Dropped Call

Masayoshi Son has a plan to pull the com­pany out of its death spiral - if it's not too late By Bryan Gru­ley and Scott Mor­tiz

Bloomberg Businessweek (North America) - - Conntents -

Some $22 bil­lion later, Soft­bank swears it won’t hang up on Sprint

Marcelo Claure is a 6-foot-6-inch Bo­li­vian who came to the U. S. 20 years ago and co-founded a com­pany that sold mo­bile phones. Bright­star was based in Mi­ami, where he par­tied with Jen­nifer Lopez and tried to es­tab­lish a pro­fes­sional soc­cer fran­chise with David Beck­ham. As Bright­star ex­panded around the world, Claure be­friended a top ex­ec­u­tive at Soft­bank, the gi­ant Ja­panese tele­com and In­ter­net com­pany. The ex­ec­u­tive thought Claure should get to know Soft­bank’s founder and chief ex­ec­u­tive of­fi­cer, Masayoshi Son. Like Claure, Son is an en­tre­pre­neur. He built a pur­veyor of PC soft­ware into a $75 bil­lion em­pire that in­vested early in Ya­hoo! and Alibaba. A meet­ing was ar­ranged. Upon ar­riv­ing in Tokyo one day in late 2012, Claure was told that Son was quite busy, so the meet­ing would be short. “I thought, ‘My God, I flew all the way from Mi­ami for a 15-minute meet­ing?’ ” he re­calls. Claure, now 45, sat down with Son, who’s 13 years older and a foot shorter. The morn­ing ses­sion stretched into the af­ter­noon as Son grilled Claure about re­selling iphones, a busi­ness that didn’t then ex­ist in Ja­pan. Son asked how long it would take Claure to start re­selling trade-ins for Soft­bank. Maybe a few months, Claure said. “How about two weeks?” Son asked. They signed a con­tract that day.

Claure re­turned to Tokyo monthly to brief Son, and they grew close. Son liked Claure’s grit, call­ing him a “street fighter.” Claure ap­pre­ci­ated Son’s de­ci­sive na­ture. “I’ve heard a lot of Ja­panese ex­ec­u­tives say, ‘ The way you think is very sim­i­lar to the way Masa thinks,’ ” Claure says, us­ing Son’s nick­name.

In 2013, Soft­bank took con­trol of Sprint in a $ 21.6 bil­lion ac­qui­si­tion. Sprint was al­ready in trou­ble, but Son an­nounced his in­ten­tion to merge the com­pany with T- Mo­bile to chal­lenge Ver­i­zon and AT&T. One of the first things he did was put Claure on Sprint’s board. When the plan to merge with T-mo­bile ran into reg­u­la­tory ob­jec­tions and failed, Son bought Claure’s com­pany and named his pro­tégé Sprint’s CEO.

In the 17 months since, Claure (pro­nounced CLAW-RAY) and Son have had hun­dreds of phone chats, ex­changed thou­sands of texts and e-mails, and sat through dozens of mid­night meet­ings. They’ve slashed prices—sprint of­fered iphones for $1 a month last year—and re­placed much of the old ex­ec­u­tive team. In late Jan­uary, peo­ple fa­mil­iar with the sit­u­a­tion said the com­pany would elim­i­nate 2,500 jobs, bring­ing to­tal cuts un­der Soft­bank to more than 4,000.

It hasn’t helped much. The stocks of Soft­bank and Sprint plum­meted to multi year lows in mid- Jan­uary, though both re­cov­ered some with Sprint’s re­port of third- quar­ter sub­scriber gains and lower-than- ex­pected losses. Soft­bank has plowed more than $ 22 bil­lion into Sprint, and yet all of Sprint is now val­ued at $ 11.8 bil­lion. Sprint’s $2.2 bil­lion in cash is about the same as its 2016 debt obli­ga­tions.

A decade ago, Sprint had a $69 bil­lion mar­ket value and a chance to dom­i­nate the U.S. wire­less busi­ness. It’s now No. 4 in es­sen­tially a four-player busi­ness. It hasn’t posted an an­nual profit since 2006.

