Dude!
Why would you buy a cell phone that can't program your home video
system? And why do you want that lame video system you can't reach with
your cell phone?
You may not think those are urgent questions, but John Garcia sure
does. Garcia is the leader of a new R&D joint venture, rapidly
taking shape and expected to launch around midyear, that pairs the
wireless telecom prowess of Sprint Nextel Corp. with the video know-how
of cable companies Comcast Corp., Cox Communications Inc.,
Advance/Newhouse Communications Inc. and Time Warner Cable Inc. As
evidenced by the deal's 20-year term and substantial financing (Sprint
has committed $100 million, and the cable companies combined are in for
another $100 million), the partners are serious. But, then, so is the
challenge both sides face: protecting (and hopefully expanding) their
turf as the bulked-up Bells, AT&T Inc. and Verizon Communications
Inc. push ahead with their plans to offer a bundle of services that
integrate wireless, video, Internet and who knows what else.
In the Battle for the Home, as this gathering brawl is known, the
alliance is a natural. "Sprint and the cable companies have had a long,
very trusting relationship over the last 12 years," Garcia says. Sprint
launched its wireless operation more than a decade ago with backing
from cable operators Tele-Communications Inc., Comcast and Cox, and the
three outside investors initially held a larger stake in the operation,
60%, than Sprint itself. Though the cable partners later sold their
equity, the pact was early proof of the convergence of voice, data and
video. "This alliance of nontraditional partners -- telephone and cable
-- will revolutionize what is delivered over your telephone, your cable
television and your computer," Sprint's then-chairman and CEO William
Esrey proclaimed at the time.
The convergence story has advanced quite a bit since then, of course
-- and the competition has gotten more bruising. Cox, Comcast, Time
Warner and other cable providers are introducing Internet telephony
services in their markets to take market share from the Bells' voice
businesses. Meanwhile, Verizon and AT&T are spending billions to
lay fiber in their markets so they can boost transmission speeds and
offer Internet protocol television, or IPTV. The telecoms are just as
eager to develop lucrative multimedia and data offerings that they can
sell over their fiber and wireless networks.
In this context, the partnership between Sprint and the cable
companies makes more sense than ever. After heaving a sigh of relief
that Sprint wasn't bought by a Bell, the cable guys were happy to see
its acquisition of wireless service provider Nextel Communications
Inc., which closed last year, and decision to spin off its wireline
unit, happening in the second quarter of this year. Those moves make
Sprint Nextel predominantly a wireless company, the largest one
challenging the Bells in that business. The cable companies, meanwhile,
are fighting the Bells in voice and Internet services and face a
serious, though longer-term, threat in video. "There was a strong sense
in the cable community about the need to be able to respond," says
Dominic Endicott of the Boston consulting group Adventis Corp.
Garcia, one of the early hires at Sprint's wireless business, was
the lead negotiator for Sprint Nextel CEO Gary Forsee in this latest
version of the telecom-cable alliance. He describes the Overland Park,
Kan.-based joint venture as a "laboratory" for devising new services
that meld the strengths of Sprint's wireless voice and data services
with cable's video, broadband and Internet telephony skills.
Communications companies look at the success of ring tones and imagine
a new generation of profitable bells and whistles. "Internally, we
refer to it as converged services," Garcia says, "but customers don't
really know what that means."
One reason people don't know about converged services is that not
many of them really exist yet. Basic examples such as playing video
games or watching television on a mobile phone are easy enough to
envision. More sophisticated innovations will allow a mobile phone to
act as a remote control for a digital video recorder or to switch to a
Wi-Fi network in a customer's home to conserve minutes and maybe
improve reception.
The joint venture partners already have about 87 million customers
who might buy these services, and there are more in the cable
operators' territory who could also be tapped. Garcia is hiring
staffers in marketing, program management, finance, strategic planning
and other departments that will support the range of offerings the JV
will develop.
| The partners |
| |
Sprint Nextel |
Comcast,
Time Warner Cable,
Advance/Newhouse Communications,
Cox Communications |
|
The benefits |
| Market access |
The ability to sell wireless services to customers of its cable partners |
The potential to sell more video, high-speed-data and Internet telephony services by adding wireless |
| Technological |
Cable's
expertise will help Sprint introduce advanced third-generation video
and multimedia applications. Possible new services could combine voice,
video and other media. |
Sprint's nationwide mobile networks
are an option to move and manage content, and its broadband wireless
spectrum may help the cable partners develop mobile broadband services.
Possible new services could combine voice, video and
other media. |
| Competitive |
The cable partners will provide a powerful ally as the Bells use IPTV to enhance their wireless offerings. |
Sprint provides the fourth element
of a "quadruple play" of wireless, video, broadband and Internet
telephony, strengthening cable's position before the Bells introduce
IPTV services on a wide scale. |
|
Source: The Deal |
The first order of business will be synchronizing the
partners' billing, customer care and other systems so the JV can offer
cable customers a conventional mobile service. Once that effort is
complete, the venture will focus on identifying, testing and developing
new services and technologies. The JV's job is to innovate; it will
leave standard corporate matters to Sprint Nextel and the cable
operators. "It doesn't make sense for us to re-create an engineering
department, or a product development group," Garcia says. He will
oversee daily operations and report to a six-member "governance
council" comprising three representatives from Sprint Nextel and one
from each of Comcast, Time Warner Cable and Cox Communications.
