By Michal Lev-Ram

Churn, or the rate at which customers defect to rival carriers, is one of the most important metrics for measuring the success of a wireless carrier.

Unfortunately for Sprint (S), it has one of the industry’s worst churn rates. On Monday it revealed that 1.09 million of its subscribers decided to take their business elsewhere in the first quarter as the company reported a net loss of $505 million, or 18 cents a share, compared to a loss of $211 million, or 7 cents a share, a year earlier. Revenue dropped 8% from a year ago to $9.33 billion. Excluding a number of one-time charges, such as job-cut costs and merger-related expenses, Sprint’s adjusted profit slid to 4 cents a share from 19 cents a year ago.

Meanwhile, rivals Verizon (VZ), AT&T (T) and T-Mobile (DK) saw their churn rates for postpaid accounts fall during the same period, and their customer base grow. Verizon added 1.5 million wireless subscribers, and 1.3 million new customers signed up with AT&T. Even T-Mobile, the smallest of the top four U.S. carriers, added nearly a million customers the last quarter, tipping its total subscriber base to slightly over 30 million for the first time.

Many of Sprint’s recently-departed subscribers also happen to be some of its best customers. That means that a large percentage of defecting Sprint users are the type of people likely to pay for higher-priced data plans, pay extra fees for text messaging and downloading ringtones or buy more expensive phones. That is a big part of the reason Sprint’s average revenue per customer declined by about $2 compared to the first quarter of 2007.

“We continue to place the highest priority on reducing churn by improving the customer experience,” CEO Dan Hesse said in a statement Monday.

He told analysts on a conference call Monday that he is investing to acquire new customers as well as to keep existing ones from fleeing.

Improving customer service and simplifying rate plans are two ways Sprint is trying to keep retain subscribers. Later this summer, the company will also launch an iPhone competitor it hopes will provide an incentive for customers to stay - current customers, as opposed to new subscribers, will have first dibs on a Samsung touchscreen called the Instinct.

But it will likely be some time before those changes turn around Sprint’s churn rate. Hesse, however, is optimistic. On Monday he told analysts that in March, “We began to see improving trends in churn.”

By Michal Lev-Ram

When Sprint Nextel CEO Dan Hesse joined the wireless company last December, he inherited a backlog of problems. Among them: The logistical nightmare of managing two different networks formed by Sprint’s merger with Nextel, a high rate of subscriber defections and a bad (okay, horrible) reputation for customer service.

At his first conference call with analysts in February after Sprint (S) announced disappointing fourth-quarter earnings, Hesse himself admitted that “the issues we face are more difficult than what I had expected to find.”

But that didn’t stop the former AT&T (T) executive from quickly implementing some much-needed changes. Within five months, Hesse has cut costs by closing 8 percent of Sprint’s retail stores and laying off nearly 7% of the staff. He also made senior management changes, launched a new unlimited voice and data plan, and just this week inked a joint WiMax venture with Clearwire (CLWR) and a slew of high-profile investors.

Now, as Sprint prepares to release its first-quarter earnings results Monday, investors are looking to Hesse to see what he’ll do next to turn the wireless carrier around.

“So far the read on him is cautiously optimistic,” says RBC Capital Markets analyst Jonathan Atkin. “He’s taken prudent steps to evaluate what the issues are, and made progress on his checklist - including the critical item of how to move forward with WiMax.”

Sprint’s investment in WiMax - a next-generation network that promises faster speeds well-suited for data services like web browsing and music downloads - has been a main point of contention among investors. Under former chief executive Gary Forsee, the company poured about $5 billion into the technology, only to find its cutting-edge service bogged down by delays and an inability to seal a WiMax partnership with broadband Internet provider Clearwire.

But last Wednesday the two companies announced they had finally come to an agreement and would combine their wireless broadband operations to create a $14.55 billion venture. Intel (INTC), Google (GOOG) and a handful of other companies have agreed to invest $3.2 billion in the new company.

In an interview with Fortune earlier this week, Hesse said the upcoming WiMax service will give Sprint a “differentiating advantage.”

“This allows us to be the only company to offer 4G [fourth-generation network] services,” said Hesse. “WiMax as a technology is available now and it works now.”

