By Kim Hart
Washington Post Staff Writer
Friday, March 30, 2007
The government yesterday awarded AT&T, Qwest Communications International and Verizon the largest telecommunications contract in history, leaving Sprint Nextel out of a deal worth up to $48 billion over the next 10 years.
The loss is a major setback for Sprint, whose commercial business has been losing ground to its rivals. Losing the contract limits the Reston company's ability to grow at a time when investors are hounding it for better results and government use of technology is expanding. Federal agencies had been steady Sprint clients over the past 18 years, though the lost business represents a small fraction of Sprint's overall revenue.
Sprint and the three winning companies spent hundreds of millions of dollars and nearly four years putting together elaborate proposals for the most extensive overhaul of the federal government's telecommunications systems in more than two decades. The three winners will now compete for individual contracts from the 135 agencies that are expected to buy telecom services and products through the contract, known as Networx Universal. The contract covers voice, video and data services that will be used throughout the United States and in nearly 200 countries.
The federal government's contract is divided into two parts, the first of which was announced yesterday and which represents the lion's share of the spending. A smaller portion that could be worth as much as $20 billion over 10 years will be awarded by the General Services Administration in May. The smaller contract, which has less rigid requirements, is intended to give business to smaller companies, but Sprint still stands a chance of being named a contractor for that award.
Sprint's government contracts account for less than $1 billion, said Tony D'Agata, vice president of the company's federal government business. Sprint's 2006 revenue was about $41 billion.
The government's decision is also a loss for more than 30 companies that partnered with Sprint on the bid, including Lockheed Martin and Hughes Network Systems.
Although the contract is a big win for AT&T, Qwest and Verizon, industry analysts said, it is a devastating blow for Sprint, which has provided services under the government's previous two major telecom contracts, spanning two decades.
"This doesn't just mean a loss of federal business -- this will marginalize Sprint and really narrow their scope to a niche wireless contractor versus a broad carrier," said Warren Suss, a telecom analyst for Suss Consulting in Jenkintown, Pa. "The fact that they didn't make the cut here means that from a pricing and technological point of view, they had a hard time providing services across the board."
Other analysts speculated that the government was wary of doing business with Sprint, which has been losing subscribers and whose stock has lost about 20 percent of its value, adjusted for dividends and splits, since its 2005 merger with Nextel. William E. Kennard, former chairman of the Federal Communications Commission, was brought on to Sprint's board of directors after the merger, in part to help bolster the company's federal presence. He resigned from his post three weeks ago -- an early sign, some say, that Sprint was facing defeat.
"It's more of an embarrassment than a revenue hit. It's a total black eye to be completely ignored by the United States government, especially as an incumbent," said Patrick Comack, an analyst with Zachary Investment Research in Miami.
Gaining customers through the contract would have quickly expanded Sprint's wireless services, which have become its core business, Comack said.
Last year, Sprint received about $325 million in revenue under the current telecom contract, known as FTS 2001, accounting for about 35 percent of the government's total spending for telecom services. The company will continue to provide services over the next two years as agencies switch to the new contract.
Although the GSA encourages agencies to purchase telecom services from the three companies it chose, agencies are not obligated to do so. Sprint expects some of its current federal customers to continue using its services rather than switch to another carrier, D'Agata said.
"As I understand it, our price was high relative to our competitors'," he said in an interview yesterday. "But a lot of customers come to us for reasons other than price."
D'Agata said Sprint will ask for a debriefing from GSA officials about their reasoning and will decide whether to protest the decision, which could force the GSA to reconsider.
Qwest stands to gain the most from Networx, analysts said. It is the first time the Denver company has bid on such a large award. Qwest's total annual revenue is about $14 billion.