Research
Publication Date: 11 May 2007 ID Number: G00148185
© 2007 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
The Future of Sprint's Fixed-Line Business
Eric Paulak
Sprint has so de-emphasized the fixed-line portion of its business in the way it sells, funds and markets the services that we believe it will turn it into a cash generator or sell off at least a portion of it. As a result, enterprises must re-evaluate how they should use Sprint's fixed-line services going forward. However, Sprint should still be considered for all its wireless services.
Key Findings
• To increase revenue, Sprint is focusing on its largest business customers and those with expanding mobility needs, instead of trying to compete head-to-head with AT&T and Verizon.
• We expect further cost-cutting as Sprint struggles to maintain margins, market share and shrinking revenue in its fixed-line business. It will instead invest in new WiMAX wireless services, in the EVDO network, and in maintaining its established wireless networks, including the iDEN network.
• Sprint's overall investments in its fixed-line business have fallen behind the market, and it is unlikely to catch up without acquiring a competitor — although we do not think this is likely.
Recommendations
• Large enterprises should not consider Sprint for stand-alone, international services, but rather only as part of a domestic deal.
• Existing Sprint wireline customers should not leave Sprint. Instead, they should add a second provider to act as a backup, as we recommended when other carriers have gone through significant transitions.
• Non-Sprint wireline customers should still consider Sprint as a leading provider of IP data services, but should also include a backup provider.
• Because of the difficulties in changing from one managed service provider to another, large enterprises should not consider Sprint's managed fixed-line services at this time.
• All enterprises should consider Sprint for its mobility services, along with AT&T and Verizon.
WHAT YOU NEED TO KNOW
Because of its single-minded focus on wireless and mobility services, we believe that Sprint will sell off at least a portion of its fixed-line services by 2009. Even if it does not, it has still underinvested in fixed-voice, managed and international services, and is behind its competitors.
Sprint is not likely to catch up to them during the next two years without a significant acquisition, which we think is extremely unlikely given its focus on wireless. Therefore, enterprises should only use Sprint's fixed-line services tactically or as a backup to other providers.
STRATEGIC PLANNING ASSUMPTION(S)
By 2009, Sprint will sell off a least a portion of its consumer and/or business fixed-line network service business (0.7 probability).
ANALYSIS
Ever since the breakup of the Bell System in 1984, the U.S. long-distance market has been dominated by three companies: AT&T, with its declining market share, and MCI and Sprint as its principal competitors. Even with the wave of mergers, AT&T, Verizon Business (MCI's successor) and Sprint were still considered the three leading, nationwide providers.
However, this assumption is no longer valid. Qwest has more fixed-business revenue than Sprint. Companies with more than $1 billion in business service revenue, and that are growing faster, include Level 3, Global Crossing and XO Communications. Because of its overriding focus on wireless services, Sprint is no longer one of the top-three fixed-service providers. We also believe that it will sell off all or part of its fixed-service business during the next two years.
Wireless Focus
Sprint earned $41 billion in 2006 revenue, and 86% of that amount came from wireless voice and data services; 14% comes from the fixed-line side. Sprint's wireless services also accounted for most of the company's profits, with operating margins of 10.1% for wireless vs. 6.7% for wireline. With these numbers, it makes perfect business sense for Sprint to focus on its wireless division.
As a result, wireless also dominated 83% of capital expenditures in 2006, and we expect that this number could be as high as 93% in 2007 as Sprint continues to support the Nextel iDEN network, further roll out its Evolution Data Optimized services, and launch its mobile WiMAX services.
Sprint's wireless business is not perfect, however. The company struggled with wireless customer churn in 2006 and had the lowest net add-ons of the top four carriers. At the same time, a significant percentage of its new wireless subscribers aren't direct Sprint subscribers; rather, they are coming in through wholesale deals with Virgin and Qwest. Sprint is still a leader, however, with its managed mobile application services. Many of its new investments are designed to shore up and grow these services.