Of course, it’s still not clear exactly when the new service will be available to Sprint customers, though the Clearwire joint venture is expected to close by year-end. Sprint rivals AT&T and Verizon (VZ) have said they are committing to a competing fourth-generation network technology called Long Term Evolution, or LTE, which is expected to become available around 2010.

With its increasingly narrower time-to-market advantage, WiMax is still far from a guaranteed success. And in the meantime, Hesse has his hands full trying to put out other fires.

Come Monday, investors will be looking for news regarding Sprint’s core business, selling voice and data services on its CDMA network, which has been bleeding customers. Subscribers have also been defecting from the iDEN network the company inherited when it merged with push-to-talk service provider Nextel in 2005.

“We are still looking for evidence that Sprint is generating positive momentum around its postpaid marketing to return back to positive postpaid subscriber growth over time,” Citigroup analyst Michael Rollins wrote in a recent report.

In an effort to retain and attract customers, Hesse has already embarked on a new brand campaign that aims to position Sprint as the “superior network.” But Rollins says that the company hasn’t “gone far enough to differentiate its message on network quality perception or price.”

Hesse has also said that improving Sprint’s customer service is one of his top priorities.

“Not only are we not attracting enough new customers, but our existing customers are leaving us at too big a rate,” Hesse had told Fortune in an interview last February, after Sprint posted a fourth-quarter loss of $29.5 billion and a continued decline in subscriber numbers.

There’s no question Hesse has his work cut out for him. But if his first five months in at the company’s helm are an indication of what’s to come, you can count on seeing more changes at the number three mobile operator - for better or worse.

By Michal Lev-Ram

Just as one high-profile buyout bid is wrapping up, another may be beginning.

Deutsche Telekom AG (DT), the parent company of T-Mobile, is considering a bid to acquire Sprint Nextel (S), according to news reports Monday.

Shares of Sprint were up nearly 6% on the news, while Deutsche Telekom was down about 1.4%.

While Germany-based Deutsche Telekom has nearly 120 million customers worldwide, T-Mobile is the smallest of the top four mobile operators in the United States, with just 28.7 million subscribers. A combination with Sprint (which has about 54 million customers) would make T-Mobile the largest U.S. wireless carrier, ahead of rivals Verizon Wireless (VZ) and AT&T (T).

Last year, Deutsche Telekom said it would look at international acquisitions as part of a new growth strategy its CEO called “Focus, fix and grow.”

“We want to use our expertise to be able to grow in mobile communications, including the possibility of acquisitions, based on our strict business criteria,” Rene Obermann, the company’s chief executive, said in March 2007.

But while Sprint’s flagging share price, coupled with the benefits of its subscriber base and spectrum holdings, may make it an attractive target, some analysts say a buyout is unlikely to happen anytime soon.

Sprint has been struggling with customer service issues and managing the two networks it currently runs, and has also run into problems with the delayed launch of yet another next-generation network called WiMAX, now expected to roll out later this summer. All three of Sprint’s network technologies are different from T-Mobile’s GSM infrastructure, which means they’re compatible with different phones. Running all four could be a logistical nightmare for Deutsche Telekom.

Citigroup analyst Michael Rollins predicts that there’s a 25% chance of a Sprint acquisition — not just by Deutsche Telekom — in the next year.

“…The problems at Sprint are still deep-rooted and may deter a buyer in the near-term…” Rollins said Monday in a written report, adding that other potential obstacles to a deal going through include issues with regulatory approval and the difficulties of integrating Sprint and T-Mobile’s different networks.

A Deutsche Telekom spokesperson could not be immediately reached for comment. Sprint spokesperson Leigh Horner declined to comment on “speculation.”

Also on Monday, T-Mobile announced the New York City launch of its 3G network. It is the last of the top four carriers to roll out the technology, which provides customers with a higher-speed network well-suited for data services.

By Scott Moritz, writer

Phone giant AT&T (T) — No.10 on the Fortune 500 list — boosted first-quarter results by finding enough growth in segments like wireless to help offset its weakening core business.

The shrinkage in Ma Bell’s total phone lines continued in the first quarter with land — or access – lines dropping 7.7% from a year ago as customers fled to rivals or simply canceled their home phone service.

On a conference call with analysts, CFO Rick Lindner said the company “still sees softness in access lines,” but he added that the impact was offset by new broadband and video customers.

Lindner now says this balancing act “supports our premise that our business continues to be more defensive than most when the economy is under stress.”

