Sprint Is in Talks to Outsource Its Network

By AMOL SHARMA and SARA SILVER Sprint Nextel Corp. is in final negotiations to outsource management of its cellular network to Telefon AB L.M. Ericsson and transfer 5,000 to 7,000 U.S. employees to the equipment vendor in a cost-cutting move to help offset Sprint's dwindling subscriber numbers. The two companies haven't finalized a contract and discussions could continue for a few more weeks, say people familiar with the matter, but Sprint could end up paying Ericsson -- the world's largest supplier of wireless-network equipment by sales -- as much as $2 billion over several years to maintain the thousands of cell sites that carry Sprint's wireless voice and data traffic. The deal is expected to slash the wireless carrier's network costs by about 20%, the people say. Ericsson and Sprint declined to comment. Bloomberg NewsSprint's board will review the transaction with Ericsson, once terms are final, and decide if the potential cost savings and other benefits justify the complex arrangement, one person familiar with the discussions said. The people cautioned it is still possible that Sprint may choose not to move forward with the outsourcing strategy at all. More Sprint's Loss Widens on Severance CostsThe negotiations come as Sprint is trying to aggressively cut spending to counter revenue losses from its thinning subscriber base. The Overland Park, Kan., company, which reports earnings Monday, is expected to say it lost more than one million contract customers in the first quarter, though some analysts expect solid gains in less profitable subscribers who prepay for service. Sprint doesn't break out its annual spending on network operations—which is part of a much larger $8.74 billion category called "cost of services" that includes items such as roaming and interconnection fees paid to other carriers. While reducing costs is a major reason Sprint is considering the transaction, it also sees network outsourcing as a way to free up resources to focus on areas like product development, marketing and strategic partnerships, the people familiar with the matter said. "These deals shouldn't simply be done for the costs," said Camille Mendler, a vice president of enterprise research at Yankee Group. "It can't be a Band-Aid for a gushing chest wound." Telecom operators in the U.S. have preferred to stay in control of day-to-day management of their networks, seeing that as a core function. But outsourcing is becoming more common in Europe and Asia. Carriers including Hutchison Whampoa Ltd.'s 3 unit and India's Bharti Airtel Ltd. have moved down that path either for mobile or fixed-line networks. Ms. Mendler estimates carriers will spend about $145 billion over the next five years on outsourcing and managed services deals. Sprint would retain ownership of its cell towers under the Ericsson deal, and would continue to be responsible for capital investments. The carrier, which has a total of 49,000 employees, would transfer thousands of workers scattered across the U.S. who maintain and fine-tune its cell sites nationwide. Bloomberg News Sprint transmission tower in Oakland, Calif. The deal could involve some layoffs, the people familiar with the matter said, but Sprint is hoping Ericsson will keep as many people as possible as it builds out its U.S. outsourcing business and courts additional customers such as AT&T Inc. and Deutsche Telekom AG's T-Mobile USA. Ericsson of Sweden and other telecom network gear makers such as Alcatel-Lucent SA and Nokia-Siemens Networks have been aggressively courting service contracts to make up for declining prices of equipment. Prices have been dropping as their carrier customers consolidate and drive harder deals for fewer contracts, as equipment is designed to meet global standards, and as low-cost Chinese rivals offer equipment with prices that can be 30% lower. Those Chinese vendors don't have the personnel in place in developed markets to compete for outsourcing contracts. Ericsson's bid for the Sprint outsourcing contract beat that of Alcatel Lucent, and Nokia Siemens -- a joint venture between Nokia Corp. and Siemens AG --dropped out of the bidding after deciding the terms wouldn't allow it to make a profit, people familiar with the matter say. It is unclear if Ericsson will make money in the initial years of the deal—the company may be willing to take a loss to gain a foothold from which to expand in the lucrative North American market, analysts and people in the equipment industry said. —Dana Cimilluca contributed to this article. Write to Amol Sharma at amol.sharma@wsj.com and Sara Silver at sara.silver@wsj.com