Sprint Nextel’s Stumble

Sprint Nextel appears to be in real trouble. A recent Wall Street Journal article offered a long analysis of the company and its current challenges. Sprint Nextel is illustrating the way market share is lost in most markets. In short, Sprint Nextel is losing the most profitable customers (post paid contract subscribers) to the top two carriers, AT&T and Verizon, as well as to the fourth ranked competitor, T-Mobile USA. Sprint Nextel’s losses in customers may be as much as 2% of these valuable customers in a quarter. These are the best customers so the company’s percentage loss in revenue would be much higher than the percentage loss in number of customers.

How did this loss happen? Analysts blame the botched integration of Sprint with its acquisition, Nextel. Customers have determined that Sprint Nextel has poor customer service and low network reliability.

This brings us to the way market share shifts in most markets. Market share moves from one supplier to another most often due to failure, not to success. Some competitor, in this case Sprint Nextel, fails to provide a level of service, functionality and price that other competitors can and will supply. This is failure, which drives customers into the arms of competition. Once Sprint Nextel fails then some of its customer volume leaves it for better competitors. Note that these better competitors were not good enough to take market share away from Sprint Nextel without Sprint Nextel’s failing in the first place. If they could have, they would have created a “win” and taken the share outright. Instead, the share is moving in this market largely on the basis of Sprint’s “failure” rather than the other carriers’ “success”.

This is going to be a long turnaround for the hapless new CEO at Sprint Nextel. Once a company develops a reputation for poor reliability, it takes a long time to win it back.

You can see the damage done to Sprint Nextel in the most recent pricing wave in the industry. The other three competitors announced unlimited minute voice plans for their wireless services at about $100 per month. Sprint Nextel, of course, had to follow. But they followed with an $89 a month plan that offers the unlimited voice minutes and also unlimited data minutes. Sprint is offering a price about 10% lower than their competitors for a product somewhat better, at least for some of the customers in the market. This is a typical characteristic pricing scheme for a Price Shaver. Not many Price Shavers do well over the longer term. They have to offer a lower price because customers don’t think their product is as good as the others’. This strategy leads to weak customers, low returns and long recovery periods.

Posted 3/10/08


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