On the July 9 conference call to announce the $5 billion managed services contract for Ericsson (ERIC) to handle day-to-day operation of Sprint Nextel Corp.’s (S) network, reporters and analysts repeatedly asked about financial projections. How much will this deal save Sprint over its seven-year life? And how much will Ericsson profit from it?
The answers, from Ericsson senior vice president Jan Frykhammar and Steve Elfman, president of network operations and wholesale at Sprint, were understandably sketchy: Such outsourcing deals generally have negligible, or even negative, bottom-line results in their first few years.
 |
| You handle this part. |
The deal, said Elfman, will allow Sprint – which has suffered from network quality issues and subscriber erosion since its $35 billion merger with Nextel in 2005, widely viewed as one of the more poorly executed telecom mergers in recent history – to focus on “improving the customer experience, expanding coverage, improving quality, and bringing new open devices, open applications and new services and integrating them on the network.”
Under the terms of the deal, Sprint will pay $4.5 billion to $5 billion to Ericsson, which will manage Sprint’s iDEN, CDMA, and legacy wireline networks. Ericsson will take on 6,000 former Sprint employees and will create a new subsidiary, Ericsson Services Inc., based in Overland Park, Kan., at Sprint corporate HQ.
Shedding Costs
The deal follows a string of such managed-services partnerships in the last two years in Europe and Asia. One of the biggest came last March, when Ericsson signed a similar, seven-year deal to manage network operations for Vodafone plc UK, totaling 19.2 million customers. Simultaneously, Orange Spain, a division of France Telecom (FTE) with 11.3 million mobile subscribers, handed a five-year managed-service contract to Nokia Siemens Networks.
Ericsson has such network management contracts with carriers around the globe including Brasil Telecom (BTM), Saudi Telecom, Hutchison Telecom in Hong Kong, T-Mobile’s U.K. division, and Cable & Wireless (CW.L), which has operations in Europe and Asia.
“Since the dot-com crash of 2001 wiped $5 trillion off the value of NASDAQ-listed technology companies, communications service providers have spent $100 billion to shed their long-term costs,” by outsourcing network, IT and business operations to third parties, Yankee Group analyst Camille Mendler reported earlier this year, in a study entitled “Redefining the Core: Outsourcing and the Virtual Telco.”
“Telcos are breaking with tradition and remolding their business model,” Mendler commented in a blog last month, predicting that carriers will spend $145 billion on outsourcing and managed services over the next five years.