With its network modernization announcement on Friday, Sprint set itself up to meet one of two fates: another spectacular, Nextel-style failure or a corporate turnaround fit for the history books.
The company laid out plans for its LTE network that involve going alone with the help of an unknown instead of its former 4G partner, Clearwire. It will do this with scant spectrum resources, even as it balances its precarious finances with a big bet on the iPhone 4S and unlimited data. The situation feels not unlike someone chewing off her leg to get out of a bear trap, then signing up for a marathon the following week.
Sure, if Sprint can make the combination of the iPhone and its network modernization plan work, the story will be that of an underdog who succeeds. The question, however, is whether that’s even possible.
Let’s break it down into all the moving parts of the argument to find out.
If spectrum is a land grab, then Sprint is stuck with two Superfund sites
Sprint is planning to build its LTE network in its existing 1900 Mhz and later into its 800 Mhz holdings, but to create room for this means transitioning folks off its 3G and 2G networks. It plans to do this by 2014, but at the same time it’s introducing the iPhone 4S, which will run on its 3G network. So it has two problems: signing up a bunch of customers that like their data on its 3G network while simultaneously having a huge incentive to stop pushing 3G so it can reallocate its spectrum for next-generation services.
Additionally, LTE poses a few problems for Clearwire. A Stifel Nicolaus report notes Sprint’s issue pretty clearly:
First, plans regarding the company’s 4G LTE were sketchy, as management appeared to be guiding to a fully competitive, national LTE network on a 2×5 GHz of PCS spectrum that will, by management’s own account, likely be well over-capacity when the network build is complete by 2014.
If Sprint is indeed limited to using that little spectrum, as opposed to the 10 by 10 MHz Verizon is using, it’s in real trouble. The amount of megahertz available determines how much capacity a network has and how many people Sprint can deliver top speeds to. In this case, less is, well, less. Less than Verizon, certainly, and less than AT&T is using for its LTE deployments.
Sprint thought it licked its 4G problem back in 2008, when it joined with the cable companies, Intel and Clearwire, to build out a WiMAX network. At the time, Clearwire had two advantages for Sprint: It provided a faster path to 4G services, and Sprint didn’t have to buy more spectrum, since Clearwire has hundreds of megahertz. Sprint was so pumped about its WiMAX partnership that it had big plans to become a data pipe offering all kinds of services to homes.
That vision hasn’t changed much, but Clearwire needs about $600 million to make its transition to LTE from WiMAX, and Sprint has seemingly switched its allegiance to a company called LightSquared. It said it would support WiMAX devices through 2012, but it wouldn’t comment about a future with Clearwire. The relationship with LightSquared, meanwhile, is odd because LightSquared has no network and is in the middle of a very public battle with the FCC and the Department of Defense over whether or not it can even get its network built. So while its bet on Clearwire hobbled Sprint with a loser 4G technology after investing billions, the plan to rely on LightSquared seems even more implausible.
Sprint can use its limited airwaves for LTE today, but there’s no sense of how it plans to get to the spectrum it will need to offer LTE tomorrow. The two land grabs mentioned above haven’t exactly worked out, and unless Sprint plans to buy T-Mobile if the AT&T bid breaks down, it’s not clear what the company will do to add more spectrum that it will undoubtedly need to compete.
Money can’t buy you love, but it might buy you a future
Sprint has $4.3 billion in cash on hand and $2.25 billion in debt coming due in March. It will see its free cash flow likely decline by about $2 billion by 2012. The numbers mean that Sprint doesn’t have a lot of flexibility when it comes to making big-time deals. Perhaps that’s why it wasn’t more aggressive with taking an opportunity to buy out or invest more in Clearwire, now that the WiMAX vendor is struggling. As UBS analyst John Hodulik put it in a research note issued on Monday:
Given guidance for higher capex spending than anticipated and our new expectations for lower wireless margins, we now expect Sprint to lose $2B in FCF in 2012. Meanwhile, the company’s bonds have been under intense pressure, making it harder for the company to refinance the $2.25B in maturities coming due in March, potentially requiring the company to redeem this debt and eat into its $4B strategic reserve.
Long story short, a little time spent with Sprint’s financials indicate that the company is going to lose money in the short term while also writing down its investment in Clearwire and having to spend money to build and convert its network to LTE. It is also spending money in adding the iPhone, although it’s not clear how much exactly. This is not the cash position of a company that makes a big-time play for spectrum through buying either T-Mobile or even Clearwire. In fact, on Monday S&P threatened to downgrade the mobile operator’s bond ratings and placed it on its credit watch list, citing some of the issues above.
But wait, what about the iPhone?
Sprint committed to buying $20 billion’s worth of iPhones over the next four years, according to the Wall Street Journal. The carrier clearly needed to boost its credibility with mainstream consumers who may be interested in Android offerings that Sprint has rolled out but would rather have the comfort of an iPhone. Sprint’s biggest problem, in fact, isn’t its network modernization. It’s competing with Verizon and AT&T. The nation’s two largest operators have gained share at the expense of T-Mobile and Sprint, and the iPhone is the latter’s attempt to counter that.
The iPhone 4S has flown off the shelves, with both Verizon’s and AT&T’s reporting that they are sold out of their initial shipments of the device. However, Sprint still seems to have some in stock, according to the site. A BTIG research report wonders if this is because the iPhone will be hobbled on the Sprint 3G network when compared to AT&T’s faster HSPA+ speeds, or if it’s because people just aren’t interested in buying an iPhone from Sprint because data prices are too high. If either is the case, Sprint may have badly miscalculated betting a lot of money on a handset that won’t help it out in the the short term.
If the move does pan out, it will require network resources that will suck up both spectrum and up to $10 billion in capital spending over the next two years. If that works, Sprint then has to figure out its long-term strategy and how it plans to pay for that. At this point, the company is doing everything it can to chew its way out of its trap. It’s hard, though, to see Sprint winning this race.