Before I start off dueling my editor Joe Magyer -- who promises no repercussions if I win the duel -- over Sprint Nextel (NYSE: S ) , I have to fess up: I was mildly bullish on Sprint Nextel less than six months ago.
So what caused my reversal of opinion? Well, I thought Sprint Nextel was at the bottom end of a turnaround cycle. But that was before the company dropped the bomb that it was going to report a net loss of 337,000 post-paid subscribers in the coming quarter. The loss of customers -- which cost CEO Gary Forsee his job -- showed that problems at the company ran far deeper, and that's why I'm taking the bear case against Joe today.
I think Sprint Nextel knows where its problems lie, and it has set out on a good plan to fix most of them. But I believe some problems aren't fixable -- at least not over just a few quarters. Yes, customer service can be patched up. And billing systems can be integrated appropriately with enough resources and money. But the defection of customers -- specifically, Nextel customers -- is something that I think is going to be a long, expensive struggle for the carrier to right.
Nextel had major issues starting to unfold in its network just before Sprint acquired the company in 2005. With an FCC-mandated "spectrum reconfiguration" order, Sprint must transition a significant portion of the old Nextel customers to different frequencies and sometimes different wireless devices. This process has led to capacity constraints and therefore resulted in dropped calls that have infuriated customers, to the point that they are leaving in droves. In fact, more customers are leaving their Nextel service for competitors than are switching over to Sprint's CDMA network.
The FCC just issued another order in September that requires Sprint Nextel to vacate a significant portion of its spectrum in many markets by June 2008. This move will further pinch the company's capacity to handle calls, and since it will lead to even more pain for Nextel customers, it could accelerate defections and drive them to viable alternatives from AT&T (NYSE: T ) or Verizon Wireless -- a joint venture between Verizon Communications (NYSE: VZ ) and Vodafone (NYSE: VOD ) .
A wrench or a hammer?
Sprint Nextel has responded to its hemorrhaging of customers with promises to reinvigorate the Nextel brand with new handsets and improved customer service. But if the network can't fundamentally support a larger base, the company will either curtail its marketing efforts or risk further network performance problems. Eventually, Sprint hopes to have the Nextel customers migrate onto its CDMA network, where the walkie-talkie function is mimicked by Qualcomm's (Nasdaq: QCOM ) QChat technology. But this function will not be commercially available until well into 2008.
With all of Sprint Nextel's moving parts in the company's operations, I see the company as being between a rock and a hard place. High levels of customer defection are almost certain for the near future, and the company will have to pay handsomely to entice its better customers to stay. With a new CEO learning the ropes, Sprint Nextel has a huge competitive handicap right now and will struggle to effectively find an answer to glamorous new devices such as the Apple (Nasdaq: AAPL ) iPhone.
I'm betting that now is a bad time to catch this falling knife. Shares may not drop significantly lower, but the reality of what's ahead for Sprint Nextel has this Fool believing that things will get worse before they get better. My advice is to keep a safe viewing distance from the sidelines.