Sprint’s Next Big Gamble
William Esrey was running a tiny Midwestern phone company in 1984 when he wagered its future on the notion that it could compete with AT&T; by building from scratch a nationwide fiber-optic network.
Skeptics labeled it a foolhardy gamble, but that fiber network gave the upstart company--now known as Sprint--the nation’s most advanced phone system and propelled it to No. 3 among long-distance carriers.
Fifteen years later, Sprint’s revenue has grown sixfold and Esrey is rolling the technology dice again, banking this time on an ambitious $2.5-billion venture to bring fast Internet access and multiple phone lines to homes and businesses through a single connection.
Instead of having separate wires and equipment to handle voice, data, video and Internet access, Esrey is convinced that the future of telecommunications is to route all traffic on a single, all-digital network. And he wants Sprint to be the first company to do it.
“We don’t care if you want high-speed Internet access, whether you’re getting a fax, or whether you’re making a voice call or two or three voice calls . . . it all goes digital and it goes over one network,” Esrey said.
Sprint has spent years working on the technology behind this project, called the Integrated On-Demand Network, or ION, which is set to launch in December in several cities, well ahead of its larger rivals, AT&T; and MCI WorldCom. Both AT&T; and MCI are pursuing similar projects, but their networks are made up of a combination of technologies, which will take longer to unify.
“Of the three big incumbents, Sprint has clearly been the most aggressive in deploying new technologies,” said Joe Skorupa, a director at RHK, a South San Francisco telecommunications research firm. “These guys are the cowboys of the [long-distance] carriers, and that’s not a negative.”
By sending all its customer traffic over the ION network, Sprint figures it will reduce its internal cost of handling long-distance calls by 90%, cut its maintenance costs by 50% and its service set-up costs by 60% to 80%--an estimated savings for the company of about $1 billion through 2004.
Esrey also believes ION will be a hit with customers and expects it to play a big role in boosting Sprint revenue by 20% to 25% over the next two years.
But some outsiders are unsure if Sprint’s latest gamble will pay off. For one thing, they note that superior technology is no guarantee of victory with customers, especially since it can change so rapidly.
And Sprint still faces the nagging question of whether it can survive on its own amid an industrywide merger frenzy. Germany’s Deutsche Telekom and France Telecom each own 10% of Sprint, although their stake can’t rise until 2005.
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So for now, Esrey, 57, the industry’s longest-serving chief executive, is free to continue betting heavily on technology to fuel Sprint’s growth. And if that plan relegates the company to underdog status in a world of giants, that’s OK with Esrey. He’s used to it.
“There hasn’t been a week or a month that’s gone by in the last 10 years that somebody hasn’t said, ‘Well gee, what’s going to happen to Sprint? Can it go it alone? What’s it going to do?’ ” Esrey said in a recent interview. “It’s just like an old friendly suit that I’ve worn for a long time. It’s almost amusing.”
Of course, Esrey isn’t so foolish as to rule out a merger entirely. But he’s a risk-taker by nature, and he’s confident that Sprint has assembled the foundation of a solid growth and survival plan.
After all, Sprint is expected to post a $1.6-billion profit on $17.5 billion in sales this year, and it has 17 million customers, and 71,000 employees--17,000 of them in the Kansas City, Mo., area that is the company’s headquarters.
Besides its large and growing long-distance business, Sprint has a solid share in the lucrative market for corporate data connections, a fast-growing cell phone business, an Internet presence through its 20% stake in EarthLink and a foothold in the international arena.
Sprint also is the only big-three long-distance carrier with a sizable presence in the local residential phone market, where incumbent Baby Bell phone companies own the so-called last-mile of copper wires to homes, which continues to shut out most local phone competition.
But with its roots as a local phone company, Sprint already has nearly 8 million local phone lines in 18 states--plus the experience that comes with it. To boost its share of that market, Sprint paid $1.3 billion on licenses for wireless cable technology, and it also will lease copper lines from other phone companies--both of which are compatible with Sprint’s new ION service.
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By contrast, AT&T; plans to compete in the local residential phone market with its purchase of Tele-Communications Inc. and other cable companies, plus spending heavily to upgrade those networks. MCI WorldCom’s plans for local residential service are less clear, but the company has purchased wireless cable operations that could serve as its route to U.S. homes.
Still, what looks like a good game plan today may doom a company to obscurity tomorrow, analysts note. “The market is very competitive, and there are no easy hits here,” said Cathy Gadecki, director of consulting at TeleChoice, a Boston-based consultancy. “Nobody’s future is secure in telecom.”
