Challenged telecommunications giant Sprint (S) is talking out of both sides of its mouth—and it seems to be a smart strategy that’s paying off.
Every year American employers spend far more money than they should on a blizzard of government filings. Some are mandatory like tax returns and Securities and Exchange Commission (SEC) filings. Some are critical for public safety or record-keeping like prescription drug studies or the Census. Some are purely voluntary—like engaging in federal regulatory agency proceedings.
However, problems arise when these filings fail to add up. For instance, what if a company tells the SEC one thing to try to win favor on Wall Street but then tells another government agency something different to get special regulatory treatment? Which one should the government believe? For that matter, what should investors believe?
Sprint provides an excellent example of this type of behavior, offering investors a bullish spin for growth based on innovation while pleading with policy makers to pity its relative weakness through ongoing regulatory intervention. In the age of heightened transparency, however, policy makers should see through the smoke and recognize the competitive market that truly is. And, unfortunately for Sprint and its investors, the story it’s telling regulators is much closer to the truth.
Last September, Sprint told the FCC that it still needs government-regulated access to business data lines, so-called “special access”: “Every one of these sites will require additional backhaul and Sprint and other competitors will depend on both TDM and Ethernet special access more than ever to be able to compete.”
Sprint said much the same in 2013.
But to the SEC (and therefore to Wall Street), however, Sprint tells a different story, one of network modernization and using modern lines. For instance, in its Form 10-Q just last August (a few weeks before the filing with the FCC), Sprint stated: “As part of our recently completed modernization program, we modified our existing backhaul architecture to enable increased capacity to our network at a lower cost by utilizing Ethernet as opposed to time division multiplexing (TDM) technology.” The company also said that network modernization program was saving it money through “reduced network maintenance and operating costs, capital efficiencies, reduced energy costs, lower roaming expenses and backhaul savings.”
Translated, this means that Sprint is modernizing its facilities and saving money by doing so, including from connections to other networks. Most of the network modernization efforts consist of building out Ethernet lines, the faster lines used for business data that are replacing the older, copper wires used for regulated “special access” lines. In fact, Sprint said just that in a press release in 2011, noting correctly that “Aggregated Ethernet access can provide a cost-effective alternative to traditional TDM access” (i.e., “special access” lines) for business.
Why then the need for special access and prices set by regulation rather than the competitive market?
So far, both sales pitches seem to be working, at least somewhat: the FCC has maintained anachronistic special access regulation, and Wall Street has accepted Sprint’s statements that its network modernization program is good for the company. Last July, a Fierce Wireless article noted that Sprint was going to use wireless backhaul to reduce its capital costs, even allocating a portion of its spectrum for backhaul; in a similar piece, BITG analyst Walter Piecyk estimated that Sprint could save from $600 million to $1.2 billion per year by switching to wireless backhaul.
In this, the analysts just echoed the views of Sprint CEO Dan Hesse, who stated in 2013 (a few months after Sprint once again filed at the FCC on behalf of “special access”) that he expected 90% of Sprint’s backhaul “to be driven by Ethernet over fiber and the remaining over microwave.” So Sprint is switching to newer, faster technology, and in the process saving money, but still wants its competitors to subsidize older lines. It tells the SEC that it’s embarking on newer lines to compete but tells the FCC that it needs regulation of older lines, too.
Wall Street knows that in the competitive world of telecommunications, the companies that invest in newer and faster technologies are the ones most likely to do better over time—even better if these investments lower the companies’ operating costs, as Sprint claims on its backhaul costs. Sprint obviously knows all this, too, which is why it is so eager to convince Wall Street analysts that it is a thoroughly modern company deserving of their money.
But Sprint can’t perform the straddle forever. Let’s take Sprint at its word that it is investing and competing in a highly competitive market, even at the same time reducing capital expenditures. It’s time to end the special pleading for special access, invest, and compete. That’s what great companies do.
Originally published at The Street