For example, Ma Bell’s sputtering video-over-the-Net offering, dubbed U-Verse, is finally starting to stem customer defections to competing services offered by cable companies such as Comcast (CMCSA) and Time Warner Cable (TWC). AT&T added 148,000 new U-Verse customers in the first quarter and says it is on target to reach 1 million subscribers at year-end.

AT&T was one of the first telcos to wave the warning flag on consumer spending. In January, the company reported that it saw “softness” in some regions with high foreclosure rates. The weak housing market comes amid an acceleration in phone and high-definition TV competition from cable and satellite service providers.

Asked if he could comment on the health of the market Lindner declined, saying he chose “not to enter the debate on the state of the economy,” and will let AT&T’s “numbers speak for themselves.”

For the first quarter, AT&T posted an adjusted profit of 74 cents a share, up from the 65 cents a year ago and in line with analysts expectations. Sales for the quarter were $30.7 billion, up from $28.9 billion at the same time last year, and also in line with the Street.

In wireless, the San Antonio, Tex.-based company added 1.3 million net new users, down from the 2.7 million in the prior quarter, but more than the 1.19 million that signed on a year ago. The net gain in retail post-paid subscribers (users who have signed on with one or two-year contracts) was 705,000. That number is below the 1.7 million logged in the Christmas quarter and up slightly from the 678,915 users that were added a year ago.

Churn, the measure of monthly subscriber cancellations remained flat at 1.7%, both sequentially and for the year. Post-paid customer loyalty remained steady at 1.2% in the quarter.

AT&T managed to squeeze more profit out of its wireless business in the first quarter. Adjusted operating income was $3.5 billion, up from $2.5 billion a year ago. Some of the improvement came from a 2% increase in the average revenue per user, or ARPU, which came in at $50.18, as wireless customers racked up more data charges for messaging, e-mail and Net access.

On the iPhone front, where AT&T serves as the exclusive sales partner for Apple (AAPL), the company said it saw “stable demand” in the first quarter. About 40% of iPhone buyers are new to AT&T, and the ARPU for iPhone customers was more than $95 a month — considerably higher than for the average AT&T customer.

But total access lines continued to decrease. Total lines fell 7.7%, to 60.4 million, from 65 million a year ago. That pace is slightly slower than the overall 8.1% line loss rate in 2007.

One area of massive growth that caught little attention was AT&T’s total debt, which grew 15% to $73.4 billion from $64 billion a year ago.

AT&T shares were up a quarter to $37.84 Tuesday.

By Michal Lev-Ram

America is known as a nation of TV watchers, but viewers have not embraced the small screen as enthusiastically as they have the big one in their living room.

Just 4.6% of U.S. wireless customers have watched TV or videos on their cell phone, according to research firm M:Metrics. Verizon Wireless (VZ) has yet to release subscriber numbers for a mobile TV offering it launched last year, but Paul Jacobs, the CEO of Qualcomm (QCOM), which provides the live television service, recently said that adoption has been slower than he would like.

Now Verizon rival AT&T (T) is gearing up for the May launch of the same Qualcomm service, called MediaFlo. The question is, will subscribers to the country’s largest nationwide network want to watch?

Analysts say that while U.S. consumers love their TV, it’s not clear there is a huge demand for full-length programming on the go. For one, most Americans commute by car, not on public transportation.

“Without a clear block of time like commuting on the subway it’s just not clear there will be that many people willing to pay for the service,” says Tim Farrar, president of research firm Telecom, Media and Finance Associates.

But Farrar says that even in countries like Japan and Korea, where consumers watch mobile TV on the train, the business model remains unproven. Korea’s TU Media, the company that runs local carrier SK Telecom’s ad-sponsored mobile TV service, acknowledges it is losing money due to poor ad sales and reportedly laid off about a third of its staff earlier this year.

Although AT&T says it won’t disclose pricing information until the service launches, Verizon currently charges $15 per month for access to eight channels, including Comedy Central and MTV. That fee doesn’t include the cost of a data and voice plan.

Another problem, says Farrar, is that Qualcomm’s live mobile TV network doesn’t yet blanket the entire country and doesn’t work on a wide variety of devices. Only those consumers who live in a select number of markets can get the service and must purchase a new phone to use it. AT&T says it will initially offer only two TV-compatible devices, the LG Vu and the Access by Samsung.

