Inside SoftBank’s Struggle to Turn Around Sprint
Two years after takeover, SoftBank’s Masayoshi Son struggles to overhaul the U.S. carrier
Billionaire Masayoshi Son asked to speak with U.S. Ambassador to Japan Caroline Kennedy right away one Saturday last year. When they talked the next day, SoftBank Group Corp. ’s chief executive said he had a message for President Barack Obama: “I love America.”
So far, America doesn’t love Mr. Son back.
Two years after SoftBank bought Sprint Corp. for $22 billion, Mr. Son seems stuck with a chronic fixer-upper. The Overland Park, Kan., company just slipped into last place in subscribers among the four major U.S. mobile operators. Sprint needs a massive network overhaul to stay competitive. And its shares have lost about half their value since the SoftBank takeover, the biggest ever by one of Japan’s best-known CEOs.
Despite the pileup of problems, Mr. Son made a surprise appearance on Sprint’s quarterly earnings call last week to tell investors he remains committed to the “historical turnaround” at Sprint and doesn’t intend to sell it.
He left out one telling detail: No one wanted to buy the struggling carrier.
Within the past year, Mr. Son and another top SoftBank executive floated the idea of a sale to cable-television giant Comcast Corp. and European telecommunications company Altice SA, say people familiar with the matter. It went nowhere.
In an interview, Mr. Son says he has been working for months with his 100 top network engineers seven nights a week from 10 p.m. to 2 a.m. to come up with a new fix-it plan for Sprint.
But there is growing competition for his attention.
“I should go back to where I was focused,” he says in a reference to the Internet side of SoftBank, which turned a $20 million bet on Alibaba Group Holding Ltd. into a $70 billion windfall when the Chinese e-commerce giant went public last year. The Internet revolution “continues to explode, and I should get back to where my passion still has a lot,” Mr. Son says.
For now, Mr. Son’s strategy at Sprint centers on patching up the carrier’s network without sinking much more of SoftBank’s money into what has become an increasingly difficult fight for customers.
His hopes for resuscitating a merger with brash rival T-Mobile US Inc., dashed by regulators last year despite the CEO’s charm offensive, are on hold at least until after the presidential election in 2016.
Sprint has been in trouble since ever since its $35 billion merger with Nextel Communications Inc. in 2005. The combined company tried to maintain two separate networks built with different technology—and rely on a subsidiary to build a third network for high-speed Web surfing on smartphones.
That technology never caught on and is being shut down. Millions of Sprint customers fled.
Sprint hasn’t had an annual profit since 2006, piling up about $50 billion in losses. Last week, Sprint reported a net loss of $20 million in its fiscal first quarter. Revenue fell 8.7% to $8.03 billion.
Analysts say the company is burning through cash even faster than before to fix its network and entice new customers.
Everything was supposed to change when SoftBank bought Sprint. SoftBank shook up the Japanese mobile-phone industry with aggressive prices and smart marketing after acquiring Vodafone Group PLC’s operations there in 2006.
Around the time of the Sprint takeover, Ralph de la Vega, AT&T Inc. ’s wireless chief, scouted SoftBank’s network while on a business trip in Japan to see for himself what the company’s U.S. invasion might look like.
Mr. Son, one of Japan’s best-known CEOs, became Sprint’s chairman in July 2013. He quickly challenged its sleepy, Midwestern culture. At meetings with Sprint executives, Mr. Son often denounced ideas as “stupid,” say people who heard the comments.
Sprint’s chief executive when Mr. Son arrived, Dan Hesse, and other board members asked the new boss to treat Sprint employees with more respect. Mr. Son softened his tone, some people who were there say.
“That’s my style that I say what I feel,” Mr. Son says.
Rip and replace
The culture clash was small compared with Sprint’s network woes. A massive “rip and replace” overhaul begun in 2011 caused dropped calls and sluggish data speeds. Many Sprint executives didn’t think the carrier could aggressively pursue subscriber growth until the problems were fixed.
Some people inside Sprint say Mr. Son didn’t fully anticipate how hard it is to quickly install cellphone antennas in the U.S. because of local zoning regulations.
Mr. Son’s plan all along was to fix Sprint by merging it with T-Mobile. He decided to go for the deal right away, despite long-running resistance by regulators to shrinking the number of nationwide wireless carriers to three from four.
The billionaire launched a public campaign that included ads around Washington, D.C., and a speech where Mr. Son said he was driven by the desire to fix America’s broken broadband networks.
“My eyes got wide open,” Mr. Son, who turned 58 years old on Tuesday, said at a March 2014 speech at the U.S. Chamber of Commerce, describing his first trip to the U.S. as a teenager. “I love America,” he added, echoing the message to Mr. Obama.
But the Federal Communications Commission and Justice Department repeatedly signaled that they wouldn’t welcome the deal, and Mr. Son gave up on it. He now says it marked a turning point in his involvement with Sprint.
“I was thinking to myself: ‘I made one of the biggest mistakes in my life,’ which was the misjudgment of the U.S. regulatory environment,” he says in the interview. Once the T-Mobile deal was dead, Mr. Son decided to “move on to the rest of the world and other businesses,” he says.
“I’m a busy guy,” he adds. “Why should I even concentrate on the U.S. market when the situation does not look good?”
At one point, Mr. Son even considered writing off Sprint as a total loss. Instead, the hands-on boss handed over the shake-up to a new CEO, Marcelo Claure, who replaced Mr. Hesse in August 2014.
