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Sprint Drops ION Business

Sprint Corp. Wednesday threw in the towel on its Integrated On-Demand Network (ION), a telecommunications network designed to give users unlimited bandwidth through one existing phone line that could transmit voice, video and data calls all at the same time.

Sprint said it would discontinue Sprint ION consumer and business offerings as part of a larger plan to improve its competitive positioning and reduce operating costs to business units in its FON Group tracking stock.

"Several factors influenced our decision to discontinue the Sprint ION initiative, including the rapidly changing industry landscape and future funding requirements for ION, especially in light of the economic slowdown and the uncertainty of the timing of a recovery," said William T. Esrey, chairman and chief executive officer of Sprint. "Great progress was made over the past several months on the technical challenges to developing an on-demand, integrated product offering. The knowledge that we have gained throughout the development of ION is already being put to use in delivering multiple services over our backbone network and will be of additional value as technology continues to evolve. We believe our vision that customers will desire integrated communications services still holds true. However, it is clear that with our current efforts and appropriate return on investment cannot be achieved in an acceptable time frame and we are adjusting our plans accordingly."

Sprint sank a large amount of resources into ION over the years. By June 1998, when ION was first unveiled, the project had already been under development for about five years at a cost of approximately $2 billion.

Sprint launched the network in 1999, but as of April of that year, as few as seven companies had signed on for the service. On Wednesday, when Sprint release its third quarter results, the company attributed a loss of 11 cents per share from FON to ION. But Esrey downplayed that figure, preferring to focus on other areas within FON.

"In the midst of an economic slowdown, significant shifts in customer preferences for products and services and continued pricing pressures in our core long distance business, the FON Group posted solid results," Esrey said. "To meet revenue challenges, the FON Group is making progress in expanding distribution channels and taking an even more aggressive approach to offering long distance service bundled with PCS and local communications offerings. Of equal importance is accelerating efforts to grow revenues in our Internet, data services, Web hosting and international businesses."

Still, Sprint said it won't leave existing ION customers in the lurch. The company promised "an orderly transition of ION customers to alternative service arrangements."

In addition to writing off ION, the company is cutting off customer acquisition efforts for its fixed wireless Multichannel Multipoint Distribution Services (MMDS) and freezing the number of MMDS markets served "until substantial progress is made on second-generation MMDS technology." Sprint said the existing MMDS customer base will be maintained, as will all video services offered through the fixed wireless spectrum.

The company is also consolidating marketing functions and streamlining network operations within its Global Markets Group and combining consumer and small business operations into a single mass market organization with a focus on acquiring customers through bundled PCS and local telephone offerings through affiliate and partnership sales channels.

Also, it is streamlining selected marketing and network support functions in its local telephone operations, product supply and directory publishing businesses, as well cutting back corporate support functions.

Sprint plans to layoff about 6,000 employees -- 7 percent of its worldwide workforce -- and 1,500 contractor positions as a result of the termination of ION, as well as the other steps.

The company expects to take a fourth quarter 2001 pre-tax charge of about $2 billion as a result of winding down ION, associated write-offs, and the lay offs. Sprint said total cash exit costs for the termination of ION will be about $600 million, including $200 million for severance.

On the other hand, the company said that the annualized pre-tax savings (using third quarter 2001 costs as a baseline) from the termination of ION, the lay-offs and the freeze on MMDS marketing is expected to be about $1 billion starting in 2002.

"We are taking significant steps to reduce our cost structure and sharpen our focus on the products and services that hold the best potential for growth and return on investment," Esrey said.

That appears to include plans for a mid-2002 rollout of high-speed third-generation (3G) wireless services. Esrey said Sprint PCS's plans for a national rollout remain unchanged.

"Unlike its wireless competitors, we believe Sprint PCS has adequate spectrum for a smooth transition to 3G and offers the most cost-efficient path to the faster services, attributable to CDMA technology in its nationwide network," Esrey said. "While our competitors promote the introduction of faster-speed voice and data services in a few markets, the true success of 3G service will be in its seamless, national deployment. Make no mistake, 3G isn't a race to the starting line, it's a race to the finish. And the finish line in Sprint's view is faster and better voice and data services clear across the country."

The need for spectrum may in part explain Sprint's decision to freeze acquisition of MMDS customers. In September, the Federal Communications Commission (FCC) agreed to allow 3G to operate in the 2500-2690 MHz band -- the same band currently occupied by MMDS. At the time, the FCC said it would allow market forces to determine the best way to utilize the band.