Ericsson, Sprint in $5B Managed Services Deal

Sprint Nextel Corp. (NYSE: S) has signed a $5 billion deal with Ericsson AB (Nasdaq: ERIC) that will see the Swedish vendor taking over the day-to-day running of its wired, CDMA, and iDen networks for the next seven years, the first outsourcing deal of this kind inked by a major mobile carrier in the U.S. (See Ericsson, Sprint Enter Agreement.)

The partners said on a conference call today that the handover will begin by the end of the third quarter. Ericsson will:

• Absorb 6,000 Sprint employees
• Add another 3,000 of its workers to the services effort
• Manage Sprint's nationwide 2G CDMA network and 3G CDMA networks
• Maintain the iDEN network Sprint acquired as part of the Nextel buyout in 2005

The center of network operations will remain in Overland Park, Kan., and will operate as a wholly owned subsidiary of Ericsson.

Sprint says that the major benefit of the deal is the money it will save on its operations, money that it expects to drive back into the network. "We're not going to disclose exact dollar savings... We're basically saying that we are spending," Steve Elfman, Sprint’s president of network operations, said on a conference call.

Sprint will pay Ericsson between $4.5 billion and $5 billion over the course of the deal. The vendor isn’t disclosing how this will affect its bottom line over time, but does say that the deal will become more profitable once it has got its people running the network.

"This is a big undertaking, and over the course of the contract the profitability will be satisfactory. Of course, it will be more challenging to start," says Jan Frykhammar, SVP and head of Ericsson's Global Services unit.

Ericsson is hoping that the deal with give it a foothold to score other similar deals in North America.

This is not the first managed services deal with a major carrier that Ericsson has signed up for. The vendor has similar deals with operators like Vodafone Group plc (NYSE: VOD) and Elisa Corp. in Europe and IDEA Cellular Ltd. in India amongst many others. (See Vendors Scrap Over Managed Services Deals.)

This deal is different for two reasons:

• It is the first deal the vendor has signed in the U.S.
• It takes Ericsson out of its GSM comfort zone

Ericsson will manage Sprint’s CDMA and iDEN technology. Ericsson actually closed down its own CDMA infrastructure business in the U.S. in 2005. Nonetheless, Sprint is confident that the vendor can handle the management of its network, having worked with Ericsson for a year hammering out the details of the deal.

"They are head and shoulders above the competition," said Sprint’s SVP for networks, Bob Azzi.

Aside from the technology differences, however, the basics of the deal follows a pattern for Ericsson, says Jim Hodges, senior analyst at Heavy Reading. "Sprint keeps the lid on network costs for its existing fixed and wireless networks to drive an opex reduction, while Ericsson gains a new strategic partner, a long-term stable cash flow, and some highly experienced personnel with alternative technology skills."

While Ericsson handles the day-to-day operations, Sprint will have final say over long-term strategy, service-level agreements, and how network traffic is managed, notes Sprint SVP Azzi.

Analysts on the call worried that Sprint rivals, such as AT&T Inc. (NYSE: T) and Verizon Wireless , will spin the deal as Sprint cedes control of its networks, meaning it won’t be able to be as responsive to customers. Sprint no longer has a hand in the day-to-day running of any of its networks, since it will piggyback on Clearwire LLC (Nasdaq: CLWR)’s mobile WiMax network for its "4G" services. Sprint executives brushed off such concerns, saying this "unique partnership" will allow to focus on its business while saving money.

Handing over control of networks that serve over 50 million customers is certainly a bold move not seen before in the U.S., although it is somewhat common in Europe. Mobile Virtual Network Operators (MVNO) are slightly more of a common approach in the U.S., with Sprint actually handling of the biggest of those operators, Virgin Mobile USA Inc. (NYSE: VM).

Sprint didn’t say on the call if this new partnership with Ericsson will have any effect on its long-standing MVNO deal with Virgin.

— Dan Jones, Site Editor, Unstrung