In the Esrey era, though, Sprint has strayed from the pack, expanding mostly from internal growth instead of through acquisitions, and readily turning to technology for an edge against larger companies.
One of Esrey’s most controversial--and potentially most rewarding--gambits came just a few years ago. In 1994, Sprint partnered with three cable companies to aggressively expand its wireless phone business.
The joint venture pledged a whopping $2 billion in 1995 for wireless service licenses covering most of the country, and Sprint then bought another $545 million in additional licenses. Next came billions of dollars to construct the network’s many cell sites--all of them based on a wireless technology that at the time was derided by many as unworkable.
Sprint’s shareholders now have control of this venture, called Sprint PCS, which is traded as a separate stock. After less than three years in the market, Sprint’s wireless arm has quadrupled its revenue to $1.2 billion and claims nearly 4 million customers nationwide, although it lost more than $2 billion in the last two years and is still in the red.
But the wireless phone business keeps getting more competitive, especially given the expected agreement between Bell Atlantic and Britain’s Vodafone AirTouch to combine their cell phone networks, which will give them about 23 million subscribers, compared with AT&T;’s 11 million wireless customers. Esrey still expects Sprint PCS operations to break even by the end of next year, as the unit signs up more customers interested in Internet, e-mail and other wireless data services.
Now Esrey’s primary focus is the ION project.
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The technology behind the one-network ION system is a complex blend of specialty software and equipment that will work with cable modems, digital subscriber lines and other technologies. Sprint has already smoothed out most of the key technical hurdles.
Indeed, large businesses ranging from Hallmark to Yellow Freight trucking and some unnamed entertainment and aerospace firms have been test sites for Sprint’s ION project, along with dozens of households in Gardner, Kan.
Under Esrey’s plan, the consumer version of Sprint ION will include a laptop-computer-sized ION phone box (cost to consumers: about $300) with four phone lines and one or two data ports that can simultaneously provide high-speed Internet access and phone service over the other lines. The monthly service cost is expected to be about $150, including “virtually unlimited” long-distance service.
Esrey envisions selling a similar--but much more robust--service to small and large businesses over ION, without charging them for the beefed-up box that will reside on site.
“This is a significant opportunity for Sprint to break out . . . to get an incrementally larger share of the high-value customer than we’ve ever had before,” said Kevin Brauer, president of Sprint’s Business unit. “By the end of 2001, we’ll know whether we hit a home run or a single or if we popped out.”
So far, many observers are taking a wait-and-see approach. After all, Sprint’s ION technology may not work as well on a large scale, and creating the billing and back-office support systems is a costly and complex task. “This could become a good competitive weapon for them,” said Skorupa of RHK. “But this is a very, very aggressive plan by Sprint, and everything they’ve tried to do has been hard.”
And meanwhile, the international telecommunications merger drumbeat continues, threatening constantly to derail Esrey’s big plans for Sprint.
“At the end of the day, this is going to be a battle of the titans, and there will be very, very few players involved,” said Ken McGee, a vice president at Gartner Group, a research firm. “I just don’t see Sprint being able to fend off multibillion [dollar] merged companies.”
Of course, Esrey has heard this before.
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Sprint to the Future
The long-distance phone business has grown rapidly since 1984 when federal regulators broke up AT&T.; During that year, Sprint unveiled a bold plan to build its own fiber-optic phone network. Since then, Sprint’s revenue has grown rapidly, but the company remains a distant third in market share for U.S. long-distance phone service.
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1984
Total U.S. long-distance phone market: $38.8 billion (operating revenue)
AT&T;: 90.8%
MCI*: 5.4%
Sprint: 2.7%
Others: 1.1%
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1998
Total U.S. long-distance phone market: $96.6 billion (operating revenue)
AT&T;: 42.0%
MCI WorldCom: 25.0%
Sprint: 10.3%
Others: 22.7%
*Includes companies that later merged into MCI WorldCom
Source: Federal Communications Commission
Sprint’s Innovations
In part because of its smaller size, Sprint has followed an underdog strategy of investing aggressively in new technology products before its larger rivals. A sampling of Sprint firsts:
* 1984: Sprint begins the nation’s first digital fiber-optic communications network.
* 1986: Sprint unveils its “pin-drop” advertisements, touting the clarity of calls made over its new coast-to-coast network.
* 1993: The company becomes the first U.S. carrier to sell prepaid long-distance cards.
* 1995: Sprint is the first phone company to offer a flat-rate of 10 cents a minute for long-distance calls.
* 1999: The company’s Integrated On-demand Network (ION) nears completion, which would make Sprint the first phone company to route data, voice and video traffic all on a single national network.