“You’ve watched a once- great in­sti­tu­tion de­te­ri­o­rate to the point that it is now a badly, badly com­pro­mised as­set,” says Craig Mof­fett, an an­a­lyst at Mof­fet­tnathanson. “They’ve been liv­ing from hand to mouth for years, con­stantly mak­ing short-term de­ci­sions in or­der to live to fight an­other day.”

Amid the tur­moil, Claure and Son are pre­sid­ing over the mon­strously dif­fi­cult chore of up­grad­ing—yet again—sprint’s U. S. wire­less net­work. Within two years, they vow, the sys­tem will han­dle the grow­ing de­mand for data-in­ten­sive con­tent—peo­ple watch­ing movies and play­ing video games on smart­phones and tablets—bet­ter than any other.

The wire­less in­dus­try is a $355 bil­lion zero-sum game. With just about any­body who wants a phone al­ready own­ing one, car­ri­ers can grow only by lur­ing sub­scribers from ri­vals with cut- rate ser­vice plans and ever- speed­ier down­loads. AT&T, Ver­i­zon, and T-mo­bile are all spend­ing bil­lions to su­per­charge their net­works and color in the blank spots on their cov­er­age maps.

Sprint’s dis­tin­guish­ing as­set is a pe­cu­liar band of spec­trum—those ra­dio waves that carry calls, texts, e- mail, and video. Com­peti­tors have shunned Sprint’s 2.5 gi­ga­hertz spec­trum as costly and im­prac­ti­cal. Son and Claure say it’s the key to what will be the great­est busi­ness turn­around ever—if Sprint can last that long.

Sprint is a de­scen­dant of Brown Tele­phone, founded in 1899 by Cleyson Brown. A mostly for­got­ten in­dus­tri­al­ist, he had stakes in lum­ber, oil, sheet metal, and other busi­nesses in­clud­ing ho­tels and the Pig­gly Wig­gly chain of gro­cery stores. He thought he’d be a farmer but, af­ter los­ing an arm in a grist mill, turned to white- col­lar work, build­ing a con­glom­er­ate in Abi­lene, Kan.

A cen­tury later, Sprint, in Over­land Park, Kan., emerged from the free-for-all ig­nited by tele­com dereg­u­la­tion as a prime con­tender in the ex­plod­ing U. S. wire­less mar­ket. In 2005 the com­pany paid $35 bil­lion for Nex­tel, known for push-to-talk devices fa­vored by truck fleets and con­struc­tion firms. Their net­works were based on in­com­pat­i­ble tech­nolo­gies. That meant Sprint had to sup­port sep­a­rate net­works and sell dif­fer­ent types of phones that worked with each.

Af­ter Dan Hesse took over as CEO in late 2007, he shut down Nex­tel’s net­work and used what he could of its re­mains to re­build Sprint’s. Dis­rup­tions dur­ing con­struc­tion re­sulted in blocked and dropped calls. Mil­lions of cus­tomers fled. By 2012, Sprint had piled up losses of $37 bil­lion re­lated to the Nex­tel deal.

Son came to the res­cue. The Soft­bank founder had built a for­tune on in­vest­ments in Ya­hoo! and other In­ter­net busi­nesses in the 1990s, lost most of it in the dot- com bust, then re­built it with early stakes in Alibaba and other com­pa­nies. He bought Voda­fone’s trou­bled Tokyo-based sub­sidiary and re­made it into a feisty ri­val to NTT Docomo, the big­gest car­rier in Ja­pan. The Bloomberg Bil­lion­aires in­dex es­ti­mates Son’s net worth at $8.4 bil­lion.

Son has ca­pa­cious ideas about what tech­nol­ogy can ac­com­plish. He’s laid out a 30-year plan for Soft­bank; the com­pany’s web­site says tech­nol­ogy should be used “to re­duce

lone­li­ness and ease the sad­ness of peo­ple as much as pos­si­ble.”

In Oc­to­ber 2012, two months be­fore Son first met Claure, Soft­bank said it would buy a con­trol­ling stake in Sprint. Af­ter the deal closed, Son started pur­su­ing a merger with T- Mo­bile— the self- de­scribed “un­car­rier” with the pink- shirted, smack-talk­ing CEO, John Legere—which was com­pet­ing with AT&T and Ver­i­zon by cut­ting prices and elim­i­nat­ing ser­vice con­tracts.

