Sprint Nextel Corporation Analysis

Sprint Nextel Corporation Analysis Sprint Nextel Corporation (Sprint Nextel) is a telecommunications company that offers a wide range of wireless and wire line communications products and services for individuals, businesses, and the government. The companys retail brands include: Sprint, Boost Mobile, Nextel, Common Cents Mobile, Virgin Mobile USA, and Assurance Wireless that run on Sprints networks that utilize code division multiple access (CDMA), integrated Digital Enhanced Network (iDEN), or internet protocol (IP) technologies. Sprint Nextel has made a device that can operate on both of its 3G and 4G networks, and Sprint also resells the Worldwide Interoperability for Microwave Access (WiMAX), fourth generation (4G) wireless services CLEAR which is provided by Clearwire Corporation. The Company was founded back in 1899 by Cleyson Brown under the name Dillo-Brown Telephone Company in Abilene, Kansas. Brown changed the company name from Dillo-Brown Telephone Company to United Utilities, in 1938 after the company filed for bankruptcy. Then changed again to United Telecommunications (United Telecom) in 1972, and Sprint in 1989  [1]  . The firm grew steadily during the 1970s and became the nations largest independent local telephone provider. In the 1980s, the company entered the long distance voice market with the worlds third largest commercial packet data X.25 data service, Uninet, and completed the first nationwide 100% digital fiber-optic network to its customers  [2]  . The company began offering cellular telephone services under the name Telespectrum, and sold it to Centel in 1988. However, during the 1990s, Sprint acquired Centel and made its way back to the wireless market. The company also started offering commercial Internet access, which made Spri nt a unique company that provides local, wireless and long distance services, and offers the first completed nationwide 100% digital PCS wireless network. Sprint established a global IP network offering 10 gigabit per second transatlantic IP backbone in 2001 and completed a nationwide 3G network in 2002. The company was finally renamed Sprint Nextel in 2005 by purchasing the wireless communication company Nextel. Recently, Newsweek has ranked Sprint Nextel as No. 6 in its Green Rankings.  [3]  As the first US based telecommunications company that has announced a target for reducing its absolute greenhouse-gas emissions, Sprint Nextels goal is to reduce the companys emissions by 15% within 10 years starting in 2007. They plan to achieve this though actions of using renewable energy sources to replace the backup generators at its cell towers and improving energy efficiency within its networks. Sprint has also launched a product recycling program that allows its customers to return the old cell phones, batteries to Sprint for free with the postage paid label. As of 2009, Sprint has recycled nearly half of its products and its goal is to recycle 99%. With 40,000 employees, Sprint Nextel is headquartered in Overland Park, Kansas; the company offers services in all 50 states, Puerto Rico and the US Virgin Islands under the Sprint corporate brand. Its Nextel Worldwide service is the largest all-digital wireless coverage in the US and operates in more than 70 countries. With more than 48.2 million customers served, Sprint Nextel is the third largest wireless telecommunication network in US, compared to Verizon Wirelesses 93.2 million and ATTs 92.8 million. In this highly competitive industry, Sprint Nextel has experienced a significant net loss of its post-paid subscribers on iDEN and CDMA wireless networks since mid-2006, which represents about 70% of its total consolidated segment earnings in the in the market. Not until the June quarter of this year did Sprint finally turn positive earnings, mainly due to the high demand for HTC EVO 4G cell phones. Its losing its existing customers mostly because of the fact the customers were not happy with the prices of the phones that Sprint offered to them, compared to its new subscribers special offers on the phone prices with the same contracts signed. Therefore, even though Sprints subscriber base has grown 110% since 2002, its market share has barely increased  [4]  . According to the Value Lines report, Sprint Nextels net operating revenues had significant declines in financial year (FY) ends December in 2008 from $40.1 million in FY 2007 to $35.6 million and continued declined to $32.2 million in FY 2009. As of FY 2009, Sprints revenues per share has decreased from $14.11 to $10.85; earnings per share has decreased from $.04 to -$.84; in common shares outstanding and has increased from 2,845 million shares to 2,973 million of shares; net profit has decreased from $240 million to a net loss of -$2,436 million since 2007  [5]  . With current companys financial strength rate of C++, which is marginal, the company is in a vulnerable status. According to Yahoo Finance, the company has a strong balance sheet with $20.3 billion in long term debt and $4.9 billion in cash and cash equivalents as of December 2009, which means the companys free cash flow is favorable. From Sprint Nextels 2009 annual report, it shows a decline of post paid average revenue per user (ARPU) from $56 to $ 55 and prepaid ARPU from $34 to $28 in this year due to the lower usage  [6]  . The company has been effectively reduced the post paid churn from 2.05% to 1.85% during last year and is on the right track of increasing the companys operating performance. II. External Analysis Sprint Nextel is a firm that finds itself in an industry where there is few, but very strong competitors. Currently Sprint is the third leading cell phone service provider in the United States. They currently maintain around 12.1% of the cellular services industry market, falling short of ATT and Verizon who maintain 25% and 31.2% market shares, respectively. The only other true competitor to