Qwest Ends Quest for New Wireless Partner Amid Profit Losses

By Tara Seals

Qwest Communications International Inc. this week made good on its intentions to replace Sprint Nextel Corp. as its official wireless provider, choosing Verizon Wireless as the lucky winner.

The announcement couldn’t have come at a better time, considering that today Qwest said first-quarter profit dropped 35 percent, falling to $157 million from $240 million a year ago. The culprit? Partly, the 195,000 home phone lines that the RBOC lost to mobile phones and cableco competitors.

So, yesterday’s Verizon news might have been meant to soften the profit loss blow by offering investors a promise of better times ahead. For one, the move will give the RBOC access to Verizon’s unlimited wireless plans, which could help offset the LEC’s wireline losses.

Perhaps it’s no surprise that Qwest CEO Ed 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 carrier. To that end, Mueller said Qwest wanted to partner with someone in a way that looks a lot like its arrangement with DirectTV, which he said is an example of a positive relationship.

And indeed, the Verizon arrangement will eschew the typical MVNO model in favor of an agency relationship. The current MVNO deal with Sprint is “inadequate,” Mueller has said, because the setup cuts into Qwest’s profit margins. Obviously, those margins are now a concern.

Qwest also will change its overall approach to selling wireless.

“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.”

The agreement with Verizon Wireless, co-owned by Vodafone plc, will supplant the Sprint arrangement when that contract expires early in 2009. 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 Inc., which has GSM-based service. Qwest’s Sprint-based offering is a CDMA service, so moving subscribers to Verizon’s CDMA network would be a less painful transition for end users, requiring no handset exchanges.

Qwest serves 824,000 wireless subscribers.