Sprint Chief's Bet Failed to Pay Off
By Frank Ahrens and Kim Hart
Washington Post Staff Writers
Tuesday, October 9, 2007; D01
Perhaps someday, WiMax will be the key to turning around Sprint Nextel, the beleaguered Reston cellphone company. Perhaps someday, consumers will walk and drive across the country, enjoying uninterrupted, high-speed Internet service, watching video, e-mailing and talking on the phone over the Web, thanks to WiMax.
But Sprint chief executive Gary D. Forsee -- the man who committed $5 billion this summer to turn the company into the nation's No. 1 WiMax provider -- won't be around to oversee it.
Forsee resigned yesterday afternoon after running the company for four years. On his watch, Sprint stock steadily climbed, from $12 per share to a high of more than $25 per share in early 2006. But shares have slumped since then, closing down nearly 3 percent yesterday at $18.50, as Wall Street criticized Forsee's decisions.
Specifically, analysts and investors thought that Forsee was short-shrifting his company's core business -- phones -- while throwing a much-riskier, high-cost Hail Mary: building a WiMax network. So far, the expensive project has been met with delays and technical hurdles.
WiMax is like a much bigger WiFi. WiFi allows you to cruise the Web from your local coffee shop without having to plug your laptop into an Internet connection, but if you walk too far away, you lose your signal. WiMax promises high-speed Internet service hundreds of miles wide.
The ultimate dream is overlapping WiMax zones covering the country, letting subscribers stay connected to the Internet even as they travel, getting passed off from one WiMax zone to the next in the same way that cellphone towers pass callers from one phone to the next.
Sprint's $5 billion investment is aimed at slowing other big telecoms, such as Verizon and AT&T, from becoming big players in WiMax. Owning the WiMax space could prove lucrative enough to be a change agent for the troubled Sprint, enabling it to transform from a third-place cellphone carrier that's barely adding customers into the dominant provider of next-generation communications.
This summer, Forsee predicted Sprint would reach 100 million Americans with its WiMax service. In 2006, when Sprint announced plans to build a WiMax network, Forsee said: "We'll give customers the power to harness business information and personal entertainment easily and inexpensively -- and in ways that they will one day wonder how they lived without."
But the technology to make WiMax work has been slow to roll out, and analysts estimate it won't gain consumer momentum until late 2008 at the earliest. Sprint is still testing mobile WiMax technology. It announced during the summer that it would partner with start-up Clearwire, which was trying to build its own WiMax network, to combine forces and speed rollout. But Sprint said last week that the finalization of the Clearwire deal is being delayed.
Sprint is now in the position of figuring how to move forward with the WiMax plan -- without the man who dreamed up the plan. This far in, Sprint may be committed to building out the WiMax network but may not be able to do it fast enough to adequately transform the company to Wall Street's liking.
Sprint's WiMax predicament is like owning miles of pristine beachfront property and then being unable to build condos on your very valuable, exclusive property.
"The fact that they bought a $5 billion network without testing it was a violation of fiduciary duty," said Patrick Comack, senior equity analyst at Zachary Investment Research in Miami Beach. "It's like buying a $5 billion car without test-driving it first."
He added that the company is still struggling to perfect the network's ability to hand over traffic between towers as people move between coverage areas, which is necessary to stay connected while driving, for example.
Forsee found himself in much the same situation as Jean-Marie Messier, former head of Vivendi Universal. Like Forsee, Messier had a vision when he took over the company in 1996.
Messier envisioned that consumers from the Left Bank to Hollywood would pay to download music and videos to their cellphones and mobile devices. Messier spent Vivendi Universal into near-bankruptcy, buying telecom, movie and music companies, chasing the dream.
Messier was right but about five years too early. His company's stock plummeted, the disparate conglomerate never fit together and it ended up getting sold off in pieces. Messier was kicked out by his board in 2002.
Mike Nelson, an analyst with Stanford Group, said investors would not be so concerned about the big bet on WiMax if Sprint was also showing signs of fixing the core wireless business.
"If we were Sprint's CEO for a day, we wouldn't kill WiMax, since it could eventually be a competitive advantage, but would halve the spending in 2008," Philip Cusick, equity research analyst at Bear Stearns, wrote Friday in a note to investors. "We would re-emphasize the core business . . . over non-core distractions" like its prepaid Boost brand and WiMax, he wrote.
In August, Sprint gained new subscribers for the first time in a year but also warned it expected to lose subscribers in the third quarter.
Cusick added that he does not expect WiMax to gain momentum until late 2008 or 2009. A management shift could further delay Sprint in finalizing its contract with Clearwire to build out the network.
"We believe that Sprint is likely to de-emphasize the WiMax business, which could result in a slower rollout for WiMax in the U.S., lower economies of scale for Clearwire and shrink the ecosystem necessary to attract consumer electronics companies to WiMax," Cusick wrote.