The third largest US wireless carrier Sprint Nextel (S) is outsourcing its networks to Sweden-based Ericsson AB (ERIC) under a seven-year agreement worth $4.5 billion to $5 billion (almost equivalent to the cash available on Sprint’s balance sheet), representing one of the largest network outsourcing deals in the global telecom industry. The agreement, however, excludes the company’s high-speed wireless broadband (WiMax) network.
Ericsson, a leading manufacturer and supplier of telecommunication equipment, will manage, optimize and operate Sprint’s CDMA and iDEN technology based wireless networks as well as wireline network. On the other hand, Sprint will maintain full ownership and control of its network assets and will continue to solely make network strategy and investment decisions.
Under the agreement terms, approximately 6,000 Sprint employees will be transferred to Ericsson by the end of the third quarter of 2009 which will be followed by the shift of network operations within 1-1.5 years.
The historic outsourcing deal has come to rescue of the struggling US carrier as it remains significantly challenged by customer retention problems, further exacerbated by the recession. Sprint continues to experience lower revenues from its wireless operation due to decreasing subscriber count (especially in the postpaid segment), largely attributable to the integration problems associated with Nextel’s iDEN wireless network, which it acquired in 2005.
Over the years, Sprint has made considerable capital outlay to unify its own CDMA network with the iDEN based platform that offers instant push-to-talk mobile service.However, this phase-out has prompted many of its subscribers to switch to other carriers (over 4 million subscribers lost in 2008), primarily to larger peers such as Verizon (VZ) and AT&T (T).
Sprint is hoping to turn the table this time around as the loss making carrier expects to achieve meaningful savings in operating cost by outsourcing its network operations. The company’s ongoing manpower reduction program coupled with the shift of its workforce to Ericsson is expected to reduce labor expenses by approximately $1.2 billion.
Additionally, the outsourcing will free resources as the company can now concentrate on product innovation and development rather than investing in network technology, maintenance and upgrades. Sprint will benefit from Ericsson’s industry leading experience in network services, which is expected to improve the quality of network performance.
We reiterate our Hold recommendation for Sprint Nextel as we await signs of material improvement in its business endeavor.
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