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Dan Hesse: Full interview transcript

Marketplace Staff Jul 1, 2010

Text of full interview

Kai Ryssdal: Dan Hesse, good to have you with us.

Dan Hesse: Thank you Kai, good to be here.

Ryssdal: When you sat down with the chairman of the board when they hired you, what was the mandate? What was the brief for this company?

Hesse: It was to turn around the company. I was hired just before the end of 2007 and the metrics of the company had been declining and my job was to turn it back the other way.

Ryssdal: Metrics is a kind word for not really doing very well.

Hesse: Yeah, well the company had had some customer service issues and as a result, the brand got damaged, we started to lose customers. And that’s really the key to basically top-line and bottom-line is how you are doing on the subscriber side.

Ryssdal: So when you come in and they say fix customer service, what do you do?

Hesse: Well actually the mandate wasn’t to fix customer service, it was to fix the business but customer service was my first objective and goal. I kind of set out with three major goals for the company and they’ve been the same three for two and a half years since I’ve joined. Every employee talk, every meeting, every external discussion including this one, analyst call or what have you talk about those three. Number one is to improve the customer experience, number two is to build the brand and number three is to generate cash. It’s like a venn diagram; they are separate but they are very related to one another. So the customer experience though is really number one because the other two follow improving that.

Ryssdal: What’s the “sweet spot” in that venn diagram, that part where they all three overlap? I mean, how do you get there?

Hesse: Well, I think really number one, you do have to improve the customer experience. It’s really the brand. The brand takes time so that’s really nirvana. When you improve the business performance and the customers have a great experience that’s when the reputation and brand really gets that cache and that is something I learned in a different company. There’s a company now called AT&T but there was a different company called AT&T back then; it’s one of the things we learned in terms of building that brand. But the customer experience, if you kind of take a look at what’s happened. Very recently in the American Customer Satisfaction Index, which is arguably the ‘Oscars’ of customer satisfaction — some people know it as the University of Michigan study — recently said that Sprint’s customer service has improved more in the last two years more than any company in any industry. As a matter of fact in their 16 years of doing the survey, only once six years ago has any company improved their customer satisfaction that much.

Ryssdal: OK, so if your customer service is improving as much as everybody else says it is, how come you are still losing customers?

Hesse: Well we have, if you hold a multitude of brands; we have the Sprint brand — and that is actually not losing customers. We have the Nextel brand. We have Boost, which is gaining customers. We have Virgin, which is gaining customers. But the Nextel brand is the only one that is losing customers, but there’s also what is called a “brand lag.” You have to improve the experience and it takes a while for customers to recognize that you’ve improved that much or if you’ve had a great brand in the past and your service declines, it takes a while before customers realize that. The key though is if you take a look at new customers, new customer additions, that’s really when you begin to see if a brand is working. We’ve gained market share of new customer additions three consecutive quarters so we’ve had a substantial increase of over 500 basis points of share gain in the past year, so that it’s also evident and tangible in the subscriber numbers.

Ryssdal: I took the New York bureau of Marketplace to breakfast this morning and we got to talking about this interview around the table and it turns out that there were two of us around the table, myself and one of the New York reporters who used to be Sprint customers who aren’t anymore. How do you get us back?

Hesse: Well, 4-G hopefully.

Ryssdal: All right, so technology is one, right?

Hesse: But the service really has changed. We recently looked at a study and they came back to us and said, we’ve never seen anything like this where you have this barbell where you have your customers who have had an experience with Sprint Customer Care or have been in a Sprint retail store in the last year who love you. And those who haven’t who don’t, and there is almost no one in the middle who have a bad perception of the brand. So it’s a very, very different company, a very different experience. And part of the way we are trying to get customers back, and you may have noticed about six to eight weeks ago we came out with the guarantee which is try us for 30 days and we will give you all your money back if you don’t have a great experience, or if you don’t have great coverage, if you have any issues at all — no questions asked, all your money back 30-day trial.

Ryssdal: Is that your idea, sitting around the CEO suite one day?

Hesse: We talk a lot as a team and I, quite frankly, people call me a player coach. I don’t have a chief operating officer, I’ve been in the industry for over thirty years and I want the fewest number of layers between me and the people in the front line as possible. So I am very involved in a lot of the discussions but it is very much of a team. It’s not like me dictating it, I am involved I would hope not in a directorial but as a participant.

Ryssdal: So when you walk into a Sprint store or a retail outlet, do they know who you are right away?

Hesse: They do because I’m on TV.

Ryssdal: Because they better.

Hesse: Well no, because I’m on television. Actually one of the things that I always love to do in just about any job I’ve had is to do “secret shopping” not only in our own stores but in competitive stores. Where in our case, you go into Best Buy or Radio Shack and see what they try to sell you. I walk into Best Buy and I get a crowd around me, or Radio Shack because they know who I am.

Ryssdal: How are those ads doing? Ads featuring the CEO are not classically successful. You had Dave Thomas from Wendy’s and maybe you, I suppose.

