Sprint-ing Into Wireless
This story is part of the Strategic History of Sprint series.
Yesterday we looked at how United Telecom expanded into Long Distance and became Sprint. The story involved joint ventures, acquisitions, and big bets. It was a long road with a few twists and turns. Today we look at how Sprint became a wireless carrier, and it’s more of the same — in fact much more.
The modern U.S. wireless industry dates back to the early 1980s when the FCC started distributing spectrum licenses for the new cellular wireless architecture. Those first licenses were given away — two in each market. One went to the local telephone company and the other went to an applicant who could prove they could build it out. (The story is a bit more colorful than that, but beyond the scope of this article. I recommend Wireless Nation if you’re interested. It’s a great read!)
As a local telephone company, United received licenses in the areas where it served. Many of these areas were suburbs of larger cities. The FCC encouraged companies to partner together so that one wireless network could be built to serve an entire metro area. United Telephone formed a joint venture with other independent telcos and AT&T’s Advanced Mobile Phone Service, Inc. (AMPS) subsidiary. The first round of licenses covered the largest cities in the country and United received a minority stake in the wireless operations in New York and Kansas City. In the second round, United gained positions in Orlando, four Ohio cities, Allentown, and Norfolk-Virginia Beach. In later rounds, the company continued to expand its footprint. When AT&T was broken up the AMPS operations were split between the 7 Bell Operating Companies which have now largely been reconsolidated into Verizon and (the new) AT&T.
By 1987 the wireless business, now named United TeleSpectrum, had grown to operate cellular systems in 18 markets and have a minority interest in 11 metro areas. The company had almost $25 million in revenue. The following year, however, Centel came knocking. Centel was fighting off a hostile takeover attempt and was willing to pay a large premium for TeleSpectrum as part of creating a “poison pill” to dissuade the acquirer. It was a price that United couldn’t refuse. In May 1988 United sold its TeleSpectrum business to Centel for $750 million and United was out of the wireless game almost before it had even started.
But, providentially, as we mentioned Tuesday, Sprint acquired Centel in 1993 and was back in the wireless game. With the merger Sprint had cellular operations in 42 metro markets, had an equity interest in 31 other metro markets and 79 rural markets covering a total combined proportional population of over 20 million people. Sprint Cellular continued to grow surpassing 1 million subscribers in 1994 and $834 million in revenue in 1995.
In evaluating external trends, the company recognized the significant growth potential in wireless, and the growing importance of data communications. Looking inwardly, strategy leaders recognized that the local telephone business was stable and profitable, but not growing, and the long distance business was still growing, but approaching its peak. It was time for another big bet, and that bet was in wireless.
The first generation of cellular service was analog. The second generation was digital but very limited. The FCC had announced an auction for new spectrum bands which could deliver higher data speeds and that would support Personal Communications Service (PCS), supporting voice, data, personalized content, pictures, and eventually video. This auction provided the opportunity for the company to build an “all-digital, nationwide network” that would complement its fiber network and voice, data, and video wireline services.
As Sprint’s 1995 Annual Report put it “Sprint Spectrum will create and market a higher quality and more reliable digital wireless service than is known in today’s marketplace. Using the most modern technology on a consistent, national basis to achieve a distinct competitive advantage may well be a rerun of how Sprint redefined the long distance market by building the nation’s first, and still only, all-digital fiber-optic network. Sprint Spectrum has already acquired licenses to provide the next generation of wireless service known as Personal Communications Service (PCS). We will package this new PCS wireless service with our long distance and local service to create a comprehensive offering that will meet all the needs of our customers from a single, well-respected source. Sprint Spectrum’s reach will cover more than 182 million people, nearly three-quarters of the U.S. population, giving us the greatest coverage of any wireless provider in the United States. We will offer better clarity, more privacy and greater value than existing wireless service.”
By the time that Annual Report was released, the company had taken two critical steps in this big bet on wireless. First, they formed a joint venture (Sprint Spectrum LP) with three of the largest cable providers in the country: TCI, Comcast, and Cox. That partnership than aggressively participated in the FCC’s PCS auctions. Together they spent $2.2 billion to acquire the 29 licenses to provide the coverage mentioned in the annual report. The company would spend another $10 billion dollars building out the network to put that spectrum to work, and another $2 billion (without partners) for more spectrum to fill in the nationwide footprint.
One cost of this big bet was that FCC rules forced Sprint to divest its existing wireless operations. In early 1996, Sprint Cellular was spun-off to Sprint shareholders as an independent entity. It was re-named 360 Communications. In 1998 Alltel acquired 360 for $5.8 billion. Ten years later Verizon Wireless acquired Alltel for $28 billion.
By the end of 1996 Sprint PCS offered service in 8 markets. By the end of 1997 that was up to 134 metropolitan markets, and by the end of 1998 the network had expanded to cover more than half of the U.S. population. While AT&T had once predicted that the total number of wireless subscribers nationwide would top out around one million, Sprint PCS added 836,000 new customers in the fourth quarter of 1998 and had reached the 3 million subscriber mark by February of 1999. In November 1998 Sprint recapitalized its common stock, creating a new PCS tracking stock that was used to buy out the cable partners. Just like with long distance, Sprint had leveraged partners to share startup costs and fuel startup growth, and then taken control of the company’s new growth engine when its partners couldn’t continue to support the steep losses required to fund that growth.
In his letter in the 1998 Annual Report, chairman Bill Esrey wrote “Sprint PCS is the only wireless service using one brand, one network and one digital technology on a nationwide basis. … By 2007, total annual revenues for the industry are expected to approach $90 billion. We are uniquely positioned to earn a significant share of this opportunity.”
Esrey and team were early in recognizing that wireless is different from traditional telephone service in one important way — the telephone user moves. Throughout the history of the industry, someone could build a successful telco business by serving a very narrow geography. But with wireless, a nationwide footprint became critical for success. Customers wanted their phone to work wherever they went and they didn’t want to be surprised by roaming charges on their bill at the end of the month.
Sprint also continued to be a leader in technology innovation being early to market with cameraphones, picture mail services, and smartphones.
Wireless quickly became the growth engine for the company. In 2000 Sprint PCS reached $6.3 billion in revenues (but with an almost $2 billion operating loss), surpassing the Local division as the second largest part of the company. Growth continued and in 2002, with over $12 billion in revenues, Sprint PCS surged past the Global Markets (long distance) division. That year the wireless division also finally achieved profitability. By 2004 Sprint PCS was larger than the local and long distance businesses combined.
Sprint had become a wireless company.