The council's members have not been named, though the group's role
is established. "We have someone with a balcony view to ensure that we
are on the right path," says Mimi Thigpen, Cox Communications' vice
president for strategy. Thigpen has been working for the past 18 months
with an internal team of eight to 12 people from Cox's marketing,
engineering, information technology, customer care, field operations
and other units to outline the company's wireless strategy and has led
the Atlanta cable company's effort on the JV. She and team leaders from
the other partners meet weekly to gauge progress.
All told, 80 to 100 people from the parent companies are focusing on
11 "work streams" that range from sales, provisioning mobile phone
handsets and customer care to finance and other matters. Garcia,
meanwhile, is hiring staff and establishing the venture's structure.
"He is going through the process of identifying what the organization
will look like," Thigpen says. "The structure will evolve, but today it
is very much a collaborative effort with resources from every parent
working to drive as much progress on a weekly basis as possible."
Before arriving at Sprint in 1995, Garcia worked for the enemy, as a
regional president for GTE Mobilenet, now part of Verizon Wireless, and
in the consumer products division of AT&T Corp., since bought by
SBC Communications Inc., which took the AT&T name. For the six
years preceding the cable joint venture, Garcia managed Sprint's mobile
virtual network operators program. Sprint Nextel has been the most
active wireless provider in setting up MVNOs, which target niche
consumer groups with specialty mobile phones and services. Sprint's
deal with Walt Disney Co.'s ESPN, for instance, allows users to buy
games or to have the theme of ESPN's SportsCenter announce incoming
calls.
Despite the success of the MVNO model, Garcia says it's not right
for the current JV, which targets mainstream users rather than a niche.
"When you are an MVNO, you have to create your own billing system ...
your own distribution channels," Garcia says. "You have to position the
brand name to be credible. You have to build a lot of different
pieces." The parents did not want to weigh down the JV with added
layers of operations and management.
As the JV prepares to launch, Garcia says the worst mistake would be
to do something that impairs customer service. The parents contemplate
adding new cable partners, but not until operations are established.
"We found that getting this many partners to market by midyear is quite
a challenge," Garcia says. "If we tried to add anybody right now, we
would probably slow that effort or cause more risk to our plan."
Indeed, as the telecom industry well knows, JVs are hard, and the
more complicated they are, the harder they become. Differences in the
parents' business cultures sometimes emerge, and strategic goals that
once seemed neatly aligned can drift apart. If the venture is
successful, the joint owners might want full control, and if not, it
can be a drain on cash. And if a JV doesn't execute well, the parents'
customers could be turned off.
One of the most prominent telecom joint bloopers was
Concert, a $10 billion JV between AT&T and BT Group plc that aimed
to leverage the international networks of the two companies but became
a global money loser. The carriers scrapped the agreement in 2002, just
a few years after founding it, and took billions of dollars in charges.
Verizon Wireless is perhaps the best-run mobile carrier in the U.S.
Still, Vodafone Group plc was uncomfortable enough as a minority
stakeholder in 2004 that it considered exiting the arrangement so that
it could buy AT&T Wireless Services Inc., a laggard compared with
Verizon.
Not to say that communications JVs can't succeed. "They seem to do
better in the cable industry than the telecom industry," Bingham
McCutchen LLP lawyer Andrew Lipman says. He points to Cable Television
Laboratories Inc., or CableLabs, an international consortium of about
50 cable operators that develops new technologies. The Sprint Nextel
venture could be a similar success. "It's almost like a CableLabs for
wireless," Lipman says.
The partners have already addressed some potentially sticky economic
issues, says Garcia. Sprint will sell more wireless and wireless data
services by tapping into the customer bases of its cable partners and,
in general terms, will keep the mobile revenues. The cable companies
will sell more video, broadband and Internet telephony by adding
wireless services to its offering and will keep the proceeds. "There
isn't a whole lot of reaching into each other's pockets," Garcia says.
As the joint venture and the market for converged services mature,
the parties must devise methods for dividing services that make use of
multiple parents' assets and skills. Another peril is what Garcia calls
"strategic drift," when a joint venture doesn't remain aligned with the
parents' goals. Of course, preventing such a drift is the idea behind
the governance council.
Roger Entner from the Boston office of consultant group Ovum plc
says that differentiating its services from those of rival carriers
will be the ultimate test. "If it's just slapping another product into
the bundle, and putting another wrapper around it, then so what?" he
asks.
Making good on the promise of convergence will be a challenge for
all telecoms and cable operators. Garcia says he has seen consumer
interest in the early tests. Controlling a digital video recording
remotely using a wireless phone, he says, is particularly popular.
Other possibilities include messaging that compiles voice mail from
multiple phones and e-mail on one Web page. TiVo and the iPod are clear
examples that managing content is a winner. Phone and cable providers
could even offer home security services.
More than any single offering, the bundle is an effort, in the
parlance of industry players, to "own" the home, which is a gateway to
a panoply of services. And wireless will be a crucial instrument as the
Bells and cable companies try to lure customers while bludgeoning one
other. - Chris Nolter
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