Sprint May Need More Than WiMAX

With second-quarter operating profits sliding 94%, can the stumbling company win customer loyalty?

by Roger O. Crockett

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Sprint Nextel's (S) lead in WiMAX is all well and good. But the payoff is undetermined, and meanwhile CEO Gary Forsee has given investors little to cheer about. Second-quarter profits on operations all but disappeared, sliding 94%, to $19 million, on flat revenue of $10.2 billion. Prospects for near-term growth remain bleak, and Forsee has had a tough time finding a No. 2 executive. "There is much work yet to be done," he said in an Aug. 8 call with investors.

The biggest problem may be Sprint's inability to keep customers loyal amid fierce competition. Sprint users defect at a higher rate than AT&T (T), Verizon Wireless (VZ), and T-Mobile customers. In the category of premium subscribers who are billed monthly, Sprint added a mere 16,000 net new customers in the spring, a tiny fraction of what Verizon and AT&T posted. Analysts expect AT&T to steal more customers in the wake of its iPhone launch.

What's pushing people away? Mainly a network that hasn't been up to snuff since Sprint bought Nextel in 2005. Management has struggled to mesh Nextel's distinct technology with Sprint's. To try to keep customers, Sprint next year will sell new phones with QChat, a version of the walkie-talkie-like feature that is popular on Nextel phones. Says UBS analyst John Hodulik: "They can't afford any more mistakes on the Nextel side."

Forsee has struck several agreements that could pay off down the road. Google will provide search, e-mail, and other Web services for the WiMAX network. Satellite companies are on board to provide TV service. And he hopes to build upon deals Sprint has to carry wired and wireless calls for cable companies such as Comcast Corp. (CMCSA) and Time Warner Inc. (TWX) But Sprint recently backed out of a cable industry WiMAX broadband strategy, choosing to focus on its own effort.

Investors are clearly restless with Forsee's efforts to compete with Verizon's and AT&T's wireless offerings, as well as their new blended phone, broadband, and TV services. With Sprint's stock down about 18% since May, it's becoming all the more crucial that Forsee deliver on his high-stakes WiMAX wager.

Crockett is deputy manager of BusinessWeek's Chicago bureau.