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 THE STAT 26Percentage of wireless customers who use their cell phones to take picturesMore Vitals
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MARCH 18, 2003 SPECIAL REPORT: THE SQUEEZE ON WIRELESS Looking for "Rational Economics" Sprint PCS President Len Lauer on the need for a business model that allows wireless carriers to profit and innovate
In the world's most competitive market for wireless services, investors have increasingly demanded that cell-phone companies reduce their huge debt and start earning a profit. To achieve that, the industry will have to change its ways, says Len Lauer, president of Sprint PCS, the nation's fourth-largest wireless provider. Sprint PCS, with 17.8 million subscribers and $18 billion in long-term debt, recorded a net loss of $578 million in 2002. Lauer argues that carriers will have to charge higher prices if they hope to get a return on their investment. But to justify higher prices, they'll also need to introduce more innovative services. Sprint PCS (PCS ) is developing new, integrated data and voice services as well as technology that would seamlessly connect its network with Wi-Fi hot spots -- high-speed connections to the Web -- in cafés and airports, which it thinks will especially appeal to business travelers. Recently, Lauer spoke with BusinessWeek Online Reporter Olga Kharif about his vision for the industry and about the efforts of Sprint PCS to survive and prosper. Here are edited excerpts of their conversation: Q: Some analysts worry about Sprint PCS's mounting debt load and demands on its cash resources. Does the company have the resources to be around for the long haul? A: The year has been significant for Sprint on three fronts: improving its operating performance, vigilant cost-containment, and a significantly improved balance sheet. On February 5, 2003, we reported our 2002 yearend and fourth-quarter results. They were consistent with the guidance we provided in December. Q: When do you think the company will earn its first net quarterly profit? A: Sprint PCS became operating-positive last year, and we expect to be free-cash-flow-positive in 2003 and net-income-profitable next year. [Sprint PCS hasn't yet given its guidance as to when in 2004 it will be net profitable.] Q: Do you see any signs that pricing is stabilizing industrywide? A: Prices actually increased in February. Part of that is seasonal, as carriers normally bring prices down in the fourth quarter and in January, when a lot of gifting is done. Then, they move back to more stable prices. But I've seen even more aggressive price hikes than usual in February. AT&T Wireless no longer offers its $99.99 unlimited plan, and we've increased prices across our plans. It's still a very competitive industry. It doesn't mean that prices won't come down again. But...the wireless industry is much more focused now on free cash flow and net income. You need to make sure that you have pricing that generates free cash flow. Q: How can this industry become healthy again? A: The carriers need to look at rational economics. There isn't one large wireless carrier today that's making a return on invested capital [because prices are so low]. And you need a return to stay in business, [so] we need to see more price stabilization to give this industry a chance to get back to health. Q: How can carriers get to free cash flow? A: A lot of carriers have already rightsized. We, for instance, have 8,000 fewer positions/contractors than we had a year ago. We've also reduced our capital expenditures, since a lot of our network buildout is behind us. That will help us become free-cash-flow-positive this year. Q: How do you hope to make money off the new infrastructure? A: In two ways: First, on voice services. The new network doubles our voice capacity. Second, on data services, such as sending photos from one phone to another.
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