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

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

DATA: COMPILED BY BLOOMBERG