Sprint is T-mobile, who maintains around a 12% share of the U.S. market as well  [7]  . The general environment for the telecommunications industry is extremely competitive. Many companies are looking to expand their resources and market share through mergers and acquisitions with smaller wireless providers that provide certain niches in the market. Some of the most recent mergers and acquisitions within the past couple of years include Verizons purchase of Alltel Wireless in 2008 for $28 billion, ATTs acquisition of Wayport (a network and applications management company that provides back-o ffice management for Wi-Fi hot spots) for $275 million in 2008, and Sprint disposed of its WiMax division in 2008 to form a $14.5 billion dollar mobile broadband company called Clearwire  [8]  . While competition drives these mergers and acquisitions, it is easy to concur that only the companies with enough capital to acquire the latest technologies are the ones who survive in this market. The overall structure of this industry can be easily broken down through the use of Porters Five Forces Model. The first part of Porters model explains the threat of new entrants into the market. Threat of new entrants is further broken down into analysis of economies of scale, product differentiation, capital requirements, switching costs, and distribution channels. While economies of scale mainly pertain to manufacturing industries, the concept can be applied to the main competitors in the market (Verizon, ATT, Sprint, and T-mobile). These four companies account for nearly 80% of the U.S. market  [9]  . Their high costs of RD, customer service, and maintenance of superior network quality can be spread out over millions of service plans. This allows each of these firms to attain very competitive pricing for service plans that non-economies of scale would not be able to obtain. The scope of product differentiation within the telecommunications industry is somewhat strong today, h owever it is weakening with time. Product differentiation derives from contracts made with electronic companies to exclusively sell certain phones through specific service providers. These contracts are usually made exclusively to the service providers with the greatest market share and best network, therefore decreasing the threat of new entrants even more. Capital requirements to start a telecommunications business are incredibly high due to the cost of setting up, maintaining, and purchasing the rights to use a wireless service. The final portion of the threat of new entrants is further suppressed through the existence of high switching costs between service providers. Each of the four big companies attempt to maintain their market share by drafting long-term contracts with their customers. Customers are exposed to penalties and fees when exiting a contract with a service provider before the termination date is reached. The next step in Porters model of assessing the industry lies in the analysis of the bargaining power of suppliers and buyers. The suppliers in the telecommunications industry consist of the manufacturers of phones, switch board equipment, fiber optic cables, network equipment, and billing software makers. The bargaining power of these suppliers is relatively low in this industry due to the decline in demand for expanding such networks in the recent years  [10]  . In contrast to the bargaining power of suppliers, the bargaining power of buyers in the telecommunications industry has been increasing over the past few years. Buyers have the choice of which phones they would like to use and which service plans they want to go along with them. A recent example of the buyers power is Sprints new service plan for unlimited everything for $69.99. In fear of too many subscribers leaving their network, Verizon and ATT very quickly presented their customers with opportunities to purchase th e same kind of plans. The external analysis of the telecommunications industry can be further examined through the analysis of substitutes present within the industry. The threat of substitutes has been increasing as advances in technology are continuously released. Customers are introduced with new ways to communicate with each other such as Facebook, Skype, and other forms of communication via the internet  [11]  . Companies are responding to the presence of substitutes through the acquisition of companies offering these forms of communication and incorporating the new communication tools into their own service plans. Porters model is finalized with the analysis of the intensity of rivalry among competitors within the industry. In the telecommunications industry intensity of competition is incredibly high. The competition is driven by economies of scale trying to minimize their costs in the most efficient manner while expanding their market shares at the same time. The competition is further enhanced by the large amount of fixed costs associated with operating a communications network and the exit barriers of the market being incredibly high  [12]  . The external analysis of the telecommunications industry can be summarized as a very profitable industry with high barriers to entry, low bargaining power of suppliers, high bargaining power of buyers, increasing substitutes, and intense competition. To the extent of whether this industry is attractive to enter is up to the judgment of the entrepreneur. Opportunities in foreign countries may be very attractive if business plans are modeled after those of U.S. companies. Sprint last year alone managed to generate $15.825 billion in profit. Industry wide revenues reached nearly $145 billion in 2009, with around 84% of the U.S. population as subscribers  [13]  . With numbers like these the industry becomes much more attractive, but of course those numbers are not achieved without each firm adhering to a set of key success factors that help each of them compete within a