Wall Street and Investor Pressure
Sprint is no longer classified as an integrated communications provider by most Wall Street analysts. It is strictly viewed as a wireless service provider. As such, it has still underperformed on its wireless services compared with those of integrated communications providers, such as Verizon and AT&T. This has led to increased pressure on Sprint to improve such areas as new subscriber additions and the increasing average revenue per user.
Because of this increased pressure, several Wall Street firms have said that Sprint must invest more in its wireless operations and, in several cases, Sprint investors have called for it to sell off its fixed-line business to do that. We do not believe this pressure will decrease until Sprint shows better performance in its wireless services, compared with its competitors. As a result, we do not expect the investment focus to shift from wireless to wireline during the next two years.
Lack of Wireline Focus
Sprint has said that it only wants to target two types of customers: companies that need mobility services and companies that need strategic services. Sprint has given mixed messages as to what the latter category really is, ranging from IP data-only customers to big revenue customers.
Sprint is at risk of losing revenue from its biggest customer — the U.S. government — because Sprint lost the Networx Universal Contract bid. We do not think this lack of wireline focus is new.
During the past five years, Gartner estimates that Sprint only spent about 7% of its revenue on fixed-line capex, whereas its competitors spent between 11.2% and 17.4%, and the average is between 10% and 12%. We consider 7% to only be at a level to sustain the business, but not to competitively add new services and grow it. Sprint has increased funding during the past year, but it is still behind overall. Below are specific views on Sprint's position in different wireline areas.
• Legacy services — Sprint has said that it has no interest in selling or investing in standalone voice offerings. As a result, it sold off its conferencing business in 2006. Sprint has also said that it is no longer actively marketing consumer voice services. These decisions, along with strong price competition, led to a 23% decrease in retail voice revenue in 2006. This means that Sprint's $1.4 billion in business voice revenue is at risk because it doesn't want to continue with legacy voice services, and it is not fully investing in new voice over IP (VoIP) alternatives. On the data side, Sprint has declared year-end 2008 to be the end date for its legacy frame relay and asynchronous transfer mode services. This again puts $906 million in revenue at risk because Sprint will force most customers to migrate off these networks during the next year and a half. Our concern is that with the forced shift to the IP data service, companies that are late to migrate off their legacy services could see a deterioration in support and likely price increases.
• International services — At one time, Sprint had a significant global wireline network, and where it did not have services, it partnered with Deutsche Telekom and France Telecom in the Global One venture. With the demise of that venture, most of Sprint's capabilities ended up with what is now Orange Business. As a result, 99% of Sprint's assets are in the U.S., accounting for 95% of Sprint's revenue. Sprint has expanded its service-level agreement coverage for international services via partners, such as Orange Business, NTT and Rogers Communications, but aside from that, it has limited plans to expand internationally. We have seen with Sprint and other carriers that the more you rely on one-off partnerships, the harder it is to manage the services, and that is the reason for our concerns about Sprint's global offerings.
• New IP offerings — When the world's carriers were rolling out their Multiprotocol Label Switching (MPLS) services, Sprint was offering a Level 2 Tunneling Protocol as its primary IP data service. Sprint corrected that error with its own MPLS service and it has continued to grow, reaching 28% year-over-year growth in the first quarter of 2007. This is mainly because Sprint's MPLS offering is more flexible and typically less expensive than many of its competitors' offerings. Sprint's data portfolios currently lack Ethernet capabilities, but the company plans to partner with cable companies to offer Ethernet services in 25 U.S. markets by year-end 2007. Thus far, the cable companies have not been strong Ethernet providers.
On the voice service side, Sprint is behind the market. AT&T and other carriers have rolled out their toll-free VoIP services, and have had IP and SIP trunking services; but Sprint has not even started investing in inbound VoIP, and will only have the trunking services in thirdquarter 2007 and fourth-quarter 2007.
