Sprint built and operates the first nation-wide all-digital
fibre-optic network in the US. It is also a leading player in
advanced data communications services. The operator had been
considered a merger/acquisition target for more than a year. In
October 1997 Sprint announced that it was merging with MCI
WorldCom in a transaction worth $129 billion ($115 billion in
equity and $14 billion in preferred stock). This concluded a
hectic round of activity, which saw BellSouth make a last ditch
bid to merge with Sprint.
A number of analysts had referred to MCI WorldCom's need to
acquire a wireless operator in the US with a national
footprint. One of Sprint's most attractive assets was its
wireless operation, Sprint PCS, which has almost one million
Bruce Roberts, a telecoms equity analyst at Dresdner Kleinwort
Benson, talks about the importance of Sprint's wireless
strategy: "I think that wireless plays a very major role, as
they have a nation-wide wireless network. There is a lot of
bundling they are trying to do with long distance and wireless.
So wireless is not only important in itself: it is also
important as a bundled offering to strengthen their
long-distance offering and market share and defend that market
share when the RBOCs come in. So wireless is definitely a major
piece of the bundle puzzle."
One of Sprint's other major assets is its nation-wide
ATM-based ION network, which is recognized as one of the most
advanced data networks in the US. Roberts talks about Sprint's
data strategy: "I think that they (Sprint) are one of the major
data players, as they have developed a very strong data network
with an ATM backbone. They have one of the best networks out
there. They are very efficient and reliable and they have a
large proportion of business customers."
One of the other key elements of the merger is that it brings
together two of the most dynamic management teams in the
industry. Roberts talks about Sprint's management team: "I
think that they have a very strong management team with a clear
vision. They work as a consensus group and set out objectives
that are realistic and well monitored and have clear
objectives. They execute very well and have executed
consistently." The combination of the two management teams
should prove to be a significant asset. The new company will
have 16 board members, with 10 from MCI WorldCom and six from
Sprint. Bernard Ebbers will be the new president and CEO, while
Esrey will be the new chairman.
In an exclusive interview, the chairman and CEO of Sprint Bill
Esrey explains why Sprint decided to merge with MCI WorldCom
and outlines how the new company will operate as one of the
leading global telecoms service providers.
What are the reasons behind the merger? Why did you
feel that this was the best deal for Sprint?
Esrey: From Sprint's viewpoint, the merger follows
from what we have said all along. We have devised a very
effective strategy to create value for our shareholders. If we
can find a better way to achieve that goal, we will always
seize it. When we started looking at this transaction, we felt
that there were a couple of areas in Sprint that could be
There were also probably a couple of areas at WorldCom which
could be strengthened. When we looked at the match, we realized
how well WorldCom bolstered the areas that we needed to
strengthen and probably vice-versa. So that was the motivation.
It looked like an opportunity to move forward better, more
rapidly and with a greater probability of success, by creating
what will in our opinion be a pre-eminent telco, when you look
at the fine resources of the two companies.
You mentioned a couple of areas where you felt that
you were a bit weak. Which particular areas?
Esrey: From Sprint's point of view, we had
difficulties in our international strategy. While operationally
GlobalOne is a very confined company doing quite well, the
partners were not aligned at all. There have been very well
publicized differences between France Telecom and Deutsche
And so that partnership, from an ownership standpoint, needed
restructuring. It was clear that the three partners could no
longer remain owners. Something had to change.
We looked at WorldCom's achievements internationally,
considering the strength of their international operations:
what they have done building broadband metropolitan area
networks both in Europe and Asia. We looked at that as a very
strong, world-wide decision, where they have established in
effect an "on net' base, where they can keep their traffic from
origination to termination pretty much on their own network.
Secondly, from Sprint's point of view, in terms of access
within the US we have on the whole been leasing the local
access facilities of the RBOCs in major cities throughout the
US, which is not a cost-effective way to deliver traffic. We
were looking at massively building our own network in the US to
offer competitive local service. WorldCom has done a very
effective job owing to the past acquisitions of Brook's fibre
and MFS and the facilities that they operate. As a result,
Worldcom could completely resolve the issues that Sprint faced
in both those cases.
