If Sprint wins its outsourcing gamble, the payoff could be big

[1]It could be the biggest flop or the most brilliant move that Sprint could make. I'm talking about the operator's $5 billion, seven-year deal with Ericsson to outsource its network operations, of course. But it's freaking people out in a market where operators have long held their network operations to their chests, touting the network as one of their biggest assets.

I remember when vendors were pushing outsourcing more than 10 years ago, but the answer from U.S. operators was always, "Hell no." There was no way an outsider was going to manage and maintain the thousands of cell sites that carry vital wireless voice and data traffic. Quality and coverage have always made up the life blood of the mobile operator business.

But desperate times call for desperate measures. And Sprint, while showing glimmers of recovery, is in desperate times. It simply must cut costs. Of course, how much Sprint will save runs the gamut among analysts, and Sprint hasn't really given a clear picture. J.P. Morgan analyst Mike McCormack estimates savings between $35 million and $260 million over the course of the contract [2], according to the Wall Street Journal. Meanwhile, Craig Moffett, analyst with Sanford C. Bernstein, thinks the fees paid to Ericsson likely will cancel out the majority of the savings of moving 6,000 Sprint employees to Ericsson [3]. "It's not clear that you're going to save any money by changing the color of somebody's shirt," he told Bloomberg.

The reality is, no one really knows what to expect. Ericsson and other vendors are doing outsourcing globally, but this is the biggest deal ever for Ericsson--which, by the way, knows it can't afford to screw this one up as it works to gain a stronger foothold in the U.S. market. Moreover, the U.S. market is unlike many of the regions where operators are outsourcing. In Europe, all operators operate GSM networks. There really is no inherent advantage of one network over another, and some of them share networks. European operators have essentially relegated themselves to being innovative marketing machines.

[4]The U.S. market is one full of multiple technologies, where the data speeds and call quality of one network are pitted against another. The network, until recently, has been the key differentiator. Of course, the iPhone has changed all of that. AT&T found a gold mine by becoming the exclusive provider of the iPhone. Ever since the gadget's introduction, rival operators have been looking to replicate that phenomena, and today such high-end devices are driving net additions.

That trend could bode well for Sprint's outsourcing strategy. With the day-to-day network operations out of the way, Sprint is now free to become very aggressive in the market, possibly handling the marketing costs for smartphones that its competitors may not be able to afford. And how aggressive will Sprint be in terms of pricing plans?

The U.S. mobile industry just took a very new, albeit uncomfortable, direction for many network traditionalists. It's not uncomfortable for competitors yet, mind you, given Sprint's struggling position and the complexity of the deal. But if Sprint and Ericsson do this right, we could see network outsourcing turn into a tremendous competitive advantage that may have other operators seeking to do the same down the road. It's just too bad that Sprint is doing this because it is struggling financially. Network outsourcing in the U.S. could be doomed as an overall failure this way. Then again, no one would have taken the first step in what is seen as a risky endeavor in the first place. --Lynnette [5]