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Happy Anniversary, Marcelo Claure

mom and dad at royals angels game croppedGreetings from Kansas City, home to some of the greatest sports fans (including my folks who are pictured at Thursday’s Royals/ Angels game) and Dallas, currently the home of some of the warmest sports fans in America.  This week’s column will be devoted to a review of Sprint’s performance over the past year and includes some suggestions for the next.  Unfortunately, the Samsung product announcements (which will have a larger impact than many expect), AT&T analyst day observations, and a host of “you might have missed” stories that many of you forward each week will have to wait.  But please keep forwarding your thoughts and observations (including to my Twitter account @pattersonadvice).

The Claure Report Card:  Turnaround?

Last August, Sprint was in turmoil.  The T-Mobile merger continued to elicit a “No means no”  response by the FCC.  Framily results, while initially strong, were being impacted by a resurgent T-Mobile.

claureSomething had to change, and on August 6,  and on August 6, Dan Hesse stepped down as Sprint’s CEO and Marcelo Claure, a Board member, took over.  A billionaire telecom executive with a passion for soccer and a love of celebrity was moving to Kansas City (and forcing his entire executive team to do the same)!

Could this be the desired turnaround?  Could Marcelo restore the lustre last seen when Candice Bergen was the “Dime Lady?” and Free Fridays were the rage for business customers? There was hope for a stronger Sprint.

In that light, we penned one of the most read Sunday Brief articles called “Dear Marcelo” where we offered some unsolicited advice:

  1. Wireless success is highly dependent on wireline success (and specifically 2.5 GHz deployment success is highly dependent on an in-building strategy).
  2. Make peace with cable (before T-Mobile does).
  3. Measure your team through the customer experience, not an arbitrary budget metric.
  4. Build a culture of innovation that goes beyond the limits of current mega-suppliers.

Overall, Sprint has done an excellent job in reducing subscriber loss and reducing churn, thanks to an eye-popping 20 GB family plan that depended on high breakage (average data usage with industry growth rates) to be profitable.  They have also leveraged Brightstar and other Softbank relationships to improve their overall costs.  The 800 MHz and 2.5 GHz network upgrades have helped out a lot in major cities (including Dallas), and overall LTE coverage is broader than many expected.

Sprint also gets the innovation and leadership award for their All-In phone leasing plans (although adjusted EBITDA now has to be readjusted if one is performing competitive comparisons).  They have made it easy for prime credit customers to get a new Apple iPhone 6/ 6 Plus or the new Samsung Galaxy Note 5 for an attractive monthly payment.  While the “Cut Your Bill in Half”, “Direct 2 You” and Radio Shack store expansions are still unfolding (Radio Shack being a real head scratcher), the core family and All-In offers continue to resonate a year later.  That’s the sign of a powerful first 90 days as CEO.

The Reality:  Sprint Cannot Define Victory

Given all of these changes, Sprint’s stock should be soaring (as most stocks do when analysts realize that the worst financial results are in the past and earnings growth is just around the corner).  Why then, has the stock price fallen 29% (and as much as 47%) since last August?   Why has T-Mobile’s stock risen by 38% since the day Claure took over as CEO (see Yahoo! Finance chart nearby) while Sprint has fallen 29%?  Why is T-Mobile’s equity value now twice that of Sprint?

Sprint tmob aug 6 through aug 14The simple answer can be summarized in one word:  horizon.  Not Verizon, although T-Mobile’s #neversettle campaign was directly aimed at their larger counterpart, but horizon.

Sprint is doing a lot of things – cutting costs, deploying networks, improving the customer experience – but to what end?  Is merely a positive postpaid phone net additions number an acceptable “finish line” when T-Mobile has just posted 1 million branded postpaid retail net additions for the fourth consecutive quarter (driven by a 1.3% monthly churn rate)?  To Sprint’s credit, getting to positive is an achievement, but T-Mobile is getting stronger – a lot stronger.  And Verizon and AT&T are beginning to use their size and industry clout to create meaningful differentiation in content delivery.