Hesse: Well the reason that a lot of people don’t remember CEO ads is because very few work. About 80 percent or more don’t work. I remember when the ad agency came to me and said that we want to put you on the ads, I was not high on the idea and I asked them, “What are the statistics and how often are the CEO ads successful?” And it was very rarely but when they are successful, they are very successful mainly because of brand recall. People know it’s a real person and when they see the person they know, you know, it’s a Wendy’s ad when you see Dave Thomas, right? So I’ve done nine ads now.

Ryssdal: Wow. Are you worried about getting over-exposed?

Hesse: No, because we always run another ad. If you notice there is always something else. I am in the media wait, I am not necessarily dominant and I take hiatus from time to time so that I am not over-exposed. And quite frankly if you take a look at our ad budget compared to our competitors, even though we do spend a lot of money on advertising, we’re relatively small spenders compared to AT&T and Verizon.

Ryssdal: Do you ever, when you see one of your ads, do you ever go, “Ooh man, get that guy off the television!”

Hesse: No, my kids do that. They laugh when they see dad. “Hey dad, aren’t you supposed to bring in the dog?”

Ryssdal: Let me get back to the customers for a second. How do you stop losing customers whether it’s Nextel or Virgin or Sprint, you know the main brand. How do you stop people from saying, I’m going to go to Verizon or AT&T?

Hesse: Well there’s a number of things that play into a customers decision of either staying or leaving. Number one is who has the device or phone that I really want and that’s why having a good device lineup is important. And number two is customer service, member coverage. A third item is just price and value. So there’s lots of things, as well as customer service, which my experience from a customer service point of view, so there’s lots of things that go into a customers decision of staying or leaving. Part of it also increasingly is the family. Where are the rest of the family going? I might love my Sprint phone but there’s one person in the family that just has to have the iPhone so the whole family goes over if I may use that as an example. What I’m hoping is that one person in the family has to have an Evo or has to have another Sprint phone and they move to Sprint. So it’s fairly complex and we spend every single Monday, every ops meeting that I run with my direct reports going through why customers churn, why customers leave and working on the issues associated with that.

Ryssdal: About the technology with this whiz-bang new phone you guys have, this is now supposed to be the only 4-G phone in the world, the Evo by HTC. Kind of seems you’re betting on this one to bring back those iPhone users and everybody who got away.

Hesse: Well we hope so and as a matter of fact today we just announced the second 4-G phone. It’s a dual mode, 3-G/4-G phone, the Epic from Samsung; which isn’t available yet so we haven’t announced price or availability. But the Evo is the only one you can get today and it is important to be on the leading edge. And we think that 4-G, anybody who wants mobile video and that’s important to you; whether you’re going to You Tube, so actually if you go on this phone to You Tube, You Tube knows that it’s a 4-G phone coming on and will automatically send You Tube HQ. I don’t know if you’ve gone onto You Tube, they have the regular and the HQ, which is higher quality.

Ryssdal: You have one right here. Let’s pull it up. Go ahead, we’ll do a little show and tell.

Hesse: OK.

Ryssdal: So this is the Evo by HTC, right, on a Sprint 4-G network

Hesse: We haven’t launched 4-G in New York yet, but if I we were in Kansas City for example where I am…

Ryssdal: Everything is up to date?

Hesse: Of course.

Ryssdal: Let’s give folks a primer on what is 4-G. Why is it supposed to be the latest and greatest?

Hesse: 4-G is short for fourth generation. And if you take the wireless generations, 1-G was analog, you remember that? That was known primarily as the car phone. They were these big monsters, the reason they were car phones is because you couldn’t carry the thing by yourself. 2-G was digital and you had acronyms like GSM or CMA and that’s when you could start to send what we in the industry call short messages or texts because it was digital. Third generation was when you started to get faster speeds, almost like the initial DSL in the wire-line world and you hear acronyms like EVDO or HSPA. And that’s kind of the state of the art now. 4-G is a step up from that and each generation is roughly a half a magnitude improvement in terms of price, performance and speed. So think about 2-G is five times better than 1-G, 4-G is five times better than 3-G. So if you went video, as you know video uses a lot more band width and 3-G just isn’t up to handling video. If you watch television on your 3-G — it’s OK, but you see pixelization. You may have to wait and delay. On 4-G, it’s really snappy.

Ryssdal: All right, so pull this thing out and give me the quick basis. Let’s get a You Tube video up or something and we’ll do a little walking customers through it.

Hesse: OK.

Ryssdal: We had a little bet going on, which kind of phone you were going to have, and I frankly said that maybe he’s got this old standby phone that he likes and he doesn’t have the new toy, but clearly you have the brand new toy.

Hesse: This will give you a good example and what I’ve done is I’ve downloaded, this isn’t live, I’ve downloaded because I don’t have 4-G here. I’ve downloaded a movie trailer so you get a feel for it…

Ryssdal: This thing weighs a ton by the way.

Hesse: Yeah but it’s very thin and they fit a lot of goodies in there. It’s got a 1-Gigahertz processor, it’s got a high definition camcorder, it’s a 8-megapixel camera in the back, it’s got another 1.3-megapixel camera in the front so if you do video chats when you talk to somebody else who has got an Evo you can see each other.

