What's Next for Sprint Nextel?

With the news that Sprint Nextel Corp. (NYSE: S) chairman Tim Donahue would step down at the end of this year comes the prospect of more consolidation among the Big Four U.S. carriers.

Sprint Nextel, which reported disappointing quarterly results and has seen its share price drop by 25 percent this year, could be looking at a buyout either by a rival wireless service provider or by a major cable company.

Last year Sprint signed a deal with a consortium comprising Comcast Corp. (Nasdaq: CMCSA, CMCSK), Time Warner Cable Inc. (NYSE: TWC), Cox Communications Inc. , and Advance/Newhouse Communications to bundle Sprint mobile phone service with the cable companies' existing high-speed data, voice and video packages. Sprint will invest $100 million in the joint venture, with the cable consortium putting up the same amount.

The nation's third-largest wireless carrier, Sprint Nextel has faced serious integration problems since the two companies merged in August 2005. Coming just two months after COO Len Lauer left the company, the departure of Donahue, who was CEO of Nextel before the merger, was not unexpected -- but it will do little to reassure Wall Street, which has shaved 25 percent off the troubled carrier's market cap since the start of the year. (See Sprint Cuts COO.)

Today's news "does not bode well for integration, recovery, and turnaround efforts within the organization," says Carmi Levy, senior research analyst at Info-Tech Research Group . It also does not necessarily bode well for Sprint's ambitious plans to upgrade its existing 3G network to more widely offer EV-DO connectivity, and to roll out a "fourth-generation" WiMax network in the coming years.

"If anything, I would expect next-generation infrastructure like WiMax to get the short end of the stick," explains Levy, "as Sprint reorganizes yet again to keep the existing core of its business from slipping away."

Ultimately, Sprint Nextel's problems boil down to trying to be too many things to too many people, adds Phillip Redman, research vice president at Gartner Inc. : "Sprint's in an identity crisis -- they need to figure out who they are, and with a laser focus direct their attention to their customer base and their strategy for the future."

That strategy could well involve selling the company to a rival carrier; according to many observers the most likely purchaser would be T-Mobile USA , which scored big in the recent auction plans, plans to begin rolling out its own high-speed, UMTS network at the end of this year, and has a parent company hungry for growth opportunities in Deutsche Telekom AG (NYSE: DT). (See T-Mobile Confirms 3G Plans.)

"The auction and the resulting acquisition of additional spectrum is an important step forward for us," Deutsche Telekom's chief executive Kai-Uwe Ricke said in a statement after T-Mobile bid $4.2 billion to acquire additional spectrum in the FCC auctions last month, "and not just for T-Mobile, but for the Deutsche Telekom group as a whole which benefits from the growth of its U.S. business."

A T-Mobile purchase would combine the No. 3 and No. 4 U.S. wireless carriers, which use different networking technologies. Like Verizon Wireless , Sprint Nextel bases its service on CDMA, while T-Mobile, like Cingular Wireless , uses GSM technology.

— Richard Martin, Senior Editor, Unstrung