Sprint Shares Whacked on Downgrade

Sprint shares lost about 25 percent of their value Jan. 18 as Fitch Ratings lowered its credit rating. The Fitch downgrades reflect the ongoing concerns over Sprint Nextel's financial and operating results and the lack of visibility as to the company's performance going forward.

Fitch now believes credit metrics will experience greater near-term deterioration with leverage worsening. Sprint's difficulties with stabilizing its core operations and improving the company's competitive position were cited as evidence for the downgrade.

Fitch believes Sprint will experience difficulties in increasing its mix of prime subscribers given the high industry penetration rates, the low postpaid churn rates of its national competitors, the slowing economy and its competitive position. Of course, Sprint has had a churn problem for a couple of years now.

On the other hand, Sprint's continues to hold a good liquidity position and balance sheet. Cash was $2.2 billion at the end of the third quarter of 2007. Free cash flow (FCF) for the last twelve months was $2.2 billion.

The problem is that Fitch expects material free cash flow erosion during 2008.

Still, Fitch sees no issue with ability to service debt obligations. With manageable maturities over the next two years of $1.3 billion coming due in November 2008 and $600 million in May 2009, Sprint Nextel has more than sufficient liquidity through its cash position and bank lines to finance its current maturities and current commercial paper levels.

Considering Sprint Nextel's other strategic initiatives such as and including the share repurchase program and WiMAX deployment, Fitch expects Sprint Nextel to conserve liquidity and conservatively finance those initiatives.

Fitch's negative outlook is an indicator of weaker operating trends and the potential that further erosion could occur to Sprint's operations if the company remains unsuccessful in stabilizing its business.

Mobile Web: Falling Walls

The Internet has proven problematic for communications providers in any number of ways. Aside from mobility, the Internet and private IP services provide the foundation for most growth initiatives. Without it, there would be no demand for broadband access services, music downloads, video downloads and streaming, videoconferencing or Web services.

On the other hand, IP-based services also allow creation of services outside the traditional service provider walled gardens, creating competition for captive provider services. As a rule, IP also lowers the cost, and therefore the retail price, of just about any communications, content or information service.

So it is no surprise that wireless providers have mixed feelings about wider use of mobile instant messaging services that compete, at least in part, with lucrative text messaging services.

By the end of 2013, as many as 24 percent of mobile consumers will be using mobile IM services, say researchers at Forrester Research. That likely will cannibalize some amount of text messaging and shift brand awareness towards the IM providers (Microsoft, Google, Yahoo, AOL) rather than mobile carriers.

Sweden to Separate Networks

It looks like Sweden will join the ranks of countries believing that creating a separate wholesale broadband access entity will spur innovation in domestic telecom markets. A law giving Sweden’s telecoms regulator, the PTA, powers to impose a separation of network operations and retail services on TeliaSonera or any other infrastructure-based telco deemed to have significant market power now is under review.

But TeliaSonera has seen the writing on the wall and preempatively launched a wholesale unit on its own. TeliaSonera Skanova Access now offers equal wholesale terms to rivals and its own retail operations.

If approved, the new law will emulate BT’s "functional" separation. Swedish regulators say they will wait to adopt the new rules when the EU has formalized its own rules on functional separation.

There's a key challenge for North American regulators here. The grave potential danger of such structural or functional separation moves is that it will scare off investors who must provide the investment capital to build robust new optical access networks. As the trend continues to grow, not simply in Europe but in the Asia-Pacific region as well, we will accumulate a track record demonstrating whether, in fact, a capital strike is a realistic fear.

If functional separation can be made to work, if it continues to provide an attractive basis for investing capital in networks, pressure might mount on North American regulators to make similar moves. That will be especially true if market abuse were perceived to be occurring under the current "inter-modal" competitive regime that now prevails, under which competition between cable companies and telcos is expected to provide competitive benefits.

Sprint Loses Customers

It's not wonder Sprint is axing 4,000 employees, closing stores and halting distribution agreements with some partners. In the fourth quarter Sprint Nextel reported yet another quarter in which it lost more customers than it gained.

True, Sprint reported a "net gain" of 500,000 subscribers through wholesale channels, growth of 256,000 Boost Unlimited users and net additions of 20,000 subscribers within affiliate channels.

Bu those gains were offset by "net losses" of 683,000 post-paid subscribers and 202,000 traditional pre-paid users. In other words, Sprint lost 885,000 customers in the quarter and gained 776,000.

In other words, Sprint had a net loss of 109,000 customers.

In the churn area, where Sprint has arguably its single greatest challenge, post-paid churn (customers billed monthly) was 2.3 percent, slightly better performance than the previous quarter, and within striking distance of the slightly less than two percent range Verizon and at&t now have.

Unfortunately, Sprint Nextel's rate of involuntary churn, where it has to cut off service to a customer, rose over the prior quarter.

At the end of 2007, Sprint Nextel served a total subscriber base of 53.8 million subscribers including 40.8 million post-paid, 4.1 million traditional pre-paid, 500,000 Boost Unlimited, 7.7 million wholesale and 850,000 subscribers through affiliates.

As this chart from Bear Stearns shows, churn creates a couple problems. First, it directly reduces the number of revenue-generating units a company has. Secondly, it almost always raises the cost of acquiring new customers as well. The former hits revenue, the latter costs.

Orange iPhone Sales Stronger than Expected

Apple's iPhone is selling better than mobile carrier Orange (France Telecom) expected, Didier Lombard, Orange CEO, says. Orange expected sales to slow after the start of the new year, but that hasn't happened, Associated Press reports.

Orange had sold 30,000 iPhones in the five days after it went on sale in France, and planned to sell a total of 100,000 of the handsets by the end of 2007.

It doesn't appear too many customers are anxious to buy the unlocked iPhone, sold without a service contract and therefore for a significantly higher price.

Orange has sold "very, very few" iPhones without a contract, Lombard says.

Carphone Warehouse Now Major DSL Channel

The Carphone Warehouse Group (U.K. market), which might formerly have been thought of as an electronics retailer, now points out how much communications service distribution channels can change.

Carphone Warehouse now has 2.6 million Digital Subscriber Line customers. It is by no means certain that mass market retailers in other markets will do as well, but both Best Buy, Office Depot and Circuit City, for example, are distribution channels in the U.S. market, with differing degrees of active involvement in the integration and broadband access businesses. In the U.S. market, Best Buy has taken the boldest steps by buying Speakeasy, a national provider of DSL connections.

Brazil, Russia, India and China Driving Growth

In 2007, Hewlett Packard earned 67 percent of its total revenue outside the U.S. market. In the fourth quarter along, Asia-Pacific grew by 20 percent, Europe, Middle East and Africa by 19 percent and the Americas region was up by 10 percent. The Brazil, Russia, India and China group grew 37 percent year over year in the fourth quarter. Growth rates of that sort are one reason new submarine cables are being laid between North America and the Far East, and being planned or talked about between Europe and India. Add mobile phones to the growth of PC and associated electronics and it is clear Asia, the Middle East and Africa is where the growth is, at least in terms of mobile and other sorts of communications.

Of course, there are other reasons for laying additional cables across the Pacific. Earthquakes are capable of taking out multiple cables and routes in an instant, so carriers logically want more redundancy on trans-Pacific routes than has been the case up to this point.