Sprint’s Path Back to Glory Is Lined With Fiber Optics : Telecommunications: Parent United Telecom is beginning to reap rewards for its patience during a long history of losses, and consumers stand to benefit.
On the southwestern outskirts of this city sits a 19th-Century farmhouse backed by a barn, a blacksmith’s shop and a covered wagon. Now a local museum, Alexander Majors’ historic home stands as a modest monument to this region’s rich past as a major jumping-off point for Western settlers and site, 125 years ago, of a key defeat for the Confederate Army.
Majors’ present next-door neighbor is something of a monument, too--but to Kansas City’s hope of becoming a 21st-Century telecommunications center. It is the sleekly curvaceous, concrete and glass home of US Sprint, the long-troubled subsidiary of nearby United Telecommunications.
After losing billions of dollars for a succession of owners over nearly two decades--first Southern Pacific, then GTE and now United Telecom--US Sprint astounded the industry last December by winning a 10-year contract worth $10 billion to provide a new telephone system for much of the federal government. Then the company reported its first quarterly profit in April, following that with its first quarter in which revenue exceeded $1 billion.
Sprint’s scrappy comeback is a tribute to United Telecom’s willingness to absorb loss after loss so that Sprint could complete a long-distance network that now has vastly improved its service quality and sharply lowered operating costs.
The nation’s businesses and consumers are among the big winners. Big telecommunications users cheer Sprint on, realizing that their bargaining position is strengthened by having three full-service carriers rather than just American Telephone & Telegraph and MCI Communications, as many had feared. And increasing numbers of computer-savvy residential customers should benefit from a spate of new services on the horizon.
Moreover, Sprint’s success has also helped double the price of United Telecom’s stock in the past year and has vaulted the once little-known parent into the big leagues of telecommunications firms. That at last has begun to reward the sometimes strained faith in Sprint of United Telecom’s retiring chairman, Paul H. Henson, and his 49-year-old heir apparent, William T. Esrey.
“Now, with Sprint finally tracking, it looks like that diversification is going to pay off,” Henson said. “Sprint has the potential to become a world-class telecommunications company.”
Added Esrey in a separate interview: “Our goal is to be the best telecommunications company in the world.”
Even a year ago, such statements would have appeared more ludicrous than ambitious, as Sprint’s chronic losses still burdened United Telecom. But now, analyst Robert B. Morris III of Goldman, Sachs & Co. expects Sprint to end 1989 with an operating profit of $250 million. It will more than double that profit next year and continue to enlarge its third-place share of the nation’s $50-billion long-distance market, Morris predicted.
AT&T;’s one-time monopoly has eroded to a still-dominant 74% market share and will decline to 70% next year, Morris estimated, while MCI will boost its share to 14% from 12.6%. Morris expects Sprint’s current 8.6% share to brush 10%.
The competition is obvious “in the way AT&T; scrambles to keep up,” said Bradford L. Peery of Brad Peery Inc., a Marin County telecommunications investment banking firm.
Sprint claims to do business with 95% of the nation’s 500 largest companies and to be primary carrier for 80 of them. Its major national accounts are headed by Sears, Roebuck & Co. and the state of Illinois in partnership with Illinois Bell.
While it may still be true that “nobody ever got fired for going with AT&T;,” as a Sprint executive put it, more and more major customers are willing to challenge tradition. Greyhound signed on with Sprint on Oct. 2 after comparing offers from AT&T; and three other carriers that previously shared the bus company’s business.
Sears invited bids from AT&T;, MCI and Sprint. After concluding that any one of them could handle its $500-million communications business, the retailer chose Sprint on the basis of price, said John Morrison, Sears vice president of voice communications. Morrison said having three strong national carriers keeps the market honest and improves responsiveness.
“It used to be that you were a slave to whatever products they had,” Morrison recalled. “But now if you ask for something beyond their standard offerings they say, ‘We’ll take a look.’ ”
Thus, United Telecom’s success with Sprint is crucial to developing what analyst Morris called “a competitive oligopoly.” To the government and to companies like Sears and Greyhound, competition is already paying dividends in terms of choice, cost, responsiveness and far more rapid introduction of new services than took place when Ma Bell reigned supreme.
“You do have to do your homework,” said Greyhound executive Sharon Heinley, “but we feel we were able to do a very good thing for Greyhound Lines.”
Residential and small-business customers also have benefited. Long-distance prices are 40% lower than in 1984 (though new local charges offset these savings for those who make few toll calls). Analyst Steve Sazebari of Dataquest, an investment research firm, expects benefits to multiply as the telephone unlocks new information services.
As a major player in this emerging world, the United Telecom that Henson will turn over to Esrey next April scarcely resembles the provincial and technologically backward firm whose roots reach back 90 years to a phone company in Abilene, Kan. When Henson joined in 1959, only 10% of its mostly rural clientele could dial their own calls.
Since the 1984 breakup of the Bell System, United Telecom is now the only U.S. company offering both local and long-distance telephone service. “We’re the poor man’s Ma Bell,” Henson quipped.
Its revenues now approach $7 billion, compared to the $1.7 billion generated 10 years earlier, when Henson decided that MCI had shown that the long-distance market would become competitive.
