Esrey looks toward level pricing field

Esrey is indeed the only telecommunications CEO with staying power. He recently spoke with Network World Senior Editor Denise Pappalardo.

Two years ago we predicted that Sprint CEO William Esrey would be the only leader of the big three telecommunications companies still holding the reins by the end of 2001. While that timeframe was about a year early, Esrey is indeed the only telecommunications CEO with staying power. During his 17-year tenure, he has created the third-largest long-haul provider in the U.S. and one of the most advanced wireless networks. Esrey recently spoke with Network World Senior Editor Denise Pappalardo.

How does Sprint plan to compete successfully with debt-free service providers that have emerged or may emerge from bankruptcy?

We look at a main competitor like WorldCom and say, ‘What if they were debt-free?’ You know right now that [WorldCom’s] pricing in the marketplace with accurate, honest accounting would not produce profits. Their new investors, whether debt holders taking equity or whatever it’s going to be, are going to want a return on investments. So they are going to have to compete effectively.

They also have an infrastructure that’s built for a lot bigger business that they’re not going to have. There is a lot of business fleeing distressed carriers.

If WorldCom comes out of bankruptcy without interest costs, as some of them do, that’s an advantage point. . . . But I don’t think it is at all clear or certain that they will come out of bankruptcy, although that is a distinct possibility.

Is WorldCom the only distressed company that Sprint is looking at from a competitive standpoint?

Oh no, there are a lot of companies, whether it’s a Williams or a Global Crossing. But those companies are not nearly as significant. But even a Qwest, which has had a lot of questionable accounting, is going to be a lot less-effective competitor going forward as they correct their transgressions of the past.

What’s happening with prices?

First of all, pricing is much better than it has been. Some prices continue to go down, some have stabilized, and some have gone up. I think it’s more important to look at the underlying situation in the marketplace. Basically you had price leaders that were trying to gain market share through pricing. In long-distance they were Qwest and WorldCom. We subsequently found out that their accounting wasn’t legit. Now they have to price like other people.

Are the traditional services such as frame relay, ATM and private line better from a profit standpoint than new services such as IP or IP VPN? And is Sprint betting on those traditional services?

No, they are all important. We have to service our customers where our customers are going. We can’t say, ‘This is our dog food and let’s eat it.’ We have to go where the customers are going. Costs are changing and pricing is changing. Generally voice services [are]more profitable than data services.

How does Sprint plan to increase profitability and reduce debt?

You’ll continue to see falling revenues because you have one-, two- and three-year contracts that were created with prices that don’t exist in the marketplace today. So just redoing those contracts with current prices will mean there’s a negative impact on revenues for the same amount of business. It will take a year or two to work through repricing all of those contracts no matter how good or how firm prices get.

Balance sheet is a separate issue and extremely important because the industry is way too debt-laden. We have about $22 billion in debt. We’d like to have a lot less.

We have a definitive agreement to sell our directories business for $2.3 billion. We have mandatory convertibles that we already sold that will bring in $1.7 billion, so that’s $4 billion. If you just look at the FON side of the business, it’s generating in excess of $1 billion in cash flow, and the PCS side is rapidly improving its cash flow. Very conservatively, you can estimate $6.5 billion in improvements in 2004.

Are there particular areas within Sprint in which you’re investing?

We are constantly investing in our growth on the wireline side. On the wireless side, we continue to build out the network, adding 1,800 cell sites this year. We will continue to spend in the billions in capital investment going forward. But we are not building ahead of demand.

There is a perception of negativity in the telecom industry. How do you deal with that?

Customers that have dealt with us know the way we do business. I think it’s more the man or woman on the street that thinks all business people are crooks, particularly if you’re in the telecom business. They read about Global Crossing, Qwest, WorldCom and Adelphia. Who can blame them? You had trillions of dollars of investor value lost between debt being wiped out and equities falling precipitously. You have falling stock prices and this absolutely egregious behavior by some people. I’d be mad, too.