On the other hand, WorldCom did not have an effective wireless
strategy. With Sprint PCS we resolved that issue for them. In
addition Sprint has ION, our Integrated On-demand Network,
which is in my opinion very advanced - and certainly ahead of
any competitors - and provides a very rational strategy for
entering the local market.
As you know, local telephone service is provided in the US by
local monopolies. These local markets are not open to
competition. Our ION strategy is not only unique - we are
probably several years ahead of any of our competitors. If you
take ION and combine it with the local access capability
provided by WorldCom, I think that together we make quite a
powerful force to really go in and break open the door of the
monopoly that exists in the US.
If I can continue on this area. MCI WorldCom displayed
an interest in Nextel earlier in the year. Did you expect
WorldCom to pursue Sprint, after the company had announced its
interest in Nextel?
Esrey: No, this is not about Sprint selling out per
se or WorldCom coming after Sprint. As a matter of fact, when
we saw the press reports stating that they were talking about
Nextel, I called Bernie to suggest that there were perhaps
other ways to adjust WorldCom's wireless strategy.
We had talked about a plan where they could actually become
involved in Sprint PCS. That was the original basis for this
contact. We were not trying to sell Sprint PCS: we were looking
for a way for them to join forces, whereby Sprint PCS could
grow even more rapidly by providing Worldcom with some air time
or part of the frequency in an air interface on Sprint PCS.
Other discussions ensued from that initial talk. We explored
what would be involved in putting the two companies together.
How do you view the future for GlobalOne? Surely you
will have to pull out?
Esrey: Well, following the transaction with WorldCom,
it is now clear that we ourselves are in conflict with
GlobalOne, since WorldCom has in-country facilities in both
France and Germany as well as in other places in Europe. I
think that the three parents of GlobalOne all agree that one
parent should buy the company and go forward.
If we can go back to the merger of your two companies.
In your opinion what will be the company's competitive
advantages? Which telcos do you consider to be your main
competitors nationally and globally?
Esrey: I think that if you look at the company's
collection of assets and businesses, you will see that it is
the best positioned in the fastest growing areas in the
industry. One area where we will be well positioned is in
international, both in terms of international traffic and
facilities-based capabilities in Europe and Asia. I don't think
that anyone has a wider capability in those assets, in terms of
metropolitan networks in the world's major cities.
I think that if you look at data and IP, Sprint is very well
positioned in data, as is WorldCom. In addition, WorldCom is
exceedingly well positioned in the Internet and the IP areas.
So that is a second area with tremendous growth. Wireless is a
third area of growth.
Clearly the new company is extremely well positioned because
of Sprint PCS, which is the fastest growing wireless company in
the US. Sprint PCS has grown substantially faster quarter after
quarter than any wireless competitor in the US, usually
outselling its competitors by one and a half to one, and often
as much as two to one.
Sprint PCS is the only company that has nation-wide licences
in the US. It is the only company to deploy one technology -
the CDMA technology - across the US. And CDMA technology is
generally being adopted for next generation on a world-wide
Finally, as I explained, owing to the potential that Sprint
ION offers and WorldCom's local access capability in the US,
the next real opportunity in the US is provided by the break-up
of the local monopolies and the chance to offer local consumers
for the first time a true competitive alternative to the
existing monopoly Bell provider.
With ION you are not only offering services as just another
competitor: you are providing a totally different capability
with regards the types of services that are offered under ION.
It is interesting to notice that I virtually did not even
mention voice in response to your question, an area which is
not really experiencing growth.
If we could now turn to the build-out of the ION
network. How far have you advanced with the roll-out? How much
are you spending on ION this year? When do you expect to offer
Esrey: ION really constitutes a complete
transformation of Sprint's nation-wide network. It comprises an
ATM network and embodies the capability of providing a whole
variety of services, whether it be voice, ATM, frame relay,
X25. Instead of operating multiple networks, as we have done in
the past and everybody else has been operating, we are using
We can achieve great efficiencies in this way. The next step
is: how do you take that network to the residential customers'
premises and to large and small businesses. ION extends our
nation-wide network right to the premises. This is not so hard
in large businesses, as you directly connect off fibre rings
right to the premises. In smaller businesses and residences,
how do you get broadband to that last mile?