very competitive environment. The key success factors in the telecommunication environment are network quality, cus tomer service, brand name, partnerships, and convergence. Each of these is discussed in greater detail in part five (comparison to competition). III. Internal Analysis Many companies provide a clean cut mission statement on their website. They do this to ensure that they are able to provide a clear company direction for all shareholders and employees. Searching Sprints revamped website, some people will be surprised to find that there is no mission statement document. One has to look through all of their new technology offerings, advertising and re-organization to determine the companys current direction. Previous to the 2005 merger with Nextel, Sprint was by far the telecommunications market share leader. Five tumultuous years, lower customer service and missed opportunities, have led to top-to-bottom corporate reorganization, with new CEO Dan Hesse being introduced in 2007. His mission was to create a company that would again become an industry leader by introducing cutting edge technology and utilizing their network to increase customer satisfaction and lower customer churn. Their new advertising campaign do more, talk less, really embodies what they are trying to accomplish. They want to move beyond just offering simple phone service, and with the introduction of their new 4G technology and Overdrive; Sprint is striving to become an all in one telecommunications provider. When Dan Hesse took over Sprint was a falling industry giant, and falling hard. To stop the bleeding, he enacted certain business strategies to first stop the flow of customers to competitors and then others to win them back. The first major issue that the new regime addressed was the call in customer service. The major change in this strategy here was how the company evaluated is customer care employees. They changed the key metric that customer service employees were evaluated on, from call duration time to first call resolution. This new metric encouraged employees to spend the extra time to make sure the customers problems were solved the first time they called. According to Tom Patton, Sprint Senior Sourcing Manager, this was the key change in strategy that has led to Sprints revival. This was effective in decreasing their customer churn, but to win customers back Sprint has developed new products offering the latest technology. They were the first in the telecommunications mark et to offer 4G service, and have won favorable market share while their competitors attempt to catch up. And their latest strategy has been the purchase of pay as you go providers, such a Virgin Mobile and Boost Mobile, which gives Sprint access to a growing market. With many people facing hardships, their phone plans were changing from 2 year deals to monthly plans. Sprint was able to turn downturn in the economy into an opportunity for the company. After a discussion with Tom Patton, he and other Sprint Employees believe that their major core competency is their extensive network. Sprint has spent many millions of dollars over three decades to improve on and create one the most powerful telecommunications networks in the United States. This is one area that sets them apart from their competitors. Since Sprint has been around much longer than many of its competitors, they have had a huge head start in building up their network. Having this network was instrumental in the introduction of the 4G technology, and it also allows Sprint to find synergies with other new products. For example, Sprint is able to offer access to their network for their pay as you go customers. Concurrent with this competency is the relationship with suppliers that Sprint has been able to build over the years. This has allowed them to involve suppliers earlier in the RD stage and has led to cost savings and creative innovation on both sides. Another recent core competency for Sprint is their heavy investment in Sprints applied research and advanced technology laboratories. This facility has allowed Sprint to create the first all digital fiber optic networks, and has lead to other innovations in security, monitoring and wireless technologies  [14]  . Outside of their core competencies, Sprints major resource advantage is the brand name they have been able to create. They were one of the few telecommunication firms that have successfully made the transition from landline service to the wireless industry. Customers could have potentially been with the company for many decades. And being in business that long has allowed Sprint to gather some of the best talent in its employee base. Tom Patton and many of his co-workers have been in the telecommunications industry for twenty to thirty years. From the supply chain group to the RD engineers, the accumulation of experienced talent has proved to be a major resource advantage for Sprint. As a potential customer looks at Sprints long line of phones, they will notice that a popular choice is missing. The iPhone is a major factor that has led to the revival of Sprints major competitor ATT. After discussion with Tom Patton, apparently Sprints extensive network attracted Apple to approach them first with the offer to be the exclusive service provider for their new phone. At the time, the Sprint brass felt that the price of the unit was too high and customers would not be willing to pay that much for a phone. Declining that offer coupled with the other issues previously discussed, intensified Sprints fall in market share. Tom also expressed that an area of disadvantage for Sprint could be the morale of the companys workforce and reliability they believe the company has for them. In the restructuring phase many of thousands of jobs were cut across the board. In Tom Pattons supply chain division 55% of the people were let go. While these cuts were necessary for the longevity of the