Fed­eral an­titrust and tele­com reg­u­la­tors pub­licly said they’d op­pose the T- Mo­bile deal. Son and his lob­by­ists stormed through Wash­ing­ton, ar­gu­ing the merger fi­nally would of­fer Amer­i­cans wire­less ser­vice as good as that in Ja­pan. When it be­came clear the pro­posal was dead, Claure says, “it was a blow to Masa. He con­sid­ered sell­ing Sprint.” But buy­ers were scarce. In Au­gust 2014, Son re­placed Hesse with Claure.

Claure was born in Gu­atemala but grew up in Bo­livia. He says one of his first busi­nesses was steal­ing dresses from his mother’s closet and sell­ing them on the street. He didn’t tell Mom, and she didn’t no­tice the miss­ing ap­parel. “I strate­gi­cally chose non­core as­sets,” he says.

His par­ents sent him to the U.S. for col­lege. He earned a bach­e­lor’s de­gree in eco­nom­ics and fi­nance at Bent­ley Univer­sity in Waltham, Mass. One day af­ter grad­u­a­tion, he vis­ited a cell phone re­tailer to buy a phone. He got to talk­ing with the store owner and wound up buy­ing a stake in the busi­ness. He as­sem­bled a sales force that hawked phones from car trunks across the North­east.

Claure sold his stake and in 1997 co-founded Bright­star, which helped phone mak­ers, wire­less car­ri­ers, and re­tail­ers buy and sell phones. By 2013 the com­pany had an­nual rev­enue of $10 bil­lion and op­er­ated in more than 50 coun­tries, in­clud­ing Ja­pan. That year, Soft­bank bought 57 per­cent of Bright­star for $1.3 bil­lion; it ac­quired the rest be­fore Claure took over at Sprint.

Claure moved his fam­ily from Mi­ami to sub­ur­ban Kansas City. His first of­fice sat in the middle of Sprint’s 240-acre cam­pus, with its stately brick-and-stone build­ings that rise from grassy quads. “You walked into this ma­hogany cas­tle,” he says. “I used to joke that my of­fice was al­most big­ger than my house.”

Sprint’s work­force was beaten down. “They were great peo­ple with the right in­ten­tions, but they for­got what win­ning was all about,” Claure says. “They stopped go­ing to sales meet­ings be­cause they were los­ing 10,000 cus­tomers a day.” He im­me­di­ately cut prices, mark­ing the oc­ca­sion with a beer-and­bar­be­cue party where he told em­ploy­ees, as so many new CEOS do, that Sprint was “go­ing to do things dif­fer­ent” and “get back in the game.”

From Tokyo, Son ran hours­long daily meet­ings with net­work en­gi­neers while Claure fo­cused on costs, pric­ing, and fi­nanc­ing. Some ex­ec­u­tives chafed at tak­ing or­ders from what they saw as a two-man ex­ec­u­tive com­mit­tee. Son didn’t help by openly dis­miss­ing ideas as “stupid,” say sev­eral for­mer ex­ec­u­tives. He also ex­pressed frus­tra­tion with net­work con­struc­tion slow­ing for zon­ing ap­provals. Son de­clined to be in­ter­viewed for this story.

“Peo­ple have a hard time ac­cept­ing that Masa is blunt, and some­times he hurts peo­ple’s feel­ings,” Claure says. Claure has told un­der­lings he wanted to do things “the Soft­bank way.” He ex­plains: “If some­thing is not right in our com­pany, just fix it im­me­di­ately, and there’s no need to an­a­lyze and make 100 pre­sen­ta­tions.”

Over the next sev­eral months, he rolled out a “cut your bill in half” cam­paign to en­tice cus­tomers from AT&T and Ver­i­zon. Sprint started rent­ing, rather than sell­ing, phones, mak­ing it eas­ier for cus­tomers to switch to new mod­els, po­ten­tially lock­ing in more long-term sub­scribers. And he probed for ways to cut costs, even down to get­ting rid of some of the waste­bas­kets at head­quar­ters.

The ma­hogany cas­tle now stands empty. Claure works in an­other build­ing on a floor of low-slung cu­bi­cles and con­fer­ence rooms named for U.S. cities. His desk faces a huge wall screen dis­play­ing Sprint’s cus­tomer gains and losses, up­dated ev­ery two hours.

