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Qwest’s New Wireless Strategy Makes it an Agent

Qwest Communications International Inc. has made good on its intentions to replace Sprint Nextel Corp.as its official wireless provider, choosing Verizon Wireless as the lucky winner of its 24,000 wireless subscribers. More importantly, the five-year Verizon arrangement will eschew the typical MVNO model in favor of an agency relationship; a potentially disruptive move for Qwest.

The current wholesale deal with Sprint is “inadequate,” Qwest CEO Ed Mueller said, because the setup cuts into Qwest’s profit margins; rebranding and sourcing handsets is costly and administratively complex. Also, exclusivity terms prevented the carrier from offering many of the hot new handsets to customers. Under the new model, Qwest will act as an agent, simply bundling in Verizon’s third-party services together with Qwest services on one bill, and giving subscribers access to all Verizon plans and devices, including VCast and popular handsets like the Venus. Financial details of the deal were not disclosed, but moving from reseller to sales agent also makes the economics of adding wireless “much, much better,” Mueller said.

The deal follows a long-term strategy Mueller has laid out for his company for bundling a range of top-of-the-line, third-party offerings for customers. Mueller explained that Qwest wants to partner for non-core services and applications in a way that looks a lot like its arrangement with DirectTV, which he said is an example of a positive relationship.

The move to an agency model also changes the way the carrier sells services; for one, the two companies will work together on bidding for enterprise and government wireless contracts. And Qwest now will offer standalone wireless via dealer stores, in addition to quad-play bundles through its regular channels. “Qwest will allow standalone sales of its wireless phones vs. only selling wireless as part of a bundle of wireline services,” said analyst Jeff Kagan. “This is a good idea because as some customers want a bundle, many others want standalone services. Until now, they were ignoring that universe of customers. That could have been one reason Qwest wireless was a weak contender.”

Qwest, the only RBOC without its own wireless service, said it would leverage the Verizon relationship for value-adds, too. For instance, Qwest plans to work with Verizon to develop fixed-mobile convergence services, like a unified mailbox for both wireless and landline calls. Qwest also will sell Verizon’s 4G services when they become commercial, and will capitalize on open access capabilities in the meantime. “We’re really excited” about offering open access devices and applications, and 4G technologies, to subscribers,” Mueller told analysts during Qwest’s first-quarter earnings call.

In response to an open-access groundswell rising from Google Inc., Sprint and archrival AT&T Inc., Verizon declared last November that it would open its network to third-party devices, applications and software – with certain restrictions. Because its network is CDMA-based, devices must be certified and tested to make sure they work correctly.

The announcement couldn’t have come at a better time, considering that Qwest’s first-quarter profit dropped 35 percent, falling to $157 million from $240 million one year ago. The culprit? Partly, the 195,000 home phone lines that the RBOC lost to mobile phones and cableco competitors. The Verizon news might have been meant to soften the profit loss blow by offering investors a promise of better times ahead.

It’s no surprise that Mueller said earlier this year the company has serious holes in its strategy when it comes to wireless and that he aims to fill them. In fact, he said, wireless will be a key aspect of Qwest’s strategy, particularly when it comes to wireless broadband and offering a compelling quad-play to compete with the cablecos that are taking customers away from the LEC, and staunching the flow of wireline attrition. Verizon’s unlimited wireless plans in particular could help offset Qwest’s wireline losses.

Qwest’s agreement with Sprint expires next February. However, Qwest will start selling Verizon Wireless services and devices beginning in September; customers will be offered a comparable Verizon phone and plan at no additional cost, and subscribers can migrate as they please, Mueller said.

Qwest, the No. 3 phone company in the United States, has been without wireless holdings since 2005, when it sold its spectrum licenses to Verizon Wireless for $418 million. Before selecting Verizon as its new provider, the RBOC also was talking with AT&T, which has GSM-based service. Qwest’s Sprint-based offering is a CDMA service, so moving subscribers to Verizon’s CDMA network will be a less painful transition for end users, requiring no handset exchanges.


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