• Managed services — Sprint has been trying to expand its managed-service offerings. We estimate that about 20% of Sprint's data services are sold as managed services, compared with 32% for AT&T, 12% for Qwest and 40% for Verizon Business. So far, however, most of Sprint's efforts have been tied to its mobile application offerings, not the traditional voice and data areas.
Sprint could correct some of these deficiencies by acquiring a competitor, but that is unlikely due to its focus on wireless services and Wall Street's pressure to focus on wireless. As a result, any improvements will have to come from new or expanded partnerships.
What Is Likely to Happen
Because of its single-minded focus on wireless and the increased Wall Street pressure, by 2009, Sprint will sell off its consumer and/or business fixed-line network service business (0.7 probability). There is some speculation by Wall Street analysts and industry pundits that Sprint will try to sell off its fixed-line network as well; however, we do not believe this will happen for two reasons:
• There is too much backbone capacity. The demand is in metropolitan networks, and Sprint has none. Therefore, there is not enough value in its network.
• Sprint gets a low cost for backhauling its wireless traffic over the fixed-line network. Although it could get this capability from another provider, it would not have the owner's economics of the network, and as wireless data use increases, backhaul demand and costs will also increase.
The list of possible buyers of Sprint's fixed-line business is large. The most probable buyers and the impact of such a deal, include:
• Investment firm — If Sprint does not try to sell off its fixed-line assets, then a large investment firm is likely to buy the company and split it up by selling pieces to some of the buyers below.
• Cablecos — Sprint already makes about $1.8 billion in wholesaling voice services — a significant amount of that coming from cable companies (cablecos), such as Comcast and Cox Communications. The cablecos could benefit from growing their consumer customer bases and lowering the cost of their voice services. Many cablecos have been trying to expand their business services; therefore, buying Sprint could be beneficial in this area. If a cableco buys Sprint's business services, be cautious when choosing it, because cabelcos mainly focus on local fiber offerings, not nationwide network services.
There is also the possibility that a cable company could buy all of Sprint to gain access to the wireless services. This is similar to the reason why AT&T bought BellSouth — to gain full ownership of Cingular.
• Second-tier carriers — Any carrier, from Qwest to XO Communications to Level 3, could benefit from expanding its customer bases and gaining greater economies. Level 3 (especially) has been expanding its retail customer base through acquisitions during the past year. Any one of these companies could turn itself into the leading competitor of AT&T and Verizon with such a deal, and enterprises should consider what a potential new company for fixed-line services might be like.
If Sprint exits the fixed-line business, we expect it to offer its WiMAX solutions as an alternative wherever it can. Where WiMAX does not meet networking requirements, Sprint will partner with other fixed-line providers (such as the cablecos with their Ethernet services, and system integrators) to offer a bundled solution for companies that want more than Sprint's wireless offerings.
Sprint says that it is committed to its fixed-line business and has no plans to sell it off. Sprint points to its IP data services and some plans for expanded marketing as proof of that commitment. However, we believe that external and internal forces will make that commitment increasingly difficult to maintain. Even if Sprint does not sell off its fixed-line services, because it has underfunded its business and fallen behind its competitors, we do not believe it will catch up without major changes.
REGIONAL HEADQUARTERS
Corporate Headquarters
56 Top Gallant Road
Stamford, CT 06902-7700
U.S.A.
+1 203 964 0096
European Headquarters
Tamesis
The Glanty
Egham
Surrey, TW20 9AW
UNITED KINGDOM
+44 1784 431611
Asia/Pacific Headquarters
Gartner Australasia Pty. Ltd.
Level 9, 141 Walker Street
North Sydney
New South Wales 2060
AUSTRALIA
+61 2 9459 4600
Japan Headquarters
Gartner Japan Ltd.
Aobadai Hills, 6F
7-7, Aobadai, 4-chome
Meguro-ku, Tokyo 153-0042
JAPAN
+81 3 3481 3670
Latin America Headquarters
Gartner do Brazil
Av. das Nações Unidas, 12551
9° andar—World Trade Center
04578-903—São Paulo SP
BRAZIL
+55 11 3443 1509