Sprint's Fate - A Cautionary Tale

Like a lot of businesspeople, I keep CNBC (or Fox Business or CNN) on in the office much of the day, just in case anything is happening. And happening things were last Friday. Whilst watching my net worth drain away, I couldn't help but notice that Sprint's stock was down about 25% - in one day. In fact, Sprint has lost about two-thirds of its value since the stock peaked over the past year, and the news, despite a restructuring plan now being crafted by new (and very capable) CEO Dan Hesse, remains bad. They're losing money, subscribers, and credibility. They're cutting back big time. I generally don't pay too much attention to the ups and downs of the stock market in a broad sense; the long-term trend is always up, and, if it's not, then it doesn't matter, as we'll all be poor. But the case of Sprint's market valuation is in fact quite instructive, and the roots of its troubles go back many years - in fact, to around 1993.

For Sprint's troubles have their roots not in their lack of an iPhone alternative, but rather in US spectrum policy, which is designed to enrich the US Treasury to the greatest possible degree, without regard for a great deal of damage left in the wake of what is perhaps the greatest mistake made by the US Federal Government since the last one they made. With the next round of spectrum auctions starting tomorrow, all of this should give us pause. While we'll of course proceed at this point with the 700 MHz. auctions, such may only be digging a deeper hole - fragmenting an industry that must have economies of scale in order to survive.

OK, some of the trauma at Sprint is self-inflicted. Acquiring Nextel might not have been the best move, but carriers are valued in large part on the number of subscribers they have, and the plan to convert the installed base from iDEN to PTT based on IP certainly seemed like a reasonable path at the time. Similarly, WiMAX also seemed like the thing to do 15 months ago, given that (a) it had a big lead over competing wide-area wireless broadband alternatives, (b) Sprint had spectrum at 2.5 GHz. that it really needed to put to work, and (c) Sprint's partners would end up funding a large part of the investment. Of course, since then, Verizon decided to go with LTE, HSPA gained installed base and performance, and Motorola has big financial problems of their own. Still, it's the loss of subscribers that hurts the most. Given that the voice market is saturating, it's not surprising that someone has to lose as grow slows. Data services alone can't make up the difference because of the large amount of spectrum required to provision mobile broadband. ROI becomes a big issue. Economies of scale, again, are the solution.

As I noted before, I expect Sprint to spin off its WiMAX effort as a separate company. But it now appears that such alone isn't going to save the company. Sprint is likely, then, to be further dismembered, with its wireless properties going to (very likely) one of the other Big Three carriers. This shouldn't be surprising in any way - remember, there were once six nationwide carriers, and we are now on our way to having just three, and possibly only two in a few more years. Such is normal and natural in high tech, but I can't help to think that all of this pain could have been avoided had US spectrum policy been established from the beginning not to provide more funds to the Treasury, but rather to build a strong, competitive industry that, after all, is a key element in national infrastructure and thus both national security and economic competitiveness - to say nothing of providing a cost-effective mechanism for the download of music and porn.