It’s customer payback time, folks!

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Unless Sprint-Nextel addresses the currently plummeting consumer confidence, downhill is where this merger is headed

‘And they live happily ever after’ is what all stakeholders of the companies want to hear post an M&A. Unfortunately, life post a merger often becomes more uphill than life before it.

The latest one to realise this is Sprint Nextel, which is facing a whopping $1.2 billion class-action lawsuit. One of the shareholders, Cora E. Bennett claims that Sprint’s decision to acquire Nextel Communications Inc. (for $35 billion) in 2005 was a disaster and Sprint Nextel has hidden information on the acquisition from shareholders and wrongly charged customers early termination fees. And that’s just the tip of the iceberg.

From the customer’s point of view, there were problems in Sprint Nextel’s network along with some issues with regard to quality of customer service. According to Jeff Kagan, “Sprint Nextel has been a successful number three company but over time, it lost focus. Customers who did need customer service often had trouble as they had to make several calls and talk with several people over time to get things done.”

All this combined has assisted this service provider to lose as many as 4.6 million subscribers in 2008 (a decrease of 8.4% yoy). Moreover, it has been losing customers from the valued post paid stream. In the last quarter of 2008, Sprint Nextel lost 1.3 million customers, out of which 1.1 million were post paid. Sprint Nextel’s loss has spelled gain for Verizon and AT&T, who have both added numbers in 2008. Additionally, revenue streams of Sprint Nextel for 2008 also witnessed an alarming decline of 11.2% yoy to reach $35.64 billion.

However, the company has assured that these factors have now been taken care of and they would soon see a turnaround. Data from Geezeo Main Street Spending Index (MSSI) for February states that the average monthly spending on Sprint increased by 1% while AT&T and T-Mobile witnessed a decline of 1%. But Wachovia’s Jennifer Fritzsche has lowered the ratings of the company from ‘Outperform’ to ‘Market Perform’, and has also warned shareholders that Sprint Nextel would continue to see more than forecasted churn (as much as 2.3% of subscriber base) from customers in the iDEN segment (walkie-talkie service). Even Bill Densmore of Fitch believes that, “Sprint Nextel will continue to experience challenges with stabilising the iDEN operating results going forward; given its niche appeal, weak business economy, and subscriber migration.”

The company’s competitive positioning remains weak due to customer perceptions. Moreover, it does not have deep pockets like AT&T to advertise which it needs to do especially at this stage. Sprint appears to have billing and customer service processes that are completely broken. Another problem is that Sprint Nextel focuses on advertising low prices and exceptional service – and is unable to consistently provide either. So the company requires to change its bad behavior and work on reversing the negative impressions. One silver lining is the forthcoming launch of Palm’s Pre-smart phone that would be available exclusively to customers of Sprint Nextel. But unless Sprint’s customers are satisfied, the company should really be worried with respect to the success of such initiatives. For that matter, so should Palm in this case!

Surbhi Chawla

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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