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.
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Categories: Cable · Mergers and Acquisitions · VoIP
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For whatever reason, Moffett is a Sprint perma-bear. I am not saying his figures are not correct, but he seems to have the incentive to splash a high dollar figure in order to validate his current recommendation and quickly take down his price target from $3 to $2.5.
There will be NO impact to 2010 figures (per Sprint) and the phase out will take 3-4 years. Yet Moffett would seem to want one to believe $250 million (if this is even correct) will be quickly eliminated from Sprints EBITDA. Does he consider that Sprint could renogiate this contract to salvage a portion of it?
I just question this guy’s motives… When someone spells out the bear case without acknowledging anything Sprint (or the industry for that matter) is doing on the positive side seems to be doing an injustice to investors and Berstein clients…
That’s why I avoided commenting until TW Cable confirmed they were bringing things in house. I agree they may renegotiate to salvage some of it. As I mentioned, Sprint’s take from this isn’t likely to go to zero.
But it does possibly shift the balance of power in the wholesale VoIP segment.
In its nascent stage, (3)’s VOIP charge per seat was $5-$15 per month depending upon the level of sauce in the suite of products being purchased. At one point, Crowe had touted $20 per sub!
The most secret sauce covered was E911, as I recall. I think it was Ron Vidal now long gone from (3)’s bosom who took on that project. He presented to regulators as well as legislators in D.C., and met with local law enforcement agencies as well as fire department and EMT companies across the nation.
Other exciting parts of services like these, still yet to occur, will include the ability of emergency response teams to have access to individual health records along with medications on their way to the scene in order to respond most effectively.
Because of AOL’s size tied to the DU or MM business back then, they were being given special pricing at the lowest end of the aforementioned range.
This contract began in 03 according to the write up. This was prior, I think, to (3)’s VOIP launching party, but I could be wrong. Otherwise, it doesn’t make sense how they didn’t get the account considering their long term relationship with AOL back when modems squealed, in addition to Time Warner, who are both currently CDN and Wholesale customers respectively and minimally, I would think.
What parts of this service can they truly do in house exclusively as an MSO tied to their infrastructures locally and nationally? What services can they definitely not do?
(3)’s Managed Modem facilities along with their long standing claim to being one local phone call away from more than 90 percent of US households-Crowe said 94 percent on Monday-always implied their cat bird seat position for capturing the largest percentage of VOIP flags.
It would be nice to see (3) capture a significant portion of this evolving Time Warner flag.
Certainly Level 3 has long been jealous of this contract, and if they get the opportunity they will likely bid competitively for any pieces that derive from its demise. But we should expect Sprint itself to fight hard to keep what it can as well, and their gear is already in place.
Presumably Level 3 would bid for the termination? If they are doing it for Skype already it would be hard to see who else would be in a position to supplant them. And in terms of call origination I seem to recall that Level 3 bought alot of number ranges way back.
Rob,
I would keep a scan on Cedar Point Communications PR’s…..
Cedar Point is the defacto softswitch vendor to MSO’s around the world…..
You’re suggesting that TWX may be buying a bunch of softswitches now that they’re bring it in house, and Cedar Point stands to gain? Hmmmm…
Why doesn’t Highwayman’s TWTC just facilitate the whole process for their former parent Time Warner Cable? Oh, I forgot, their network isn’t in the right places and ACCESS CHARGES are becoming quite cost prohibitive for them! Ma Bell and its offspring are putting it to them as I write.
The key there is ‘former’, plus TWTC doesn’t run a wholesale voice biz anyway.