new wireless boss is swinging the ax, signaling a long-anticipated shift away from the industry's profligate pursuit of growth.
The unit's new chief, Len Lauer, didn't take long to put his thrifty, profit-obsessed stamp on struggling
. He handed out 1,600 pink slips Thursday, just over a month after he took over from Charles Levine. Levine was ousted earlier this fall after
botching the third quarter.
Despite the pain of the layoffs, investors applauded Sprint's embrace of fiscal sanity. Indeed, observers now expect to see similar moves across the maturing sector, as financial discipline takes top priority in a tough economic environment. Shares in Sprint and Sprint PCS took part in a solid tech rally Thursday, each rising more than 2%.
"When things were growing so fast, it was easy to forget that every customer you added didn't necessarily contribute a net positive value to the business," says Jefferies & Co. analyst Richard Klugman, who has a hold on Sprint's phone business. "It's not pretty and it's not innovative, but cutting costs is certainly going to have an impact."
Getting a Grip
The many wireless carriers offering cutthroat pricing started to catch up with the industry last quarter, when previously fast-growing shops such as Sprint PCS actually started to lose customers. In Sprint's case the loss amounted to a coming to terms with the fact that the company was taking on too much credit risk while gaining too few solid paying customers in its quest to keep expanding its subscriber rolls.
Everyone in the troubled telecom arena could stand to cut costs, of course. Rival
, the joint venture of regional Bells
, is widely seen as next up for some fiscal housecleaning.
In fact, Cingular COO Mark Feidler acknowledged at a UBS Warburg conference Wednesday what has lately become a painfully obvious strategic flaw in the wireless industry. He told investors that chasing subscriber growth is an unsustainable business when you aren't adding profitable customers.
And while the number of wireless calls has been steadily increasing, expanding traffic volumes haven't come close to offsetting falling call prices. In fact, industrywide per-minute charges have plunged to an average of 11 cents a minute this year from 60 cents just five years ago, going by analyst calculations.
Sprint has also suffered from a disappointing launch of its wireless data service, which has yet to catch on with mobile phone users looking to tap the Net or send images on expensive new handsets. It is anticipated that to get customers interested, the service providers will have to tangle once again, this time in a
data price war.
It's little wonder that Sprint PCS shares have dropped more than 80% in the past year as investors abandoned the growth-without-payoff idea.
Investors gave Sprint's job cut announcement a warm greeting Thursday. Some of the renewed enthusiasm for Sprint PCS surely rides on new chief Lauer. As the head of Sprint's long-distance business, Lauer was credited with restoring margins despite a sharp fall in revenue.
"Their long-distance business was written off as dead a couple years ago," says Klugman. "But I think people look at what he did through cuts and improved margins, and they got the sense that the business was worth something."
Investors certainly wouldn't mind seeing some of those same improvements on the wireless side.