“The handwriting was on the wall,” Henson said.
In 1980, Henson recruited Esrey, then an investment banker and earlier an AT&T; executive, to head corporate planning and help build the company into a telecommunications giant. The two soon concluded that if United Telecom were to start a long-distance network it would need something more than cut-rate service to woo customers.
“If you’re going to compete against a well-established monopoly like AT&T;,” Esrey said, “a lower price is not enough.”
Creating a better network, they decided, would give United Telecom the competitive edge it needed. In 1983, United Telecom’s board approved construction of a long-distance system that would be the world’s first to be built entirely of fiber-optic cable. These hair-thin strands of flexible glass carry vast quantities of digital data at the speed of light, invulnerable to the noise and distortions inherent in traditional copper cable and microwave transmission.
The company quickly acquired a fledgling Dallas venture called US Telephone that had begun building an all-fiber network, but it soon became apparent that more muscle and more money would be needed to complete the contemplated 23,000-mile project. So Henson and Esrey looked around for a partner to share the substantial risk that lay ahead.
As it happened, GTE, based in Stamford, Conn., had bought a sagging long-distance firm, SP Sprint, from Southern Pacific. GTE Sprint’s chief asset proved to be not its aging microwave network, but the railroad rights of way that the network was built along. Acquiring those rights of way, Henson and Esrey realized, would speed the laying of a nationwide fiber-optic network. Moreover, GTE Sprint offered enough customers--and GTE deep enough pockets--to make a joint venture attractive.
GTE agreed. So in mid-1986, GTE Sprint merged with US Telephone to form US Sprint, a 50-50 partnership of GTE and United Telecom.
With Charles M. Skibo, a former MCI marketing executive, ramrodding construction and offering fire-sale prices to woo new customers, business boomed. But rapid growth and the difficulties of integrating multiple accounting systems and separate networks proved overwhelming.
“That,” Esrey said, “has been likened to changing a tire while the car’s going 60 miles an hour.”
Massive billing problems eventually forced the partners to write off nearly $1.3 billion in uncollectible phone bills. That brought Skibo’s resignation, almost on the venture’s first anniversary, and led a year later to the early retirement of his successor, Robert H. Snedaker Jr., who had started the venture back on the road to recovery.
In mid-1988, Esrey, United Telecom’s chief executive, took over the presidency of Sprint as well. Esrey hired computer whiz Clifford Hall from GTE to successfully solve the billing problems.
Meanwhile, Henson’s counterpart at GTE, Theodore Brophy, retired and his successor, James L. Johnson, decided that the company should focus on its local phone companies and other businesses and abandon long-distance telecommunications and, with it, Sprint’s mounting losses.
With hindsight, the result proved a masterstroke for United Telecom, which paid GTE $585 million to increase United’s stake to 80.1% from 50%.
Now, for the first time, Sprint had a single management--and one that still believed, despite the skepticism of many analysts, that salvation lay in completing the 23,000-mile fiber-optic network begun years ago. Not only would service be unsurpassed, but operating costs would drop by at least the $500 million a year that had been paid to lease lines from AT&T; during construction.
By the end of 1988, the network was finished, the federal contract was won and Sprint was ready to start its first profitable year.
In anticipation of exercising an option to buy out GTE’s remaining 19.9% interest to make Sprint a wholly owned subsidiary, Henson’s last major act before retiring next April is to consolidate long-distance and local telephone operations in a new United Telecom.
This month, he tapped Ronald T. LeMay, 43, to succeed Esrey as president of Sprint and to head what will eventually become United Telecom’s long-distance division. Esrey remains as president and chief executive of the parent but took the new jobs of chairman and chief executive of Sprint to provide corporate unity until GTE is out of the picture.
For LeMay, consolidation marks “a new phase” for Sprint. “We suffered through growing pains,” he said. “Now we are growing rapidly, but in a much more manageable sense.”
Sprint’s presence is sure to grow internationally with the company’s joint ownership with Britain’s Cable & Wireless of a new transatlantic cable that provides a fiber-optic link to the United Kingdom. The partners will also market one another’s services on either side of the Atlantic. Sprint also leases fiber-optic cable across the Pacific, where Cable & Wireless subsidiaries provide local service in such burgeoning markets as Hong Kong and Singapore.
But Henson and Esrey also expect United Telecom’s local operations to become increasingly important. The subsidiaries already provide operator and other support for Sprint, and United Telecom intends to connect its local customers to fiber-optic cable, making it possible for businesses to locate facilities in rural communities. This may breathe new life into Kansas City and Middle America.
Analyst Morris of Goldman, Sachs, for one, believes that United Telecom’s local phone business has been overshadowed by the wild adventures of US Sprint. “Everybody’s focused so much on Sprint,” he said, “that one of their real jewels has slipped through the cracks.”
THE LONG-DISTANCE MARKET Percentages and total market are estimates for 1990
Total Market: $50 billion MCI: 14% US Sprint: 9.9% Other 6.1%* AT&T;: 70% * Includes nearly 300 regional and specialized carriers Source: Goldman, Sachs & Co.
