Voice over the Internet won't be

the next big thing at

Sprint

(FON)

, judging by rumblings from people who follow the long-distance phone service giant.

Sprint is preparing to pull back the broad rollout of its integrated on-demand network effort, dubbed ION, say analysts who were briefed by Sprint officials during a roadshow last week for a secondary offering by Sprint shareholders

France Telecom

(FTE)

and

Deutsche Telekom

(DT) - Get Report

. Threatening Sprint's 3-year-old dream of an all-in-one data-and-phone network is the grim reality that, as money has grown scarce in a slowing economy, stringing "last-mile" network access without the promise of an immediate payoff has become a costly extravagance. Sprint and other big telcos had staked ambitious growth plans on the prospect of marrying voice and data services, but now they are recoiling at the prospect of spending speculatively during an industrywide funding crunch.

As a result, Sprint is likely to reduce the $1 billion it planned to spend on ION this year, analysts say. For its part, Sprint says it will assess the project over 90 days, adding that it intends to fund ION where it sees a good chance of getting quick sales.

Sprint had expected to have hundreds of thousands of customers for the service, but as of last quarter it had signed on only 3,300. The ION project has cost Sprint $2.14 billion in equipment purchases, network expansion and marketing costs -- or $648,484 per customer. Sprint dropped 76 cents Tuesday to $19.61.

Cutbacks Everywhere

Sprint is only the latest big spender to hint that further spending cuts are in the works. Last week,

Qwest

(Q)

told analysts that it was

preparing to trim 2001 capital spending by $400 million, to $8.8 billion. Spending cuts by big network builders inevitably mean bad things for gearmakers such as

Cisco

(CSCO) - Get Report

and

Nortel

(NT)

, which are hoping a quick second-half sales rebound will reverse their financial declines of the past year.

Sprint originally planned to spend $6.2 billion on network expansion this year, marking a 51% increase over last year's budget. But earlier this month, Sprint cut $300 million from its capital budget to bring costs into line with decreasing revenue expectations. Now the company faces a $2.4 billion shortfall in its 2001 budget. With a planned $3 billion share offering for its wireless business now in doubt due to a weak market, Sprint needs to cut costs.

ION has been such a dud that saving it will require a massive infusion, says analyst Lisa Pierce of

Giga Information Group

.

"Unless they focus on resolving its shortcomings, the market will think it is dead," says Pierce, whose firm consults for most of the large telecom companies.

It's no secret that giving homes and businesses access to the Internet has proved among the most challenging aspects of network building. While communications traffic speeds effortlessly along the optical fiber routes at the core of the network, it slows to a crawl in the copper-wire capillaries on the endpoints.

Sprint says that given the cash squeeze and its increasing emphasis on generating returns from its investments, it won't market what it has trouble selling and in turn won't fund what it can't sell.

'Moving Forward'

"We're moving forward, we're still selling the service, but we have chosen not to market it heavily until we're confident that the trouble report rates are equivalent to what we are competing against," says Fred Harris, Sprint's head of network research and design. The trouble is Sprint's inability to deliver Internet-based "packetized" voice service that's equal in performance to conventional "circuit-switched" voice service.

ION is an Internet-based network. All Internet traffic is packetized, or broken into bits and sent piecemeal to its destination, where the signal is reassembled. By contrast, traditional circuit-switched connections provide a dedicated line between two callers. Packet-based networks offer vast potential for boosting network capacity and cutting costs, but they have yet to prove they can match the reliability of traditional phone networks in dependably delivering a dial tone, let alone offering 911 service or wiretapping capabilities.

Without reliable voice service, Sprint can't deliver the most important component of its broadband bundle of phone and Internet offerings. Last year, 67 cents of every $1 in revenue that Sprint brought in came from voice calls.

It's not for a lack of trying. Sprint has shouldered more than its share of the industry's efforts to make packetized voice, or voice over Internet protocol, a success. Sprint got out of the blocks early with its ION announcement in June 1998. But ION's nearly exclusive equipment supplier, Cisco, didn't have all the voice bugs worked out, and Sprint has struggled to find other suppliers.

"Our relationship with Cisco is getting better," says Sprint's Harris. "This has been a good year of rediscovery, figuring out where they fit in the business model."

Cisco says it continues to be a supplier to Sprint.

And analysts say Sprint has little to gain by pushing a flawed ION on the market, especially where there is little competition. Now that other broadband competitors such as digital subscriber line providers

Covad

(COVD)

and

NorthPoint

are restructuring, and since

AT&T

(T) - Get Report

has scaled back its cable broadband efforts, Sprint might be wise to wait for better technologies, say analysts.

And clearly, with some competitive breathing room, Sprint's got at least one place to reduce costs.