The num­bers in black ( good) and red ( bad) are vet­ted each day at a meet­ing at­tended by all top ex­ec­u­tives and run by Claure. “If you aren’t hit­ting your marks, you’re ex­pected to come in with a plan to fix it,” says Kevin Crull, pres­i­dent of Sprint’s 15- state cen­tral area. “There’s pa­tience for your plan as long as it’s mea­sured in hours and days, not weeks and months.”

Sprint has sta­bi­lized its sub­scriber base. In the quar­ter ended on Dec. 31, churn—a monthly mea­sure of cus­tomers can­cel­ing ser­vice—was 1.6 per­cent, down from 2.3 per­cent a year ago. Sprint gained 501,000 monthly phone and tablet cus­tomers in the quar­ter, the high­est num­ber of net ad­di­tions in four years. But, as Claure says, “Price will only get you so far. You can’t do a turn­around with­out a great prod­uct”—the net­work.

Shortly af­ter ar­riv­ing, Claure be­gan daily meet­ings about Sprint’s worstper­form­ing cell sites—what the net­work team called the Top 10 S--- List. With about 20 ex­ec­u­tives around a ta­ble or di­al­ing in, Claure brought up each site re­spon­si­ble for large num­bers of dropped calls and asked how it would be fixed within 24 hours.

If a site was still on the list the next day, Claure would ask again: Should an an­tenna be tilted up or down or side­ways, so it points to­ward more cus­tomers? Does Sprint need to add an­ten­nas, or use an­ten­nas with more band­width? “It was painful,” says John Saw, Sprint’s chief tech­nol­ogy of­fi­cer. “But it was good for get­ting the net­work fixed.”

Sprint’s net­work geeks are now con­sumed with the de­ploy­ment of ra­dio fre­quen­cies sel­dom used be­fore in the U. S. “The 2.5 gi­ga­hertz spec­trum is the crown jewel of Sprint,” says Saw, who also spends a good deal of time on the phone with Son.

Wire­less providers trans­mit sig­nals via three broad cat­e­gories of fre­quen­cies: low-band, such as the 700 mega­hertz fa­vored by Ver­i­zon; mid­band spec­trum, such as the AWS-3 va­ri­ety that gar­nered $45 bil­lion in a fed­eral auc­tion last year; and high-band spec­trum, such as Sprint’s 2.5GHZ.

To un­der­stand the dif­fer­ences, pic­ture the U.S. wire­less sys­tem as a hon­ey­comb of in­ter­lock­ing hexagons. Within each hexagon stands a cell tower. The big­ger the hexagon, the far­ther the tower can trans­mit sig­nals, which is op­ti­mal for voice calls and build­ing an at­trac­tive na­tional cov­er­age map. Those large hexagons rely on low- and mid­band spec­trum.

High-band spec­trum has smaller hexagons—it doesn’t cover as much ter­ri­tory. But those high-band air­waves cre­ate fat pipe­lines that fa­cil­i­tate the speed­ier flow of enor­mous amounts of data, the stuff of movies, TV shows, and games. Sprint con­trols more 2.5GHZ spec­trum than any car­rier.

Son used the same sort of air­waves to build a ro­bust net­work in Ja­pan. Other car­ri­ers don’t have much, if any, 2.5GHZ spec­trum, partly be­cause it presents costly chal­lenges. Its shorter reach can re­quire more cell sites at added cost. It doesn’t pen­e­trate walls and ceil­ings well. It’s akin to Wi-fi, which op­er­ates at 2.4GHZ and works less ef­fec­tively as a user moves far­ther from the sig­nal source.

To ad­dress th­ese is­sues, Sprint en­gi­neers have been go­ing city to city, build­ing to build­ing, to “den­sify” the 2.5GHZ net­work. The com­pany is putting tens of thou­sands of trans­mit­ters about the size of a pizza box on rooftops and util­ity poles and in­side build­ings to ferry sig­nals along. For many in­stal­la­tions, it must ne­go­ti­ate leases one by one with mu­nic­i­pal­i­ties and prop­erty own­ers.