We can use different technologies, as ION is what I like to
call "last mile agnostic". With ION, we can use cable
television plant, DSL or fixed wireless. We are initially
rolling out DSL technology. We will follow very quickly next
year with fixed wireless under the MMDS frequencies.
Earlier this year Sprint bought about half the available MMDS
frequencies in the industry. And WorldCom bought the other
half. So together we have about 58 million of the 100 million
households in the US under our licence and MMDS frequencies.
The ION roll-out is right on schedule: it is the same roll-out
that we announced about a year and a half ago. We have large
businesses up on ION now, on direct connect. We have begun to
roll out to medium businesses. And we will start to roll out to
residential customers by the end of the year, offering ION to
the home initially in Denver, Seattle and Kansas City.
Could you tell us about your relationships with Cisco
and Telcordia? Why did you decide to base the ION network on
Esrey: We talked to all the major manufacturers. We
obviously needed help to manufacture the equipment. We talked
to all the suppliers. We opted for Cisco and Telcordia owing to
the individual capabilities that each possesses. We use ATM for
the simple reason that it is the only technology available that
can handle all these different types of service at the quality
that the customer demands.
ATM is the only technology today that can handle voice with
what we would call total quality or the highest quality. Voice
over IP suffers many problems in terms of quality and latency.
In terms of our network, we are not religious zealots about
ATM, IP or anything else.
I think that IP will continue to evolve to a state where it
will be able to handle voice better. That will add some
overhead to IP. I think that ATM will go in IP. You will
probably end up with something in the middle. And we will be
there. But right now we cannot provide the type of services at
the cost we want, unless we use ATM, which can incorporate
everything, whether it is data, video or voice, under one
Could you tell us about the roll-out of your DSL
services? How do you view DSL providers such as Covad, Rhythms
Esrey: I think that if we had been talking about this
a year ago, you would have found people questioning how fast
DSL was really going to roll out. We were quite confident that
it would roll out very rapidly, as there is a market. I would
say two things about the DSL roll-out. With just DSL, what you
have is basically sessions. You have a voice session and a data
session, and you split. When you reach the end of the DSL in
the central office, typically people send voice over the public
switched network and data probably through the Internet.
With ION we use DSL, but then we take the DSL and convert it
to an ATM stream right from the premises. Now we have created a
pipe that we can allocate, depending on a customer's specific
needs. We can have multiple phone calls, not just one voice
session. We can have multiple data sessions. That can be
dynamically allocated millisecond by millisecond with bandwidth
going to wherever the customer needs it. Lastly, service can be
designated. For instance, voice can be designated, so that it
is never impinged upon and always maintains its high quality.
So we basically take DSL as a foundation and then use the ATM
stream to put that premise right on our nation-wide backbone,
rather than simply putting something through the central
offices, pulling off a data session and a voice session. You
are on the nation-wide Sprint network with ION and that
There are about 25,000 central offices in the US. If you
consider outfitting about 2,500 of those central offices, you
have most of the addressable market for the people that are
going to want high-speed data access multiple phone lines for a
substantial amount of long distance, those type of users.
We look at the Northpoints, Covads, Rhythms and others, which
are rapidly putting in DSL, as well as the RBOCs. Existing
market prices are considerably higher than what we could offer,
if we owned our own facilities. Again, owing to our knowledge
and expertise from operating local telephone companies, we have
a good understanding of the cost structure.
So we did not really want to build out our own DSLD-Slams, but
were forced to do so to make the economics attractive. As a
result, we are co-locating and building out D-Slams all over. I
think that we will have installed 1,500 D-Slams by the end of
next year. WorldCom is also doing quite a bit in this area. As
there is not that much overlap, I think that the combination of
the two companies will offer us a very broad DSL reach.
Then, as I mentioned earlier, you add the D-MMDS licences of
the two companies to our DSL capabilities. Together we cover
about 58 million of the 100 million households in the US. Based
on our modelling, MMDS appears to be an even more
cost-effective last mile strategy to connect the customer to
the ION network than DSL.
