It’s now official, Sprint Nextel (NYSE:S, news, filings) has signed an agreement to outsource both its wireless and wireline operations to Swedish equipment maker Ericsson (NASDAQ:ERIC, news, filings). The seven year deal is valued at $4.5-5B and will apparently begin later this year, although it will take over a year for everything to be fully in place. The deal is pretty much as expected based on earlier rumors, Sprint maintains ownership and control, while Ericsson does the daily monitoring and maintenance of the equipment itself. I still don’t quite get the concept, to me the network seems like it should be an area of core competence for any wireless operator. But I don’t have a dog in this hunt, so good luck to Sprint and Ericsson on making this thing work.
Not just on the spreadsheet either, but for the people. The deal will involve the transfer of some 6000 employees to an Ericsson subsidiary which will be based at Sprint’s HQ at Overland Park. For most, hopefully that means that the biggest upfront change will be the name on the company stationary, they will be working in the same places they always have doing the same things they have been doing. Longer term, I would expect Ericsson to make some changes to streamline things to fit their own corporate structure of course.
The inclusion of its wireline assets in the deal answers my earlier question: why wireless and not wireline? They did both. In an answer to a question, Sprint said its ability to do a JV/sale of its wireline division is not affected by this deal. Of course, it is affected – any change affects things, but what they mean is that having strategic control of the network means they can still do what they want with it. The contract surely includes the ability to modify the network depending on the needs of the business. Also, the underlying strategic reasons why Sprint’s wireline business might have a JV or something else in its future don’t change when operations are outsourced, because much of that is rooted in things like the age of the original fiber build.
While much PR is spent on the ‘customer experience’, investors are probably more interested in turning around the bottom line for now. Sprint expects to save money of course (can you imagine anyone outsourcing so they can pay more?), but the company isn’t yet saying how much. That’s probably smart, because it probably isn’t that easy to predict the true effects given that nobody has really done this before at such a scale in a developed market.
I’m curious now whether Ericsson will find other wireless networks looking to outsource. It would seem that such an outsourcing business would do better with more than one customer, given the efficiencies of scale. But I can’t see AT&T (NYSE:T, news, filings) or AT&T (NYSE:T, news, filings) following Sprint down this path. TMobile perhaps? MetroPCS (NYSE:PCS, news, filings)? Hmmmm…
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If I read the press release right, it included the wireline assets as well. If so, is this a deal killer for the LD asset rumors?
Sorry, jetlag is slowing me down today. I’ve included some comments on the LD assets in the article.
I do think that Ericsson running the LD assets implies that Sprint is probably thinking about more of moving up the food chain than of a pure JV venture. For instance, if they sought to outsource over time at the transport level to third party wavelengths etc, it would just be Ericsson that managed that process.
Why does this Ericson deal have any impact on Level 3? Do you think Sprint will no longer use Level 3 for wireless transport just because of this deal? Of course not. Just like it won’t affect Sprint’s current massive use of Level 3 for its business markets group. They use Level 3 alot. Consider this a modified form of an EDS deal, where GM or Bank America use EDS to run all the systems, back office, HR applications, you name it. Some consider that core stuff (JP Morgan Chase for example), while others don’t. And GM can then use whatever computers or network they want, despite EDS running it all and managing the procurement etc..
I’m not a tech guy at all, but I don’t get the impression you guys understand this type of Ericson deal any better than my mother does.
I think the wire line deal would be easier with the outsourcing to Ericsson, because whoever buys the assets does not have to assume any employee cost. Each employee would have to be hired by the new buying company. They would not have to take on any of the outsource employees they did not want to keep. Which probably means no severance packages would be paid out to employees not picked up.
Rob… Great blog post. You are correct that the Sprint – Ericsson Network Advantage deal is a remarkable new chapter in the US Telecom market. This deal includes both wireless and wireline, though please note that business customers in particular will continue to interface with the same Sprint staff under this deal as they do today.
One thing that I wanted to clarify however, is your statement regarding the network being a “core competence for any wireless operator.” While you’ll get no disagreement from me regarding the importance of any operator around go-to-market strategy, marketing, customer experience and product, I don’t subscribe to the idea that any carrier / service provider that owns their network has no choice but to go it alone. Core competency can be grown organically or can be acquired by partnering with an expert who brings cutting edge best practices born out of global experience. Quite simply, the breadth and depth of the experience an organization like Ericsson offers is immeasurable compared to what Sprint or any single carrier itself could develop in-house, especially given geographic and spectrum limitations. Considering that more than 40% of all mobile calls in the world are made through Ericsson systems and network operators in 175 countries use Ericsson equipment, they truly bring a level of capability and competency that no carrier can match on their own.
Outside of the US, a wireless operator actually running their network is more the exception than the rule. There are lots of reasons for this (common technology in GSM, market efficiencies, staffing issues, etc.), but suffice to say, the biggest wireless carriers in the world use 3rd parties in the daily operation of their network. Throw in other players that are also in this space like Alcatel-Lucent and Nokia and it is possible that in some regions (e.g. Europe) the majority of wireless networks follow this model.
Thanks again for the opportunity to respond to your post. Full disclosure, I am a Sprint Employee.
Thanks for the response, Steven. I suppose the issue at hand is what does it mean for the network to be a core competency. Can you outsource its operation and still keep it? I’ll have to think about that one.
Food for thought, Steve brings an idea to the table, what I read however, is that Sprint being the giant that it is or once was, could not and was totally incapable and unsuccessful of showing a good strategy in marketing, customer experience and product, also incapable of creating cutting edge best practices, by learning from those with global experience and create their own platform, therefore showing lack of expertise, which resulted from what I could consider negligence and poor management staffing that could not create a formula for success. Steve, I believe that instead, Sprint opted to outsource to Ericsson because the carrier was not capable of a long lasting and successful formula.
(By the way here in the US we have plenty of American companies from which Ericson acquired and implemented some or most of their globalization best practices)
Your point though I respect it, is not! At all convincing. I am thinking Steve is one that stayed on board with Sprint, trying to make us believe this venture was a great one. On the other hand great for the ones that stayed but the ones that left? What do they think because they had no alternative, are you concerned with the operations employees that left? Are the 6000 plus employees being hired by Ericcson directly and indefinitely? Could there be yet another outsourcing from Ericcson to other European companies? This is highly unclear. what about job security not that there is much these days but still I am interpreting your words as if you are more concerned with saving 2 billion. And the concept that business is business end of story!!. Out of curiosity, why not do business with a well known and also reputable American company? Reason I say this is because it is clear we need to energize our economy, and sending our money overseas make others rich while we in the US are struggling and having serious issues. Hey Steve I could be wrong.
I am also curios the last paragraph does not mention Verizon but could it be we are seeing a domino effect with all the carriers?