Of course, another possible reason for the slow uptake of mobile TV is that many consumers don’t even know it exists.

“When people haven’t tried a service before you need to educate them and show them how much fun it will be,” said AT&T spokesman Mark Siegel, who declined to comment on how the carrier plans to market and advertise its upcoming service.

By Michal Lev-Ram

Couch potatoes, listen up: If you’re still using an analog TV, you might find static instead of “American Idol” on your screen come Feb. 18, 2009. That’s when the Federal Communications Commission plans to end a half-century of analog broadcasting.

This is the final step in switching to digital television broadcasting, which takes up less bandwidth and allows for high-definition pictures. With the government’s auction of the old analog TV spectrum now completed — companies like Verizon Wireless (VZ) and AT&T (T) bid billions of dollars those airwaves, which are well-suited for mobile broadband — attention is focusing on the 11.4 million U.S. households that Nielsen estimates are not ready for the big switch to digital television.

The only way consumers can keep their old televisions is by paying for cable or satellite service or buying a converter box, which receives and converts digital signals into a format that analog TVs can display. To make sure these analog-only households aren’t stuck without programming next February, the government has launched a coupon program to make the transition to digital smoother. Qualifying families can apply for up to two, $40 coupons to be used toward purchasing converter boxes.

Todd Sedmak, a spokesman for the National Telecommunications and Information Administration, the government group overseeing the coupons program, says companies in the broadcasting, cable and consumer electronics industries have committed to spending over $1 billion to educate consumers about the upcoming change.

“Many resources are being tapped to inform the public,” says Sedmak, who adds that more than 4.5 million households have already requested about 8.5 million coupons. To date though, the government has only mailed about 2 million coupons.

Critics say despite the efforts to educate, getting the word out to over 11 million people — many of them living in rural locations — will be difficult. They also argue that converter boxes are not readily available and that that the coupons are good for only three months. Best Buy (BBY) carries only one model, retailing for $60, that is covered by the coupon.

What’s more, the upcoming switch could affect some groups more than others. According to a recent Nielsen study, adults over 55 are better prepared than younger households, while Hispanics and African-American households will be more affected than whites and Asians.

Eric Rossi, head of Nielsen’s digital transition preparedness team, said in a recent report: “The change to all-digital broadcasting is the most significant change in the history of television.”

By Michal Lev-Ram

After nearly eight weeks and 261 rounds of bidding, the government’s spectrum auction finally ended Tuesday.

In January,  the Federal Communications Commission began auctioning off the coveted 700MHz spectrum, which is particularly suited for broadband services and is the last major chunk of nationwide spectrum.  The FCC had hoped to raise at least $10 billion from the auction, but as the last bid came in late Tuesday the total reached $19.6 billion. The auction attracted companies such as Verizon (VZ), Google (GOOG), AT&T (T) and Qualcomm (QCOM).  The spectrum is currently used for television, which will give up the airwaves in 2009 when TV broadcasting goes digital.

As this was a “blind” auction, the bidders’ identities were kept secret.  But the winners won’t be revealed until all five blocks of spectrum up for auction are accounted for — the so-called D block, which was set aside for a nationwide public safety network, failed to raise the minimum price set by the FCC. Analysts say it’s likely the government will separate the D block from the rest of the auction and put it up for sale again  so they can collect the money for the other blocks.

By Michal Lev-Ram

The race to be the most “open” wireless carrier is heating up. On Wednesday, Verizon (VZ) will release a set of technical specifications that will enable non-Verizon branded cell phones to work on its network for the first time. Not to be outdone, early Tuesday AT&T (T) unveiled a new website which includes resources for consumers who want to use phones they’ve purchased outside of the carrier’s stores on its network.

Unlike Internet service providers — which are required to allow any laptop, browser or website to run on their networks — most U.S. carriers have historically blocked devices or applications that aren’t directly distributed by them. But more recently, U.S. mobile operators have adopted an “if you can’t beat them, join them” attitude.

Google (GOOG) takes at least some of the credit for the shift.

After it began lobbying for more open networks last year and launched its Android open mobile platform for developers, “AT&T and Verizon started to fight over which one seemed more open,” said Rich Miner, Google’s VP of mobile, at a recent conference.

