Sprint Nextel Corp. will eliminate 2,000-to-2,500 positions within the company in the fourth quarter of 2009 to reduce internal and external labor costs by at least $350 million yearly.

The impact on geographic locations will vary, and many impacted positions will be eliminated by Dec. 31. The reduction impacts positions companywide, including those previously announced this month in the Wholesale organization, as well as a reduction in contractor and other outside labor.

?It?s an unfortunate reflection of the reality of their business?they have been steadily losing high-value subscribers and revenue has declined," said Charles Golvin, Santa Cruz, CA-based analyst at Forrester Research. ?Not only have AT&T and Verizon been growing more quickly than Sprint and T-Mobile, due to the level of saturation in the market much of that growth is at the expense of the smaller carriers?customers churning to the larger carriers, in particular high-value customers.

?Further, AT&T and Verizon are preparing to expand their networks to include additional blocks of spectrum from the past two auctions, which is likely to accelerate this separation in the future,? he said. ?I don?t have sales figures for the Pre, but I believe Sprint is looking for its two Android devices from HTC and Samsung, the BlackBerry Tour and the new Palm Pixi to help with additions in the fourth quarter.

?Unfortunately there is very stiff competition from new Android devices from Verizon and T-Mobile, and of course the iPhone, and I believe it will be very difficult for a single device to be a breakout hit in Q4, rather we?ll see a number of more modest successes.?

Sprint Nextel is the No. 3 carrier in the U.S., operating two wireless networks serving more than 48 million customers at the end of the third quarter.

The labor cost reductions are the latest action in the company?s efforts to make its cost structure more competitive in the industry and to remain financially secure in a challenging economic environment, according to a Sprint statement.

At the end of the third quarter 2009, the company had a balance of $5.9 billion in cash, cash equivalents and short-term investments, and said that it expects to continue to generate positive free cash flow during the fourth quarter.

Sprint will provide severance benefits and outplacement services for impacted employees.

The company expects to recognize a charge of approximately $60 million to $80 million during the fourth quarter for severance and related costs associated with the reduction.
 
Analyzing Sprint?s strategy
This second round of job cuts brings the total to 16,500 for Sprint in 2009. That figure includes the transfer in September of 6,000 Sprint employees to Ericsson, which will manage carrier?s network.

The cuts are another attempt to drive efficiency as Sprint's revenues continue to suffer.

The third-quarter-2009 results put Sprint?s revenues almost 25 percent off their peak level in the third quarter of 2006, with earnings before interest, taxes, depreciation and amortization (EBITDA) cut by more than 60 percent since that time, according to Strategy Analytics.

?So, cost cutting is essential,? said Phil Kendall, Milton Keynes, England-based director of global wireless practice at Strategy Analytics. ?Sprint is getting close to a return to positive retail net adds as its Boost unit performs well and reports improving customer satisfaction, so hopefully the worst is behind it.

?But it is a case of Verizon Wireless and AT&T Mobility pulling away from the rest of the market,? he said. ?Sprint generates a fraction of the EBITDA of Verizon Wireless or AT&T Mobility, which puts constraints on its activities, both in terms of the need to keep the tightest control on all aspects of its operations and on its ability to fund significant network expansion or upgrade through the use of cash.

?So in general, Sprint has now been dragged more into a dogfight with players below it in the market, in particular all-you-can-eat carriers like MetroPCS and Cricket, and the same applies to T-Mobile.?

The Boost Unlimited offer is performing well there, but those customers are generating lower revenues than Sprint is used to, so it does not want to divert too much resource to fighting it out for unlimited voice/text at those $40-50 price points, according to Mr. Kendall.

Pre-mature celebration?
The Palm Pre is the preeminent smartphone that is exclusively available on Sprint.

While the Palm Pre has generated some buzz, whether or not the handset can sustain sales in the face of competition from Apple?s iPhone, Research In Motion?s BlackBerry and Google?s Android remain to be seen.

?Regarding the Pre, there are signs that early sales are nothing to get excited about,? Mr. Kendall said. ?Sprint recently downplayed the impact of the Pre and early signs from Palm are that the Pre has seen less-than-expected take-up at Sprint.?

