The turnstile at Sprint Nextel keeps spinning. The latest executive exit was announced on Oct. 10, when Sprint said Tim Donahue, executive chairman of the Sprint Nextel board of directors, will step down at the end of the year. Donahue, 57, was chief executive of Nextel before Sprint acquired the company last year for $35 billion. And Donahue's departure comes just a couple of months after the ouster of Chief Operating Officer Len Lauer, a veteran Sprint executive who left after the company reported weak second-quarter earnings in July.
Now, all eyes are fixed on CEO Gary Forsee. With his operations guru gone and respected leader Donahue on the way out, Forsee is left to prove the big strategic bets he's placed were on the mark. It was Forsee who encouraged Sprint's laser-like focus on wireless—a plan punctuated by the Nextel acquisition. And last year, Forsee inked an unconventional joint venture with a group of cable operators to offer cable-branded wireless service. The deal was intended to differentiate Sprint (S) from other telecom stalwarts and put it on a path to faster growth.
Today, though, Forsee faces a daunting task. Sprint has recently found itself beset by falling revenue per user and embarrassingly high customer turnover. After almost a year, the cable joint venture with Comcast (CMCSA), Cox, Time Warner Cable (TWX), and Advance/Newhouse Communications has yet to get off the ground. While it plans field trials in seven mid-tier markets such as Portland, Ore., and Austin, Tex., by yearend, those cities represent a smidgen of the nearly 90 million customers that Sprint and the cable companies serve. Sprint shares have lost a quarter of their value since early April, closing at $18.04 on Oct. 10.
CONSULTANT SHOPPING. It makes sense then, that the board of directors (on which Forsee sits) isn't happy. Even with Lauer gone and Donahue headed for the door, BusinessWeek has learned that the board has stepped up pressure on Forsee to demonstrate he can get Sprint back on track over the next several months, according to sources familiar with the board's thinking. "Forsee is in trouble, and there's talk that the timer is ticking on him," says one Wall Street insider. Sprint Nextel spokeswoman Leigh Horner says, "The board has full confidence in Gary's leadership."
Despite the pressure, there's evidence Forsee has no plans to give up. BusinessWeek has learned that he is talking to advisers at consulting firms such as McKinsey & Co. to help refine strategy.
With the company struggling, company insiders say those in the Nextel camp are eager for a Nextel executive to assume greater control of day-to-day operations. Before it was bought, Nextel was the most profitable wireless operation in the U.S. and boasted one of the lowest rates of customer turnover.
CEO IN WAITING? That's why before the Oct. 10 announcement, the hedge fund community had been abuzz with talk of Donahue becoming more of a hands-on exec at Sprint Nextel. Now that he's stepping out of the picture, some on Wall Street speculate that Paul Saleh, the former Nextel chief financial officer who stepped into the same role at the merged company, could takeover as CEO if Forsee is unable to steady the ship. "That would not surprise me," says one Wall Street insider. Sprint declined to comment.
Forsee's future will hinge at least in part on whether he can stimulate the venture with his cable partners. The joint venture is supposed to provide the cable operators with a wireless service that competes with that of telecom rivals such as AT&T (T) and Verizon (VZ). The telcos and cable companies are battling each other to offer consumers a package of services that includes basic phone, TV, Internet, and cellular calling. While the venture was an active bidder in a recent auction of U.S. government airwaves (see BusinessWeek.com, 8/25/06, "Who Needs Radio Frequency?"), it's got a lot of work to do with what sources say is a skeleton staff.
That won't be easy, given what cable-industry analysts and consultants say is a poorly structured deal (see BusinessWeek.com, 11/3/05, "Sprint Nextel's Watershed Deal"). The cable companies function as mere agents for Sprint Nextel's wireless service. The cable companies get what amounts to a commission on sales, plus a payout based on the number of subscribers. The service has few if any subscribers to date. "It doesn't provide the cable guys with a rich economic equation or the opportunity to mount an effective bundled play where they control the service offer," says one telecom consultant.
CABLE VETERAN IN. With nothing but trials to date, and a host of operational problems, sources close to the cable industry say cable players are getting impatient with Sprint's progress on the joint venture. That's why as Sprint announced that Donahue was leaving the board, it also announced that Robert Bennett, formerly of cable provider Liberty Media, would join. "Appointing a cable executive to the board is absolutely clear recognition from Sprint that they are renewing their commitment to the cable joint venture," says Richard Siber of Siber Consulting.
The cable companies say they remain committed to the project. But some cable players may find it easier to just start anew. Witness the demise of ESPN Mobile, an unrelated venture. ESPN leased network capacity from Sprint to sell its own branded service, but recently pulled the plug because the consumer base never took off. Subscribers didn't see the value in leaving the likes of Verizon Wireless, which offers ESPN content, to buy separate service from ESPN.
ESPN struggled even though it marketed service to potential customers. The cable consortium has less control over a service co-branded with Sprint. So it's no stretch to see that customers would be hard to come by under the current cable-Sprint joint venture. "Sprint's position has certainly weakened since Forsee struck the deal," says another consultant. "So the cable companies have an opportunity to go back and restructure it."
Restructure—or perhaps even buy Sprint Nextel. Insiders on Wall Street are talking about the possibility that Comcast will make a bid to buy Sprint Nextel.
PLAYING THE T-MOBILE CARD? One scenario poses Comcast using recently acquired spectrum to entice Sprint rival T-Mobile USA, owned by Deutsche Telekom (DT), into a deal. But if T-Mobile balked, under this scenario, Comcast could then go to Sprint and make a low-premium offer, using its T-Mobile talks as leverage. In other words, they could tell Sprint, they're exiting the venture and buying T-Mobile, leaving Sprint without a content partner and foiling Forsee's cable strategy, unless Forsee agrees to the price the cable companies demand. "It's not unlikely," says a Wall Street insider.
For now, the cable companies are focusing on delivering their bundle of TV, Internet, and phone service. But wireless is a priority they won't neglect for long. If Forsee doesn't strengthen his company's performance soon, he could see his deal-making innovation get tossed along with his desktop nameplate.
Crockett is deputy manager of BusinessWeek's Chicago bureau
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