Over the past few days, it has emerged in stages that the wireline division of Sprint Nextel (NYSE:S, news, filings) has lost its VoIP outsourcing contract with Time Warner Cable. Sanford & Bernstein analyst Craig Moffett broke the story with a reasearch note, and apparently TW Cable has confirmed its new plans to bring the business in-house over the next four years. Moffett's calculations apparently peg the outsourcing deal at $10-11 per VoIP subscriber, and that some $250M or 25% of Sprint wireline's EBITDA is at stake. I can't judge the accuracy of those numbers, but if he's even remotely close ... ouch. There's no way that isn't going to hurt.
My first reaction was, $10-11 per subscriber? Wow, I'd bail at that price too. This contract dates from a different era in VoIP, i.e. from when it was perceived as difficult to get right. TW Cable's VoIP business is a very different animal now, I'm not surprised they are overhauling how they manage its costs. But I think I doubt the premise that it is all going away. By taking this in house, TW Cable doesn't eliminate its costs entirely. They will still be buying various services to make it all work, it just won't be as a monolithic package from Sprint. That means Sprint will probably keep a fraction of the business, and it also means that Sprint's wholesale VoIP competitors may have the chance to pick up some business as well.
The other thought that came to my mind is what this might mean for Sprint's position in the sector. They have been spending very little capex on its wireline business relative to the rest of the sector, they have clearly been managing it for cash. Unless they change that course and move to an expansion footing (unlikely), they probably won't be replacing this revenue which means there will probably be layoffs on the way to keep costs in line with the lower revenue. Given the outsourcing contract with Ericsson for network operations, I'm not sure just who it is that is at risk there but whoever it is had best keep their eyes open.
It also changes the shape of potential M&A activity down the line. Sprint's wireline division was the focus of some speculation last summer regarding a posited combination with a carrier like Level 3. With this revenue decline hanging over them, there are now shades of the giant SBC outsourcing contract that WilTel lost back in 2005. Hamstrung by the overhanging loss of so much revenue, they sold out later that year to Level 3. Sprint's loss of TW cable is smaller relative to their business of course, but nevertheless it may add an urgency to future planning. I think the likelihood that the next large M&A in the sector will involve Sprint just rose a few notches.