But Verizon’s decision to open up was also a preemptive response to a government push for giving consumers more control over how they use their cell phones. The carrier’s announcement was strategically timed ahead of the Federal Communications Commission’s high-profile spectrum auction, which set aside a valuable portion of airwaves to be used for a new, open network. Verizon is believed to be the most likely winner of that block of spectrum, though we won’t know for sure until the auction closes — probably sometime in the next few days.

“Verizon Wireless’ Open Development initiative is driven by the company’s desire to encourage innovation, give customers new wireless choices, and quickly address opportunities to expand the wireless market,” the company said in a recent statement. Its open network will be available by end of 2008.

AT&T, of course, maintains that it will win the race.

“The driving force of our business is our commitment to be open to innovation and to offer our customers more choices than any other wireless company,” Ralph de la Vega, president and CEO of the company’s wireless unit, said in a statement.

But critics are skeptical that either carrier will become truly open, making it both simple and affordable for consumers to use outside devices and easy for developers to meet the specifications for getting their applications up and running on the networks.

By Michal Lev-Ram

Sprint CEO Dan Hesse has been in office for just three months, but he’s already starring in the company’s latest television commercial — an ad for its new unlimited pricing plan, which offers both voice and data for $100 a month.

The black-and-white ad is the first in Sprint’s (S) new branding campaign, which will emphasize a more “immediate approach” to customer service and highlight the “capabilities” of the company’s products, according to a release issued by the company early Monday.

Last month, Hesse told Fortune that his number one priority is improving customer service, followed by rebuilding Sprint’s brand. The key to the company’s new identity, he said, would be building on its wireless data services like text messaging, Web surfing, videos and music and navigation.

“Every carrier in America does voice well — it’s really not a differentiator anymore,” Hesse said in a phone interview late last month. “You need to define what position you can occupy that is different and then execute around that.”

Sprint’s unlimited “Simply Everything” plan was announced after Verizon Wireless (VZ), AT&T (T) and T-Mobile unveiled similar plans. But Sprint’s was the only one to include full data services in addition to unlimited calls.

But even Hesse, who implies that the new unlimited plan is revolutionary in the new ads, admits that “Simply Everything” is not enough to fix the company’s many problems. Last month, after Sprint posted a fourth-quarter loss of $29.5 billion and a continued decline in subscriber numbers, Hesse told investors that a turnaround will not happen for “many quarters.”

By Michal Lev-Ram

The federal government’s high-profile wireless spectrum auction will likely end in the next few days. That means we could soon find out who won the last major chunks of spectrum available in the United States, which have attracted nearly $20 billion in bids.

Analysts say it will likely take about a week after the auction concludes for the Federal Communications Commission to compile and release the list of winners for five “blocks” of the 700MHz spectrum that are particularly suited for mobile broadband services. But the announcement could be delayed because the “D Block” of spectrum — a portion set aside for a nationwide public safety network — has failed to raise the minimum amount set by the FCC. According to the auction rules, the identity of the winning bidders won’t be released until bidding is completed on all blocks of spectrum. But it’s possible the government will set aside the D Block so that it can finish (and collect money) on the rest of the auction.

The 700 MHz auction has garnered attention for the number of non-traditional companies that registered to bid, including Google (GOOG).

But many in the industry believe the search giant was bidding just to ensure the $4.6 billion reserve price on the coveted C Block was met and thus the requirement that it remain open to any mobile device assured. Analysts say the likely winner will be a traditional mobile operator like AT&T (T) or Verizon Wireless (VZ).

Bidding has already dragged on for about seven weeks but auction activity slowed last week and the FCC upped the number of daily rounds in an attempt to accelerate the process. The rules of the auction state that it will end only when no new bids are placed. Only seven bids were placed in the latest round early Monday.

The spectrum up for grabs was originally allocated for analog television, which go off the air in January 2009. Analysts are calling this the last big chunk of “beachfront property” in the wireless spectrum.

“Everyone knows there’s nothing else of great significance coming down the pipe,” says Stifel Nicolaus analyst Rebecca Arbogas. “There’s a finite amount of spectrum that’s considered desirable, and there’s no way to squeeze more out.”

But Arbogas adds that the wireless industry has all the spectrum it needs for quite a while. For nontraditional or smaller players, though, getting their foot in the door will be a challenge.