Sprint’s Customer Erosion Prompts Cutbacks

Sprint Nextel’s announcement on Friday that it is losing customers more rapidly than expected is making investors nervous about a weak economy’s effect on other wireless companies.

Shares of Sprint fell $2.87, or 25 percent, to $8.70 after it said that it planned to lay off 4,000 workers and close stores to trim costs as its customer base shrinks.

The stock prices of AT&T and Verizon also slipped after the news. AT&T, the largest wireless carrier, was down more than 3 percent, and Verizon, which owns Verizon Wireless along with Vodafone, fell more than 4 percent.

Sprint has been struggling for more than a year, and installed a new chief executive only last month. But the sharp drop in the company’s customer count during the traditionally strong holiday quarter, analysts say, raises concerns that the problem extends beyond Sprint.

“The broader question here is whether this is the tip of the iceberg in a deceleration of the U.S. wireless market over all,” said Craig Moffett, an analyst at Sanford C. Bernstein & Company.

Industry analysts had estimated that in the fourth quarter Sprint lost about 350,000 contract subscribers — a carrier’s most valuable customers, signed up for contracts of a year or more. Instead, Sprint announced that it had a net loss of 638,000 contract customers.

“It’s the magnitude of the weakness that is shocking,” said Michael Nelson, an analyst at the Stanford Group, an investment firm.

To reduce costs, Sprint said it planned to cut its payroll by 4,000 workers. The company, based in Reston, Va., currently has about 60,000 employees.

Sprintsaid it would also close 125 company-owned retail stores, about 8 percent of the nearly 1,400 in the Sprint chain. The total labor savings, the company said, should be $700 million to $800 million a year.

The cutbacks were the first major step taken by Sprint since the arrival last month of its new chief executive, Daniel R. Hesse. He had been the chief executive of Embarq Corporation, a local-phone spinoff of Sprint.

Cutting costs at Sprint, analysts say, is a logical step, given the decline in business. But they say the company must address other fundamental issues — some unresolved since Sprint completed its $35 billion purchase of Nextel in 2005. The company, the analysts say, runs two networks that use different technologies, and making the transition to a single compatible technology is proving to be more time-consuming and costly than expected.

Sprint, Mr. Nelson said, has also not settled on a consistent marketing strategy. By contrast, he said, Verizon has successfully promoted the quality of its network with advertisements that include the catchphrase “Can you hear me now?”

And AT&T has carved out a position as offering a reliable network and stylish handsets. It was the first to offer Motorola’s Razr and, later, Apple’s iPhone.

“But Sprint has not come up with a broad enough marketing strategy to appeal to a mass consumer audience yet,” Mr. Nelson said.

It is unclear whether Sprint’s travails are solely its own or portend broader troubles for cellphone carriers. Before the Sprint announcement, Mr. Moffett of Bernstein published a report that noted the telecommunications industry has long been considered a safe haven when the economy is weak. “Suddenly,” he wrote, “that looks like a riskier bet.”

The reason, he said, is doubt about the outlook for the wireless business. The industry has been adding 3 million to 5 million new subscribers a quarter in recent years. But by now, more than 85 percent of Americans are subscribers — well into the 90s, if one includes only adults.

The growth in net new subscribers will inevitably slow. Some of the slippage will be offset by increased revenue per user, as subscribers buy more data services like Web searching, video and audio. But the main engine of growth for the industry, Mr. Moffett said, has been new subscribers.

In the last national economic slowdown, the pace of new-subscriber signups fell approximately in half from 2000 to 2002, before rebounding again.

“If we’re headed into a recession,” Mr. Moffett said, “wireless growth expectations are suspect.”
Source : http://www.nytimes.com