"This Industry Looks Very Healthy to Me"
europe.businessweek.com
Sprint PCS President Charles Levine expects wireless penetration rates in the U.S. to approach the European and Asian levels
Sprint PCS is known as a pioneer in the cellular business. One of the first service providers to market to teens, the company leads the industry in wireless games and fancy cell-phone ring-tones, both hits with consumers. It will soon become the first U.S. operator to launch a nationwide high-speed wireless network, allowing for cell-phone access to e-mail and photo downloads. The innovation has paid off in market share: Sprint PCS (PCS ) has 15.8 million subscribers, nearly triple its 5.7 million in 1999, and has become the No. 4 wireless provider in the U.S.
During 2001's fourth quarter, though, Sprint suffered the same slowdown in customer growth as rivals Cingular Wireless and Verizon Wireless. Sprint PCS has since cut its growth forecast for 2002 to 3 million new subscribers, from 3.6 million to 3.7 million. The company is $16.7 billion in debt and is posting operating losses. New services and a focus on becoming profitable should help it prosper eventually, declares President Charles Levine, who talked to BusinessWeek Online reporter Olga Kharif on Feb. 8 about the slowdown, the company's new network, and some of the challenges facing the industry. Edited excerpts from that conversation follow.
Q: Does the slowdown in customer sign-ups mean slower growth in the future?
A: I think the problem is with the economy. This industry looks very healthy to me. In late 1986, we were at about 16.5% wireless penetration [share of potential customers] as an industry. Today, we're at about 43%. In Europe, many countries are at 70% to 80%. In the Far East, the same is true. There's no reason I can see that the U.S. won't approach those same rates.
Q: But all the prime customers are taken. Now, service providers have to go after customers with credit problems, who are more risky and not as profitable. Sprint PCS has the largest share of this so-called prepaid market. How can you make it work?
A: It's very difficult to make money in the prepaid market. That's why we aren't active in it. What we do have is our Clear Pay plan. It is not a prepaid product, it's postpaid. And we find that it's profitable.
As wireless penetration increases, you must go after new market segments. In many cases, those customers will not be as strong financially as customers you had previously. And I think we have to only serve customers profitably. So far we've been able to do that. If we can find a way to develop a prepaid program that's profitable, we'll do it. But so far we haven't found that.
Q: What's your strategy to keep your customer base growing?
A: The most important element is offering customers new applications. Later this year, we'll be introducing next-generation wireless networks, which will increase data speeds by a factor of 10. In the business market, we think applications will emerge that will create a lot of usage from very good customers. In addition, we will also increase usage among youths, who find applications such as gaming and instant messaging to be of enormous interest.
Q: Which applications do you expect to be most popular with businesses?
A: The killer application will be access to e-mail. More and more, businesses and employees are spending time -- unproductive time -- at airport lounges, for example. More and more companies are finding their hotel bills now have huge charges on them for telephony, because many hotels have now started to charge a $1 to $1.50 connection fee, and often charge by the minute, even for 1-800 calls after a certain amount of time.
Our new networks [expected to be launched this summer] will offer an alternative that is faster than the dial-up at hotels and significantly less expensive. We can also customize applications and, essentially, allow businesses to take the applications that are important to them and make them mobile.
Q: How soon do you think data services like these will take off?
A: I don't think it will be instant, and our plans for 2002 don't reflect instantaneous take-off. But we already have 2.5 million users for wireless Internet. And I think that number will go up significantly when we introduce the new networks.
Q: What advantages will the new networks bring you?
A: The networks will double our capacity for people who have new cell phones that are specially made to use this technology. As those proliferate, we will [be able to accommodate more voice calls through the same network]. What we'll have, in essence, is a much lower-cost network to provide the same level of service and clarity.
Q: Some consumer advocates have said that Sprint PCS receives the most complaints of all carriers in relation to coverage and customer service. What are you doing to resolve these problems?
A: I haven't seen any statistics that show we have more complaints than other people. Last year, we won two awards for customer care. And since then, we've reduced the time that customers wait to get calls answered, and we've improved the percentage of calls we answer correctly the first time.
It is also true that customers, especially heavy users, have some dropped calls. It's a very low percentage, though it does exist. We are continually adding cellular sites [which capture calls and send them along the network]. There's a challenge associated with that, however: Some communities are putting roadblocks in the way of putting cell-phone towers up. In some cases, they've passed laws that appear to violate federal guidelines and mandates.
So, there are areas where we have a hole that we can't fix unless we get permission to build the site. Sometimes, that requires us to go to court.
Q: Do you think that, perhaps, the government isn't doing enough to help cell-phone operators?
A: Congress has directed the Federal Communications Commission to oversee siting. And, in my mind, the FCC could be doing significantly more than it is today. I would like to see a common policy for siting across the country. That would help us reduce our costs and the savings, of course, could be passed along to consumers.
Q: You've cut your capital spending plans from $3.5 billion to $3.4 billion for 2002. Where do you hope to get that money?
A: As we'll have fewer net subscriber additions this year, we have less need for spending to expand the network than we had before. What we can't provide internally we'll be able to get through the debt market.
Q: Many analysts expect a lot of consolidation in the industry in the next 18 months. Have you discussed mergers with other U.S. operators?
A: We aren't going to discuss whether we are talking about mergers with other carriers. Generally, I think there's likely to be some consolidation, based on similar network technologies.
I think there's also an obstacle, which is the Department of Justice. It's not obvious to me how willing it will be to approve mergers of the larger players. If it's willing to do so, there are likely to be some. That won't happen until the end of this year, though [when the FCC is expected to lift its limits on how much spectrum an operator can own in a given area].
Q: Investors' focus has shifted from subscriber growth to profitability. How does this affect your strategy?
A: We've been pretty consistent on this. Three years ago, we were negative $2.5 billion for earnings before charges such as taxes. Last year, we had $1.5 billion in earnings before taxes and other charges. And this year, we are targeting to make $3 billion before various charges. So I would argue that we've had a pretty consistent track record and focus on improving profitability.
Investor sentiment has changed from a focus on growth to a focus on profitability to sheer panic. I think as a result the industry is hugely oversold. |