When we spoke last year, you said that: "IP telephony
is not nearly as cost effective as it first appears." You also
noted: "IP as a protocol is not very effective in handling
high-quality voice." Do you still believe that these opinions
Esrey: Let me explain why I think that this is true.
IP telephony is basically subsidized by the lack of any access
costs. That is why I am saying that it is not as cost effective
as it first appears. A voice call involves access payments. An
Internet call does not involve access payments: when I say
access payments, I mean payments to the local exchange company.
The fact is, the identical facilities of the LEC are used,
whether you make a toll voice call or an Internet call, but one
has an associated access charge, while the other does not. So
there is an artificial subsidy.
You know, it really goes both ways. There is an unofficial
charge for the toll call that is higher than the cost. There is
no charge for the Internet call which is obviously lower than
the cost, but there is an imbalance between the two. That is
one reason why you temporarily have an artificial cost
distortion on the Internet, and therefore on IP telephony.
Secondly, you have the problems of quality of IP handling
voice. It is getting better, but it is still inferior to a toll
quality voice, unless you throw in loads of bandwidth. The ION
strategy is to address all those problems and use the
efficiency of packetizing everything: ATM packetizes that, but
with a better voice quality for the voice side.
Do you believe that customers are reaping the benefits
of these new broadband technologies?
Esrey: In my opinion, while there has obviously been
a huge delay and difficulty in getting broadband to the
consumer, you will see that those walls are about to come
tumbling down. AT&T, with its cable strategy, is bringing
broadband into the residence of the consumer and so forth.
Sprint is bringing - and Sprint and WorldCom will bring -
broadband to the consumer with DSL and fixed wireless. Of
course, you have the rapid build-out of DSL by companies such
as Covad, Rhythm and Northpoint, which is bringing broadband
partially into the home. I believe that this is also forcing
the RBOCs to move along rapidly.
Do you see the paradigm shifting to wireless? How
important is it to have a national footprint in wireless?
Esrey: A national wireless footprint is a significant
benefit for consumers. They want to have a wireless provider
with a presence wherever they are, offering the same type of
predictable charges, so that they don't have to wonder what the
roaming charges are going to be when they are travelling, or be
subjected to some kind of daily charge or something like that.
We are witnessing the initial shift of wireline minutes to
wireless. This is happening more and more rapidly: people are
using their wireless phone, not only as a substitute for the
wireline phone; they are also using wireless for long-distance
needs. Now, of course at Sprint we have rolled out data and
Internet access, which is now available on a nation-wide basis.
I think that while wireless is quite the buzz now, we will look
back and see that we are just at the beginning.
How do you view the potential for wireless data
Esrey: I think that wireless data is going to be
amazingly important. We are seeing very significant
developments in wireless data. We rolled it out last month.
I have been using wireless data for a couple of months. It has
already changed my behavioural patterns. This is interesting.
About a month or so ago I was at a meeting in California - a
regional review of our Sprint PCS operations in Southern
California - and I noticed a guy with his PC open, who was
taking notes during the meeting. At the end of the meeting, he
sent an e-mail to his people with action items from the
At the end of the meeting I walked out of the building, got
into a car and called my family who were driving to Sprint
International, which is a golf tournament that we sponsor in
Denver. My wife was driving with some Sprint PCS employees that
had wireless access to e-mail. I called up and she said: "Gee,
you had a great meeting". I replied: "How do you know?",
because I had literally walked out of the meeting five minutes
They said that they had received this e-mail with the notes of
the meeting. I was a little bit confused, as I thought that
they were driving into Denver. They said that they were on
Interstate 70. They had the PC hooked up to a Sprint PCS phone
and were receiving their e-mail. They had received the e-mail
five minutes after the meeting, while going down Interstate 70
at about 70-75 miles an hour. That is the way the world is
moving. I am in the business and even I sat back and said
As pricing margins are squeezed, how will you maintain
revenue growth in this area? How many new customers do you
expect to add this year? How much are you spending on the
expansion of the wireless network?
