberry device would be delivered later this year.  This mistake was pointed out in a comment by "idenguy" on Seeking Alpha.  I do not know who "idenguy" is, but I thank him for the correction.  The implications of my mistake on my analysis is that, while iDEN might indeed prove to be a logical underpinning voice play for Clearwire in a bundled spin from Sprint, the product or handset foundation supporting such a scenario remains to be built.  I still believe that a long term future of iDEN under Sprint ownership will be hard to justify, given the inability of iDEN technology to evolve to any form of broadband.

Additional Related Links:

UPDATE 4-Sprint's loss widens, sees slow improvement
Sprint customer satisfaction keeps dropping
D-Block comments begin rolling in

Analysis

It's been a few weeks since Sprint Nextel's 1Q08 earnings call and there seems to be a lull in any dramatic or negative news announcements.  Sprint's debt has been rated junk, but that news was expected.  So, without recapping all recent events (e.g., Clearwire venture), now might be a good time to take a breath and list some pros, cons, and facts that might provide some insights to the future. 

First, some selected Pros: 

1. WiMAX / iDEN Blackberry device to be delivered later this year:  If there were doubts iDEN were to live, the announcement of this device, along with increased media spending for the iDEN network, and CEO Dan Hesse's 1Q statements supporting iDEN, add more to the credibility that:  a) iDEN will not be shut down, b) iDEN customers will have a broadband solution, c) the unspoken strategy of having a forced migration of iDEN subscribers to CDMA is less likely, d) a spin of the Nextel / iDEN network to the Clearwire venture is more plausible with a dual mode WiMAX device on the roadmap.
2. ARPU at $56:  I'm putting this in the Pro column, because it's the highest among the major carriers (VZ:  $51.40, AT&T: $50.18, T-Mobile:  $55, Alltel:  $53.64) and is testimony to the strength of CDMA data ARPU, which is $14.
3. Management:  Although additional changes should have been made at the senior level and below, not to mention at least one more person at the board level, overall, there are positive changes afoot.

Now for some selected Cons: 

1. and 2.  Churn and Customer Satisfaction:  Both remain persistently poor, especially customer sat.  Despite Sprint's claims of improvement in customer sat during the quarter, at least one index places Sprint substantially below the competition.  Although so many factors influence churn, such as network reliability, RF coverage, features, handsets, apps, etc., the customer experience with care and at the retail level is one where Sprint appears to continue to disappoint in a big way.  The customer experience is the single biggest hurdle to overcome in Sprint's turnaround and is the primary reason for continued poor churn and net add performance, despite having finally gotten a handle on network and billing issues. 

Now for some selected factoids (mostly from the earnings call):

1. iDEN has 3 million public safety customers, as of 1Q08
2. iDEN postpaid subscribers are 12.3 million, 15.7 million including Boost pre-paid, with an additional 1.6 million Power Source subs (these are dual mode iDEN PTT / CDMA voice and data phones).  The iDEN network would appear to have quite a ways to go before it gets below the 10 million sub mark.
3. iDEN ARPU is below $56; CDMA ARPU  is above $56.
4. D-Block Revision process is just under way (this was not on the earnings call)

Based in part on the above, some linear logic, prognostications and bold predictions:

• As stated above, the foundation continues to be built to support a potential iDEN spin to the Clearwire WiMAX entity.
• It will take several more months for Sprint customer sat and churn to stabilize, perhaps 4Q08.  If there's no improvement by then, expect continued deteriorating performance and, if no spin off of iDEN, cash problems.  
• Wide commercial rollout of Qchat and interoperability with the iDEN base starts late 4Q08. 
• A Nextel spin (or semi-spin into a JV, similar to the Clearwire structure), if it happens, will be late 4Q08 / 1Q09.  If the iDEN subscriber base and overall customer sat has stabilized, then Sprint will be in a relative position of strength.  If not, then an iDEN spin will be a distress sale.  The timing of late '08 / early '09 also presumes that by that time, D Block rule making concludes and settles.  There will probably be no iDEN spin to support any public safety purpose until at least the D Block rules are finalized or the block is re-auctioned.  Any potential suitor interested in iDEN for public safety that might in any way be related to Cyren Call would be would never jeopardize or complicate the D Block license process with a premature bid for Nextel, unless blessed by the FCC.

Conclusion
Sprint has some positive underlying strengths, but the road to recovery will be long and take many more months.  The moment when a number of factors that will determine Sprint's future structure will come together nine to twelve months from now, as Sprint's ability to function acceptably with the most basic level of customer care as a wireless provider will reach its moment of truth.  Externalities comprised of suitors  that will finally be ready to make a move for either piece parts or the whole of Sprint will drive this ongoing Sprint saga to resolution.