The build­out amounts to a huge bet that Sprint will emerge as the pre­ferred provider for cus­tomers who gorge on data in 4G and forth­com­ing 5G sys­tems—think ur­ban mil­len­ni­als. Eric­s­son pre­dicts mo­bile-data us­age will grow more than ten­fold by 2021, with video stream­ing ac­count­ing for al­most 70 per­cent of traf­fic. Claure says con­sumers will grav­i­tate to net­works with greater data ca­pac­ity of­fer­ing the fastest down­loads. “By the end of 2017,” he says, “we will have a net­work with the most amount of ca­pac­ity.”

A June study by in­de­pen­dent re­search com­pany Rootmet­rics said Sprint’s net­work has im­proved in sev­eral mar­kets in re­li­a­bil­ity, speed, and other mea­sures. There are plenty of skep­tics. Tim Far­rar, an an­a­lyst at re­search firm TMF As­so­ciates, says Sprint is still play­ing catch- up with to­day’s most ad­vanced 4G net­works, and its den­si­fi­ca­tion plan could cost too much. Some worry the re­build will re­peat past mis­takes, such as ser­vice dis­rup­tions that alien­ate cus­tomers. Mean­time, Ver­i­zon, AT&T, and T-mo­bile are seek­ing to fat­ten their data pipe­lines. Un­like Sprint, they don’t have to worry about where the money’s com­ing from.

One af­ter­noon in Novem­ber, Claure sits in a glass-walled con­fer­ence room in Over­land Park, rock­ing in his chair as 30 deputies de­bate how to re­spond to a T-mo­bile pro­mo­tional of­fer of lim­ited free video. He turns to his mar­ket­ing chief, who joined Sprint in May, then to a net­work ex­pert who’s been with the com­pany three months, then to his chief fi­nan­cial of­fi­cer, an­other short-timer. Look­ing im­pa­tient, he fi­nally says, “We will talk about this ev­ery day un­til we fig­ure it out.”

A week later, Sprint ex­tends its hal­foff-your- bill of­fer to cus­tomers who switch from T-mo­bile. Sprint stock falls 9.3 per­cent that day. By Dec. 31, shares had dropped 15 per­cent for the year, to $3.62. The mar­ket re­ac­tion high­lights the dif­fi­culty of Sprint’s path. Un­til the net­work is done, Sprint doesn’t have much in ad­di­tion to dis­counts to at­tract and keep sub­scribers. More than $7 bil­lion in debt obli­ga­tions come due in the next three years. Soft­bank, which owns 83 per­cent of Sprint, can’t in­vest much more with­out tripping a con­trac­tual man­date to buy the en­tire com­pany.

Sprint re­cently re­ceived a $ 1.2 bil­lion cash life­line from a new phone-leas­ing com­pany owned by Soft­bank and some equity part­ners. That will re­duce Sprint’s an­nual $10 bil­lion-plus cash out­lay for phones, partly be­cause the lease com­pany charges lower in­ter­est than the high­yield debt Sprint typ­i­cally uses. More such deals are in the works, Claure says.

“If you re­move the bal­ance- sheet con­cerns, the rest of the story is good,” says Wells Fargo an­a­lyst Jen­nifer Fritzsche. Mof­fett says Sprint could be play­ing for time, hop­ing a new ad­min­is­tra­tion in Wash­ing­ton will look more kindly on a T-mo­bile merger. Claure says he’s run­ning Sprint to be a stand­alone com­pany, but “that doesn’t mean we’re not open to do­ing deals.”

Even if Sprint sur­vives the cash crunch and com­pletes the net­work, it’s not clear when it will be able to start rais­ing prices and mak­ing prof­its. It might have to find a way to shed its rep­u­ta­tion as a cheap al­ter­na­tive per­pet­u­ally in turn­around.

Son re­cently bought a $5.5 mil­lion house near the Kansas head­quar­ters so he can visit Sprint more eas­ily. The house, which has a pool, is next door to where Claure lives with his wife and five chil­dren, with­out a pool. “I love that Masa comes one day of the month,” Claure says, “but I now have a pool 365 days a year.” <BW> �With Pavel Alpeyev

“By the end of 2017, we will have a net­work with the most amount of ca­pac­ity”

At Sprint head­quar­ters in Over­land Park, Kan.

Son

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