Esrey: We have been the fastest growing wireless
provider in the US. Literally our PCS operation has grown from
having virtually no customers two years ago to a situation
today where we have well over four million. We will have way
above five million customers by the end of the year.
The average revenue/subscriber has held at a fairly good level
of about $54 a month. This number is higher than the figure for
traditional cellular companies and indicates a real mix of high
users and safety users. We are enthusiastic about the
additional features and functions that are being added to the
phones and the wireless network.
We expect to generate considerable additional revenue from new
data capabilities. We continue to aggressively expand the
network, not only build-out in terms of geographical reach:
owing to traffic growth, we are constantly splitting the cells,
which increases the quality. The more cells there are, the
greater the penetration.
Why did you decide to form a broadband wireless group?
Why did you decide to buy the first five wireless companies,
People's Choice TV, American Telecasting, Transworld
Telecommunications, Videotron US and WBS America? How do these
acquisitions strengthen your competitive position?
Esrey: They were all the MMDS licences I referred to
as part of our ION strategy. It is another way to access the
last mile and enter directly into homes and businesses. Those
frequencies have generally been used for one-way traffic: for
entertainment/TV. Now the FCC is changing and improving those
frequencies for two-way communications. We will use them as a
delivery method for reaching our subscribers and putting them
on the ION product.
How do you view the recent decision by China Unicom to
terminate all JVs with international carriers? Could you tell
us about the blend of international assets between Sprint and
Esrey: Let me comment first of all on China Unicom
and the issue of foreign investments: it was disappointing, as
it is a change in the regulations. I think that there is an
issue for China: how to resolve the awesome task of expanding
their telecoms infrastructure and find a way to achieve this
goal that is attractive to foreign investors and makes it worth
their while spending their time, talent and resources to help
implement that task. But there has got to be a fair return as a
I think that the international community looks at this as
somewhat disappointing: you think that you have reached an
understanding and you have a deal that was concluded with China
Unicom, which is also part of the government. And then the
rules subsequently change - that is a setback. I think that
everybody is waiting for clarification on this issue.
As to Sprint and WorldCom going forward and the handling of
our international traffic: you have to understand that our
transaction requires regulatory approval before it is closed.
How do you view the events of the last couple of
weeks? How significant is the merger for the overall future of
Esrey: Our main strategy can be summed up as follows:
if we could find a way to create a more capable and more
successful company going forward, we were going to seize that
opportunity. That was the opportunity that we saw, which
evolved from our discussions with WorldCom. That is why we were
so pleased to be able to consummate that transaction. So it was
really about strategy and how to make yourself more effective
If you look at the history of our company - it is the 100 year
anniversary of our company - we have always hooked up with,
acquired and supported other companies. This is the first time
that we have been acquired by someone else, but in this case it
involves two large companies coming together. Our employee base
is almost the same. We have 70,000. They have about 72,000
employees. The shareholders in the new company will be split -
about 55% WorldCom and 45% Sprint.
There has already been speculation from top industry
analysts about your future. Do you see your long-term future
with the new company?
Esrey: Absolutely. I plan on it. I certainly don't
consider my job to be over. This is not about selling out
Sprint. This is about making it a more effective competitive
company going forward, which is what we have done. Bernie is
going to be CEO of the company. I am going to be chairman. I am
very excited about what I will be doing there.
What are your hopes and ambitions for the new company
over the next two-three years? In your opinion, how will all
this consolidation affect the telecoms industry on a global
Esrey: Clearly when you look at the collection of
assets and our positioning in the fastest growing parts of this
industry, I think that you will find that almost all the
innovations, as Bernie Ebbers has said in the telecoms
industry, have come over the past few years out of Sprint and
WorldCom, almost without exception. That is our opportunity
Our goal is to blend these companies and capabilities and lead
the industry in the areas that are the most dynamic and the
fastest growing: international, data, wireless and the newly
evolving local competition. But we perceive that to be a
challenge. If we can lead in both of those areas, we will have
created a company that in my opinion delivers tremendous value
to our customers in terms of new innovative products. I think
that we will as a result be rewarded with outstanding growth