company, afterward there can be trust issues with the remaining workforce. While the effect of these cuts could take some time to hit the companys bottom line, its employees remain scared that they could be the next ones to be let go. As Sprint attempts to recapture much of the market that it once had, their new CEO has enacted business strategies that will once again make them a major force in the telecommunications industry. He has made major strides in that direction by utilizing their major core competencies while at the same time trimming the size of a bloated corporation. The unsuccessful merger with Nextel in 2005 could have left this company in bankruptcy. Trying to have a merger of equals left no one with clear decision authority, and the new company was left stagnant. The recent top- to- bottom reorganization of the corporation has led to a leaner more efficient company. The new Sprint is a company with a clear direction, even though they dont provide it in a neatly packaged mission statement. IV. Comparison to Competition The reorganization of Sprint has allowed for them to have a larger impact on the market than theyve had in recent years. By refocusing their business to work around their core competencies, moving forward Sprint will continue to be an industry leader. By focusing on Key Success Factors of the industry, it is easier to gain insight as to Sprints competitive position within the telecoms industry. One of the most important Key Success Factors for any telecommunications company is network quality. Sprints network is as extensive as any other in the country and has been able to achieve differentiation by being a first mover in bringing in new technologies to market such as the 4G (WiMax) network. Along the lines of network quality is the need for convergence, which is the ability for customers to access any data effortlessly without restrictions and to have the networks and devices to get that data. Sprints network capabilities match that of any competitor for the need of technological co nvergence as well as some of the most state of the art smart phones in the market. Being the first to put 4G to market has allowed for them to gain market share, but Verizon is right on their heels with a 4G network of their own coming out. The next Key Success Factor that is essential to the sustained growth in the telecoms industry is customer service. Although there is rarely direct contact between the customer and firm, mostly only during installation and service outages, it is a vital aspect and can define customer experience. The truth is that customers dont want to have to deal with customer service calling centers or have to go into the store, theyd rather have no problems at all or have their problem fixed immediately; which is another reason why Sprint changed their operating procedure for measuring customer service effectiveness from call duration to first call resolution. Sprints redefined customer service strategy is now on its way to leading Sprint to the top of the industry in terms of customer satisfaction. One area that Sprint is decently far behind the competition is in terms of retail presence and the ability to achieve economies of scale. The telecommunications industry is largely a fixed cost business, having to install and constantly maintain the network. The marginal cost of adding a new customer to the Sprint network is minimal compared to the revenue it generates, as a result, providers with large subscriber bases enjoy a significant advantage over the smaller ones  [15]  . Sprint is the third largest provider in terms of customers being served at 48.2 million while industry leaders Verizon and ATT serve 93.2 million and 92.8 million, respectively. Having nearly half of the customers served compared to the industry leaders shows that Sprint is a ways behind the competition in achieving the full effect of economies of scale. Sprint is also a ways behind VZW and ATT in terms of retail locations throughout the United States. Sprint owns and operates approximately 1,200 retail locations while VZW and ATT own and operate 2,200 and 2000+, respectively. Having less retail locations could be a potential cause for Sprints diminished market share, but they are in the process of increasing that number within the next couple years. The final Key Success Factor that Sprint is doing exceptionally well at is maintaining partnerships. Diversity of services [in] this industry makes it difficult for a service provider to be good at everything, so the crucial thing for a firm in this industry is to forge partnerships to be able to provide what customers need  [16]  . Sprints major partnerships include Cisco, IBM, Intel and Microsoft, which are all very successful and innovative companies to be partnered with. In comparison with the telecoms industry leader Verizon Wireless partnerships; Nortel, Cisco, Alcatel, Lucent and Polycom, Sprints competitive position in terms of partnerships is rather high. Leveraging these partnerships and carrying them on into the future will be a vital key for success for Sprint. In terms of financials, Sprint is pretty far behind ATT and VZW. According to Morningstar.com in 2009, Sprint recorded revenues of $32.2 billion while the competitions was much higher, Verizons revenue was $107.8 billion and ATTs was $123 billion. In comparison with industry leaders, Sprints gross margin in 2009, as a percentage, was approximately 10 percent lower. Sprint also suffered much harder through the worst of the recession between 2006 and 2009 where they posted negative net income in each of those years. During the same span of the recession both VZW and ATT were able to post net income above the line. The hardship for Sprint isnt over yet, according to Moringstar.com, they are projected to post another consecutive FY end with a loss for net income. While [Morningstar] believe Sprint holds a collection of valuable assets, [they] expect a rough ride over the next several quarters.  [17]  Sprint is on its way out of the red but there are still major changes that need to b e made to ensure Sprints spot atop the telecommunication industry. V. Recommendations for Strategy After further analysis, there are four ways in which the Sprint Nextel Corporation can improve their operation. The Sprint Nextel Corporations can improve their business and operations by continuing to develop a better quality customer service, offer the most cutting edge technology in wireless mobile industry, cutting overall cost and venturing into the international markets. If Sprint can achieve these four objectives, the corporation will become more competitive both domestically and internationally and enhance their profitability in the future. First, the Sprint Nextel Corporation must continue to improve their customer service. In the past, the Sprint Corporation had the reputation for one of the worst customer services in both quality and the duration of the time it takes to rectify the problem. In response, the Sprint Corporation began First Call Resolution in which the customer service representative is rated on their ability to resolve the problem on the customers first call. Hence, the First Call Resolution is a great way to improve their overall quality of the resolution as well as the duration of the service. Moving forward, Sprint must continue to initiate similar projects that will enhance the customer service experience of the customers so that if and when the problem arise the customers know that the problem will quickly and correctly be resolved. In the end, happier customers will create more market share and the reputation as the best customer service provider will be a difference maker in a saturated mobile t echnology industry. Secondly, the corporation must continue to develop cutting edge technology. More specifically, the Sprint must develop technology that is aligned with their core competencies which is the extensive network throughout the nation providing an excellent coverage. In juxtaposition to their network, Sprint must develop technologies for corporate customers who have different needs than the individual users. Nowadays, many corporate customers want mobile wireless Internet that can be accessed anytime and anywhere. In response to this need, Sprint must continue to leverage their extensive network and coverage into providing the fastest and the best quality wireless Internet coverage for the corporate customers. Also, there has been a great technology innovation in personal mobile technology. Many of the mobile devices can stream videos in high quality definition. However, some of these videos may have to be downloaded onto the device, which has limited storage. Therefore, developing a websit e portal where individuals can download their preferred shows, movies and videos and then access it through the high speed internet via handheld device may be in need. In summation, Sprint must respond to the changing technology environment in both the corporate market and individual market to gain first mover advantage in the new markets. Third, the Sprint Corporation must develop a cost leadership strategy. There are two approaches in which Sprint must cut costs. First, Sprint must cut costs towards its bottom line. In other words, the Sprint Corporation must cut their operating costs. There are many subsidiaries of Sprint that are not contributing to developing Sprints core competencies. After reviewing the financial data and subsidiaries, there are few subsidiaries that may be spun off or be eliminated. These subsidiaries incur various operating costs as well as the research and development costs that do not add value to the Sprints future operations. Moreover, these cost reductions will allow Sprint to revise their pricing strategy, providing a lower price for equivalent or better quality of service to the corporate and individual customers. For example, if Sprint successfully eliminates some of the subsidiaries, they can procure more mobile devices from vendors such as Blackberry, Samsung, etc. and package those devices into a bundle for customers. In the end, cutting costs towards the bottom line will help Sprint develop its core competencies as well as gain pricing competitive advantage in the consumer market. Lastly, Sprint must venture into international market. More specifically, Sprint must develop markets in developing nations. The nations such as Brazil, Russia and India are popular nations that have already grown intense competition among mobile technology companies. It may be a better strategy to develop a market share in other countries such as Kuwait, Iraq or Afghanistan because the competitors do not heavily target them. Having s joint contract with the U.S. Military to provide services and devices may give Sprint relatively low costs and expansive exposure to the brand. The expanded international market will allow Sprint to hedge the volatility of the domestic market and stabilize the revenue stream of the company. In conclusion, the Sprint Corporation can strengthen their competitiveness by providing higher quality customer service, developing cutting edge technology, cutting costs for operational activities and providing lower priced services and venturing into international markets. By providing a better customer service, Sprint will gain trust of the customers they have lost in the past and regain market shares by gaining reputation as customer oriented corporation. Developing technology will allow Sprint to gain first mover advantage in new markets. The cost reduction will allow Sprint to be more competitive because the customers will respond to cheaper pricing point that is packaged with high quality of service. Lastly, transitioning into international markets is crucial to the corporations success, because it will diversify their risk and hedge the domestic volatility of the industry.