Sprint has been a long-time benefactor of Palm device sales here in the U.S. and still offers some of their legacy devices such as the Centro, the TreoPro and the Treo 755. Sprint will also offer the low-cost Palm Pixi.

?But Palm is struggling to get traction with developers for its WebOS platform, and relative to Android and Apple, it is really struggling to get noticed in the rich-Web-device market here in the U.S.,? Mr. Kendall said.

?This is not the time to be scaling up support for a new device platform in an already crowded market, and Palm is plagued by bad headlines that seem to be greasing the skids for a downward spiral at the manufacturer,? he said. ?The recent bad press that the Pre does not sync with iTunes is a good example.?

Sprint has been successful with devices like the Samsung Instinct, which did very well for Sprint in the last few years and now comes in several versions, including a high-resolution version.

?But that device sold more for its design and its iPhone copycat UI more than it did for the compelling services and apps that it offers,? Mr. Kendall said. ?In terms of forward-looking priorities, Sprint is banking on Android devices to help supplement its position relative to other operators for things like applications stores and compelling Web experiences.

?It already offers several Android devices from HTC and will likely be aggressive in expanding its mix of Android n the short-term future,? he said. ?It will continue to offer a mix of customized devices like the Instinct along with smart devices using Android, Microsoft and RIM.

?If Android devices sell well at Sprint, Palm and Windows Mobile are most likely to suffer as a result.?

Merger in the works?
There have been rumblings in the industry about a possible merger between Sprint and Deutsche Telecom?s T-Mobile USA, and consolidation is an obvious option for scale.

?A Sprint/T-Mobile USA merger would put them on a par with Verizon Wireless and AT&T in wireless revenue terms, though still behind in terms of combined EBITDA,? Mr. Kendall said. ?It offers the potential of scale, but the prospect of running those different network technologies is a major cause for concern.

?There is a good long-term story of the cellular technology of Sprint/T-Mobile collapsing on LTE, but running radio networks based on CDMA/iDEN/EDGE/HSPA (putting Clearwire to one side for a minute) generates the kind of complexity that makes the scale advantages somewhat redundant,? he said.

?It is a good longer-term option, it just doesn't solve any of the competitive weaknesses Sprint has today in relation to the financial clout of Verizon and AT&T.?

While integration would be a challenge, a merger is something that Sprint and T-Mobile USA could consider.

?There is no quick fix for Sprint and T-Mobile in a market where Verizon and AT&T are dominant,? Mr. Kendall. ?A technology merger on that scale looks like one big headache, but is definitely an option.

?Certainly recent experience internationally suggests Deutsche Telekom is taking a quite pragmatic approach to its position in key markets, for example the merger of its British operations with Orange,? he said.

Others are much more skeptical about the viability of such a merger taking place.

?I don?t think it?s a good idea nor is it likely,? Mr. Golvin said. ?Sprint is already using three different networks using three different technologies?CDMA, iDEN and the Clearwire WiMax network?and joining with T-Mobile would introduce a fourth, and even a fifth if you include their WiFi Hotspot business.

?I think the network complexities would make the task extremely challenging and would not allow them to take advantage of the increased scale,? he said.

Brighter days ahead?
News of the job cuts actually caused the price of Sprint's stock to go higher. So is this just a blip on the radar caused by the recession?

"The bleeding at Sprint is slowing as demonstrated by fewer customer losses than past quarters," said Dan Shey, Denver, CO-based practice director of mobile services at ABI Research. "But they still have a tough road ahead and it shows that in a tough competitive environment, it is hard to regain momentum.

"It almost takes another carrier to falter to get out of the slump," he said. "Will T-Mobile?s Sidekick debacle be that event?"
 
Sprint in depending on WiMax to reinvigorate its sales proposition and drive sales.

"The question is can they effectively market the speed and capacity benefits of this technology to consumers and businesses in a message customers can understand," Mr. Shey said. "Should they take the other carriers head on similar to what Verizon is doing with their recent misfits commercial?

"Probably not since their WiMax network does not cover the entire U.S.," he said. "The other carriers know they have Sprint in a weak position even though they will all be broadband speed laggards once Sprint?s WiMax network is fully deployed across the U.S. 

"The way the other carriers stay on the offense is to continue to gain marketshare with their networks and we are seeing that in Verizon?s recent prepaid mobile broadband offerings."