Sprint’s current horizon is “above water.”  No doubt there is a 300-year plan tucked away in a secure safe in Japan, and there are myriads of 3-year plans being modified to reflect $15 billion in spending on mini-macro architectures with large employee reductions, but there is no rank and file elevator pitch for how Sprint will lead the wireless industry.  Here’s the best  elevator pitch the Sunday Brief has heard from a Sprint employee/ officer recently:

  1. Sprint’s upcoming network changes will attract disproportionately new customers. Sprint will win with speed across most metro areas.
  2. Sprint’s existing All-In and 20GB family plans will maintain and improve their relative attractiveness.
  3. Sprint will leverage the global reach and scale of Softbank to maintain a free cash flow generating cost structure that will more than pay for network growth.

Some of you are probably reading this thinking that most employees could not begin to communicate this with as much clarity as is outlined above.  To Marcelo’s credit, however, I have heard renditions of this pitch from several current employees over the past three months.  To many of them, it’s Network Vision (Sprint’s LTE deployment and 3G upgrade) done right plus a couple of sizeable layoffs (cue the nervous laughter) and a side shot of empowerment.  The current employee base are skeptical yet believers – not blind to “I’ve got a secret” promises over the past 15 years (Sprint ION being the costliest technology promise of the past two decades), but willing to take the next step.

The harsh reality is that the rank and file Sprint employee does not understand the concept of victory.  This is not achieving a budget goal or being retail postpaid phone net add positive or receiving an RootMetrics award, but an acknowledged defeat of the incumbents.  Without a doubt, few if any of the legacy Sprint employees have ever existed in an environment where victory was defined.  The concept of beating an opponent is completely foreign and not “Sprint nice.”

To be victorious, someone needs to surrender.  Who is going to surrender tens of millions of customers to Sprint?  In fact, what should the victory horizon look like?  Here are some thoughts:

  1. Sprint’s victory horizon needs to be one that is relevant and achievable. On June 30, 2015 Sprint had 45.4 million combined postpaid and prepaid customers.  Growing that number to 68 million by the end of 2019 (22-23 million connections in four years) with an average service ARPU of $45 is not a pipe dream.  And adding $1 billion in monthly revenues by the end of 2019 is audacious but achievable with the right network architecture.  Someone wil definitely feel the impact of Sprint’s victory.
  1. A Big Hairy Audacious Goal (BHAG) like the one described above resets the assumption about how the network is designed and how the (local wireless) network is architected. The same network engineers who forecasted five-year growth of a few T-1s at an average cell site in 2009 and who missed the symmetrical nature of wireless growth thanks to picture uploads in 2011 need not apply for these positions.  20 million net new connections implies data growth of 2-4x per year for four years.  Transitional goals like “FCF positive” and “net port positive” are nice to mention, but designing a network that works better yet is 10-20x larger within the depreciable life of the network asset is going to require a new breed of thinking.
  1. hopewell vaGrowth may not be directly connected to a handset – it might be connected directly to a router (or an antenna that is connected to a router). Nearby is a map of Hopewell, Virginia, a small but quickly growing suburb of Richmond and Petersburg (for those of you not familiar with the area, it’s shorter from Richmond to Hopewell than it is from Arrowhead Stadium to the Kansas City airport).

Residential broadband customers have two choices according to www.broadbandnow.com (enter zip code 23860):  Verizon DSL (no FiOS) – 3 Mbps for $29.99/ mo. (regular rate is $35) and Comcast with 25 Mbps for $39.99/ mo. (regular rate is $67).  The same monthly circuit cost for a small business customer is $48-53 (VZ) and $100 (Comcast).  Guess who is winning?  To make matters worse, see below for Sprint’s wireless coverage in Hopewell as of August 16 – a bad mosaic for sure (and to think of the data experience cliff that customers go through moving from Spark yellow to Verizon 1xRTT purple roaming speeds – the net promoter score in Hopewell must be outrageously negative).

sprint coverage in Hopewell VAWith the new BHAG described earlier, Sprint needs to stop thinking  solely about handsets and start thinking about connections (and these need not be wholesale connections exclusively).  Turn the nearby map solid yellow and offer small business customers a $70/ month “fast as possible” circuit with a minimum of 10 Mbps and a 35GB cap.  Or, better yet, pull a Google Fi on data access and charge a one time fee of $500 to connect, and annual fee of $500 and have business customers pay only for the data that they use!

