FRAMINGHAM (03/09/2000) - Sprint Corp. is spinning off its Internet business into a yet-to-be-named subsidiary that some industry observers believe will be sold before year-end.
When MCI WorldCom Inc. announced plans to acquire Sprint five months ago for $115 billion, experts expected that regulators would not allow the merger to go through unless Sprint sold off its Internet assets.
Sprint quietly issued an internal memo earlier this month stating the firm's intention to spin off the Internet business and related services, says Deborah Trevino, a communications director at Sprint.
But timing of the move remains unclear. In fact, Sprint has not yet revealed what assets or services would be part of the new Internet division, although Trevino says more details will be available in the next 30 to 60 days. In the meantime, Trevino says the company's reasoning for spinning off its Internet business is threefold.
Firstly, spinning off the Internet business underscores the significance of the business to Sprint's product and service mix, she says. Secondly, after the merger, a separate business unit would better align with what MCI WorldCom has right now with its UUNET subsidiary. "And finally, in the event that we are asked to divest, this will help better identify what's involved and impacted by that move," she adds.
The last reason appears most compelling to industry watchers.
Sprint unquestionably is spinning off its Internet business to smooth out the approval process with regulators, says Stephen Elliot, an analyst with Gartner Group, a Stamford, Conn., consulting firm. Speculation about which service provider would snatch up Sprint's ISP business started at the same time MCI WorldCom announced its intention to acquire Sprint.
But what exactly would Sprint be separating into this new business unit?
"It's tough to say how many employees and assets will be moved over," Elliot says. Analysts believe Sprint's Internet backbone and related services will be part of the shift, however (see graphic).
Sprint's network is primarily IP-over-SONET and has 320 points of presence (POP) in the U.S., with 15 of those defined as "super POPs," says Steven Harris, senior research analyst at IDC, a Framingham, Mass., consulting firm. A super POP is a major access node in a metropolitan area. Sprint is using Cisco 12000 switches at the core of its network and dense wave division multiplexing gear from Vienna Systems. Sprint is also expected to introduce Multi-protocol Label Switching support early this year for additional quality-of-service capabilities, according to IDC's most recent ISP Review and Forecast report.
And while Sprint has the pertinent business offerings, such as managed virtual private network, e-commerce and Web-hosting services, these will probably not be Sprint's biggest selling points. Sprint's network assets and wholesale customers will make Sprint's Internet business a much more attractive buy for other service providers.
Based on business access service revenue of $180 million in 1999, Sprint ranks fifth in market share, behind UUNET, AT&T, GTE Internetworking and PSINet.
However, based on its wholesale service revenue of $420 million in 1999, Sprint ranks third in market share behind UUNET and GTE Internetworking.
But Sprint still has a substantial business user base that now has to worry about the spinoff and perhaps an imminent sale.
"I expected it as a result of the potential merger with MCI WorldCom, but I'm still surprised," says David Rondan, executive director of operations at MGM.com in Santa Monica, Calif. Rondan anticipates that another carrier will soon buy Sprint's Internet business, a prospect that worries him.
"We chose Sprint over many other ISPs that could now buy our business," he says. "But I will not have a knee-jerk reaction to the sale. If it's a company that can offer the same or better service levels and address our needs as well as Sprint has, then we'll stay with them. If not, we'll move to another service provider."
Analysts say it's difficult to predict which service provider will buy Sprint's Internet business. IDC's Harris says there is likely to be interest from several international service providers that want a strong entry into the U.S.
"That's what Cable & Wireless did when it acquired MCI's Internet backbone, the company's Internet presence was nonexistent until it made that acquisition," Harris says. But with companies such as Deutsche Telekom rumored to be in talks with Qwest Communications and British Telecommunications working very closely with AT&T, it's difficult to say which carrier might make a bid.
However, Gartner's Elliot notes domestic service providers such as GTE Internetworking, PSINet, AT&T and Cable & Wireless could be interested.
"A lot will depend on which company MCI WorldCom feels most comfortable with," Elliot says. For instance, he adds they may not want to sell the business to archrival AT&T.