“He’s my soul mate,” Mr. Son says of Mr. Claure, who has never run a wireless carrier but won over Mr. Son with his earlier success building a multibillion-dollar phone-distribution business. Mr. Claure is “a street fighter sharing the underdog experience like myself,” the billionaire says.
Mr. Claure, 44, is trying to inject more entrepreneurial spirit into Sprint. “It’s often said that the people are the greatest asset of a company,” Mr. Claure wrote in a memo that announced an executive shake-up last November. “I disagree. The right people are the most important asset.”
Six top Sprint executives have announced their exits, including the company’s finance chief last week. Those still at Sprint were moved from a wood-paneled executive suite to cubicles with Mr. Claure.
He also took down the name cards in the executive parking garage and has encouraged employees to show up early and stay late. On some Sundays, Mr. Claure served bacon, eggs and pancakes at his home to keep Sprint executives working without going to the office and build camaraderie.
‘Stupid rules’ email
Sprint’s new CEO created an email address that encourages employees to identify “stupid rules.” Mr. Claure personally reviews many of the incoming messages.
He killed a requirement that sales-store employees wear dress shoes after an employee complained that they are uncomfortable. Now employees can wear any black shoes they want.
So far, Mr. Claure’s plan for making Sprint more competitive with AT&T, Verizon Communications Inc. and T-Mobile has focused on price cuts and network improvements.
In the latest quarter, Sprint’s cancellation rate was the lowest in company history. “We feel we are in a good place, and we feel we’re making progress,” he says in an interview.
But fixing the carrier’s network is staggeringly expensive. Sprint burned through $2.2 billion in the latest quarter, up from $496 million a year earlier. Some analysts say the carrier could run out of money by 2016 just as an important government auction of wireless airwaves gets under way.
Sprint says it expects to hit “peak cash flow burn” this year, followed by a major improvement in 2016.
The cash pinch has complicated the network overhaul. A four-year effort called “Network Vision” stitched together Sprint’s two networks and improved call quality substantially, according to data from independent testing service RootMetrics, a unit of IHS Inc.
In May, though, Mr. Claure said Sprint needs to launch yet another project to add more cell sites and “densify” the network. Data speeds are still slower and less reliable than those of Sprint’s rivals at a time when subscribers expect to be able to watch streaming video and swap photos instantly.
Setting up more cell sites will boost data speeds in major cities, but the work is costly and time-consuming.
Meanwhile, Mr. Son felt boxed in. Fixing Sprint once and for all would “cost us tremendous money, and Sprint does not have that much money,” he says. Another problem: SoftBank’s covenants with Japanese banks prevent sinking more cash into Sprint.
The SoftBank CEO pushed engineers at the company to come up with a plan to improve Sprint’s network on the cheap. The four-month effort in Tokyo included more than two dozen Sprint employees, and the team worked for at least one stretch in conference rooms down the hall from Mr. Son’s office for 16 hours a day.
Breakfast, lunch and dinner were brought in, and Mr. Son visited in the mornings and afternoons to check on their progress, one participant says.
At first, Sprint engineers and outside equipment vendors said the plan was impossible, according to Mr. Son.
“They came up with hundreds of reasons why it cannot work,” he says. “I said: ‘OK, I will find a solution to each one of those 100 reasons of why it cannot work.’ And I came up with a very logical solution to all of them.”
Sprint now plans to add tens of thousands of small cell sites to its existing network using technology it says costs far less than traditional methods.
Mr. Son won’t say exactly how Sprint will pull it off. “It’s like a fight, a boxing match,” he says. “As a fighter, you are not going to explain how did you do the special training and how you intend to hit the left punch from what angle, at what timing.”
The company plans to form two stand-alone entities backed by SoftBank and other investors to finance some construction and phone-handset leasing costs. The move would keep additional debt off Sprint’s balance sheet.
Meanwhile, Mr. Son has been spending more time with Nikesh Arora, an executive he lured from Google Inc. last year. Mr. Son has said Mr. Arora would likely move into the top job at SoftBank when Mr. Son retires.
Less than six months after the two men set out last year to meet with startups in India, China and Southeast Asia, SoftBank invested more than $1 billion in a handful of companies. SoftBank plans to invest more than $10 billion in India alone.
Those are ominous signs for Sprint. In addition, Mr. Arora has privately expressed his frustration with SoftBank’s ownership of Sprint and has recommended trying to sell it, say people familiar with the matter.
“Many people said that,” says Mr. Son. “It was not just one person.”
In a meeting with Comcast Chairman and Chief Executive Brian Roberts, Mr. Arora casually dropped a hint that Mr. Son might not always want to own Sprint, people familiar with the matter say. Mr. Arora couldn’t be reached for comment.
A similar hint was made to officials at Altice, the fast-growing company controlled by European cable magnate Patrick Drahi, these people say.
Mr. Son declines to comment on the meetings but concedes in the interview that Sprint doesn’t look attractive to potential buyers right now.
“If nobody wants to buy it and we still have the customers, we still have employees, so I have to take care,” he says.
Sprint director Gordon Bethune, a retired Continental Airlines chief executive, says he is fully confident that Messrs. Son and Claure will pull Sprint through because of their leadership. “The sickest patients need the best doctors,” Mr. Bethune says.
With no way out of Sprint in sight, Mr. Son is re-emphasizing the positive. He says he is “totally happy that I did not sell. Because I see the light at the end of the tunnel.”