As you can see, there are plenty of opportunities to add connections.  Handsets are going to continue to be important, but enterprise branch connectivity can move the needle without breaking the bank.  Many of the former Clearwire employees realize this and have specifications already written for a premiere business data backup product.

  1. Create local operational partnerships that deliver as much value as the financing partnerships being established for handset leasing. Turning any geographic area solid yellow is going to take a lot of work and require a lot of money.  Growing 20-25 million net new customers over the next four years is also going to cost a lot of money (more than $15 billion).

For the largest metropolitan areas, Sprint needs to control and manage its metamorphises.  For the suburbs and the byways, that’s a different story.  Why not bring the Alamosa, US Unwired, Ubiquitel, iPCS, and other affiliate bands back together to lend a hand?  This is more than network management – give them the rights to “fight local” against Verizon and AT&T.  Protect the entity from any parent bankruptcies (just as has been done with the Special Pupose Entities described in your most recent 10-Q), and reunion is possible.

This “re-affiliation” accomplishes two important objectives:  a) it spreads the financial and deployment risk of the new mini-macro architecture beyond Sprint, and b) it allows historically weaker market share areas to regrow without the fetters of Sprint’s dwindling advertising budgets.

Transformational change is hard.  Creating competitive advantage against AT&T and Verizon is even harder.  Sprint needs to define a victory horizon and engage external parties to help secure success.  Time is running out.

Next week, we’ll hit the AT&T and Samsung announcements.  Until then, please invite one of your colleagues to become a regular Sunday Brief reader by having them drop a quick note to sundaybrief@gmail.com. We’ll subscribe them as soon as we can (and they can go to www.mysundaybrief.com for the full archive).  Thanks again for your readership, and enjoy the remainder of your summer!


3 Comments

  1. Infostack says:

    Jim, It was great to see Masa-Son talk blue-ocean strategy with respect to the proposed throughput of the network in early 2014. But as I suspected, it’s the coverage stupid and not the speed. As you quite correctly point out they need creative ways from a partnership AND network topology basis to take on the big boys. The current data throwaway battle is comical in that very few except a tiny minority actually use that much bandwidth. But it becomes dangerous when people actually do, because coverage will shrink rapidly and speeds will drop dramatically. As I like to say wireless is great because it means many things to many people and wireless is bad because it means many things to many people. 4K VoD, 2-way HD collaboration and the internet of things requires a fundamental rethink (aka open) of both the business model and network topology. Intelligence needs to rapidly move to the edge and densification needs to occur. Based in the mid-west, it would be subtle irony if Sprint were to divest itself first of silo-ed thinking to achieve that goal. Michael

  2. Steve Bedell says:

    Its not about selling phones anymore, its about selling big GB buckets of data. We’re basically down to Apple and Samsung now anyway.
    Sprint has the advantage of not having to care (as much) what the street thinks, so why not go against the grain and report different, better metrics.

    Since you’re using sports analogies, counting how many “subscribers” are connected, is as relevant as calculating batting average.
    On base percentage is what’s important, e.g. report how many GBs did you sell versus how many traversed your network. Embrace “other party pays” models where a corporation, school, advertiser, or other 3rd party can buy a huge bucket of GBs and allocate them back to the individual’s plan, based on usage of applications tied to that 3rd party.

  3. […] Transformation (more in this Sunday Brief here and here). Although the nearby stock price comparison (to T-Mobile USA) does not reflect Sprint’s […]

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