Sprint Franchises to Expand CDMA networks:
Tough Love From Sprint PCS -- Affiliation
Can Save Small Operators, But Are The
Demands Too Great?
Meg McGinity
Companies try-ing to turn the spectrum won at the personal
communications services (PCS) auction into operating
businesses face many complex questions. The most
important one may be simple, however: Just how much
autonomy will they cede to win the backing of a powerful,
national wireless player on whose coattails they could ride
to profitability? The answer, at least according to some of
those taking the deal Sprint PCS has on the table, is: Quite
a bit.
Sprint PCS (Kansas City, Mo.) is eagerly signing affiliates
to expand its network coverage, says Bob Egan, director of
wireless research at Gartner Group Inc. (Stamford, Conn.),
a market researcher. Some say its heavy courting may have
something to do with its upcoming initial public offering
(IPO), while others argue it is simply Sprint's strategy to
get services up and running quickly.
Whatever the reasons, Sprint is moving aggressively. By
the end of August, it had agreements with 10 companies
covering an aggregate of about 24 million potential
customers-about one in every 11 Americans-in 16 states,
according to the company.
Affiliates get a lot and give a lot. They get the Sprint brand
name, the reflected glory of the company's advertising,
discounts on equipment like handsets, access to its
nationwide 156-market presence (a tremendous way to
attract users who value roaming) and the ability to address
lenders with a powerful name atop their letterhead. The
"give" part includes a monthly franchise fee, said by
insiders to be about 8 percent of gross revenue; agreement
to construct and maintain a code-division multiple access
(CDMA) wireless network; and a promise to stay out of the
wireless local loop (WLL) business in areas where Sprint
offers landline local services.
WLL remains a question mark. If it does emerge as a potent
force, PCS operators will be perfectly positioned to offer
it-unless they've signed over these rights to Sprint. The
markets where Sprint's local service and PCS operators'
wireless services will overlap are fairly minor, says Tom
Mateer, vice president of business development for
affiliates. But if WLL blossoms, say others, affiliates might
be constrained in the services they could offer. "If affiliates
want to diversify their services, these agreements may keep
them down a little," says Peter Nighswander, senior
consultant at consultancy The Strategis Group (Washington,
D.C.).
And then there's that 8 percent franchise fee. Will Sprint's
name and expertise offset the payment, bringing affiliates
more revenue and improving their own ability to borrow
money? Or will it deepen the hole that all service
providers launch from, short-circuit the business plan and
reduce operators' attractiveness to lenders? "Having an 8
percent haircut off the top does hurt," Nighswander says.
"Margins will be negative for a few years, and there will
be significant outlay. Having the brand name Sprint and
having access to discounts may or may not make up for
these costs," he says.
"This puts pressure on the business model for the affiliate
because it's a percentage of gross revenue," says Gerald
Vento, chief executive officer of Telecorp PCS Inc.
(Washington, D.C.), a PCS operator. Telecorp evaluated
both the Sprint deal and the AT&T Wireless Services
(Bridgewater, N.J.) affiliate program before picking the
latter. AT&T Wireless offers more of a "partnership,"
Vento says. "Banks and bondholders don't like that money
going out the door before the bondholders are paid." The
proof is in the funding, he says: Telecorp just completed a
$529 million bank deal and raised $200 million in private
equity. Still, Bill McKell, president of affiliate Horizon
Personal Communications Inc. (Chillicothe, Ohio), a
telephone company, say the Sprint offer is a good deal
regardless of the fee.
Sprint is not the only game in town for small operators;
they can simply remain independent or join an alliance like
the North American GSM Alliance LLC (Chicago), which
enables companies to work together without giving up their
independence or business plan. On the national level,
carriers can grow through acquisition, such as AT&T
Wireless's Oct. 5 purchase of Vanguard Cellular Systems
Inc. (Greensboro, N.C.). AT&T's major initiative involves
the joint ownership of spectrum with affiliates. Sprint,
conversely, leases out its spectrum to be used by the
affiliate. Sprint has enough spectrum to cover the United
States. Some affiliates return spectrum they won to the
FCC; others intend to provide additional service and thus
hold the spectrum.
There is some evidence that Sprint's drive to sign affiliates
is a recent development. Some PCS license holders,
including Enterprise Communications Inc. (Brookfield,
Wis.), contacted the big national service providers right
after the auction, but with no success, says Enterprise CEO
Tom Beal. It wasn't until less than a year ago that Sprint
called Beal and reopened discussions about affiliate
programs. Enterprise is now a Sprint PCS affiliate.
"[Sprint PCS] realized it had more on its plate than it could
handle," he says.
The question that only time will answer is whether the
agreements are overly restrictive or simply ask a fair price
for a relationship that may stave off calamity. Sprint says
the nature of the FCC auction makes bankruptcies likely
and that companies following its affiliate structure improve
their chances of survival. But many think the company is
driving a ferocious bargain.
"Sprint has got its affiliates by the throat," says Kevin Inda,
vice president of investor relations at Powertel Inc. (West
Point, Ga.), a competing PCS operator. The affiliates'
marketing strategy gets complicated when it has to meld
what they already offer with Sprint's rigid business plan,
Inda says. "Some smaller companies are having the
shackles put on them so heavily, it's a shame," says Andrew
Cole, senior wireless analyst at Renaissance Worldwide
Inc. (Lincoln, Mass.).
The agreements' defenders-and they are numerous, judging
from the 10 companies on board-say the Sprint name is
worth a lot of compromise. "The benefits outweigh the
perceived lack of control," says Rick Rappe, CEO of
WirelessNorth LLC (Plymouth, Minn.). WirelessNorth will
make a decision to affiliate or not by year's end, Rappe
says. Sprint says its non-equity stake agreement is the best
deal available to affiliates. "Sprint PCS advertises
nationally. To compete with that is a daunting task," says
Mateer. "They'd rather be part of that than compete against
that." Sprint's choice of CDMA technology, marketing
power and willingness to talk to the smaller operator
makes Sprint a good provider for his company, says
Horizon's McKell. AT&T uses a time-division multiple
access (TDMA) network.
More affiliate deals will be announced soon, Sprint says.
Those, and the ones already on the books, seem classic
cases of trying hard to do the impossible: predict which of
several significantly different paths will lead to first
survival and then success. "In time it will be shown what
our investment in this affiliation relationship brings," Beal
says. "We are going into this thing for the long haul."
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