Ryssdal: So we have Jake Gyllenhaal here.

Hesse: Here’s a movie trailer for “Prince of Persia” and you can see what that 4.3 inch screen can do. This, by the way is the new Samsung Epic. It’s a 4-inch screen but it has a new what’s called a super-emulled screen and is really sharp in color.

Ryssdal: So this Epic is one step up from the Evo.

Hesse: Well no, it’s actually, they are both 3-G/4-G — they are just slightly different. The fundamental difference is the Evo is thinner because it has a touch screen keyboard and a lot of people like a qwerty keyboard and the Epic has a qwerty.

Ryssdal: So what all this tells me is, I mean you’re hauling around all these two really nice, new smartphones, it tells me that here’s a guy who runs a major wireless network company; in a lot of ways it is all about the toys. It’s all about the gizmos on the other end.

Hesse: It’s getting more and more that way each year where it’s becoming a bigger piece of the value proposition and it’s actually one of the challenges for the industry because these are heavily subsidized. The average user doesn’t know that these are $500 and $600 phones. They think that they are $100 and $200 phones. And that’s why they say, “Why do I have to sign a two-year contract?” Well it’s because you are making a down payment. You are not really buying a phone, you’re making a down payment on the phone.

Ryssdal: If Steve Jobs came to you tomorrow and said, “Dan when our contract with AT&T expires in a couple of years, we would like you to have the iPhone contract.” How long would it take you to jump on that deal?

Hesse: Well I would want to see what the deal was. I’d want to read what the answer was…of course it’s a great device and I would be very interested but everything has a cost and price.

Ryssdal: Does it keep you up at night? The AT&T-iPhone, you know, partnership they have and how successful that’s been?

Hesse: No, it doesn’t. I mean it is a competitive issue that I think about every day so whether it’s the Epic or the Evo or a year ago, the Palm Pre, you do know you’re competing with one device. But if you take a look at what’s happening is Android, which is the competing platform…

Ryssdal: It’s the Google operating system.

Hesse: Right, which is what both of these phones operate on. OK they are both Google Android systems and O.S. is what we call operating system phones, is doing extraordinarily well. And if you read a lot of the reports, Android is outselling Apple. And the reason is it’s available on so many devices and on every network. So you got your HTC that uses Android, a Samsung that uses Android. Verizon talks about the Droid that uses Motorola and if you want, whether it’s T-Mobile or Verizon or Sprint or AT&T, you can get an Android phone with any carrier. With Apple you are stuck with one form factor and one network.

Ryssdal: It seems that everybody in this country over the age of 11.5 has a cell phone and there’s not a lot of room to grow in the actual cell phone part of the market. How do you guys grow then, I mean where is the growth opportunity for you if you can’t get more cell phones into people’s hands?

Hesse: Penetration in the Unites States right now is 91 percent which is high, and it’s a very good question. How do you grow? First if you just look at the phone piece, and I’ll get into non-phones, but for phones the pre-paid market is growing very rapidly. That’s continuing to grow, the people who don’t have a phone. Part of it is because if your credit score isn’t high enough we won’t sell you a phone unless you go pre-paid because basically we are a bank when you come in and sign a two-year contract.

Ryssdal: You are financing that phone.

Hesse: We are financing the phone and data is growing a lot so a lot more usage and applications on the device, that’s a revenue opportunity. But these two phones both have what’s called mobile hot spot which means that these will connect to the Sprint network at 4-G or 3-G but anything you have with Wi-Fi, you can take with you and it can be part of the mobile internet connected to this. So there’s so many more devices that are going to be mobile wireless devices. It can be your iPad, your iPod, your Xbox, a Netbook, a PC. All of those things will become wireless. So there is growth there…all sorts of different wireless devices that the person will carry. Then there’s what I call the inanimate objects that will start to carry wireless chips…what we call machine to machine. Meters will be read, vending machines… you go right down the list. Cars will have wireless chips where they are monitored all the time. And that will give us revenue on our part so there will be many more devices that are connected to the wireless network than there are people so the concept of penetration is how many people have a cell phone won’t be as important because penetration could reach 300 percent or 400 percent in terms of the number of devices that are connected to the mobile network because people will have many mobile devices. More than just what we would call a phone, although they are hardly a phone anymore.

Ryssdal: But basically all those devices are relaying data I mean, data is where it’s at.

Hesse: Absolutely that’s where the growth is. Voice revenues are basically flat. All of the revenue growth in the industry is coming from what we call data and data is a broad term used to describe everything that’s non-voice so text and video we include as data. Revenues are growing at roughly at 25 percent per year and the big driver of data growth is mobile video and that’s why 4-G is so important.

Ryssdal: How has your industry dealt with this recession, I mean it seems like as you were talking before you know that penetration number is pretty high. Have people cut back on cell phone and data plan because the economy is pretty bad?

Hesse: Well it’s been interesting for me to watch since I’ve been in the telecom industry for a long time and over thirty years in terms of how things have changed in terms of what’s a staple and what’s a luxury. When I got involve in the wireless business, I started running, I was the CEO of AT&T wireless back in the late 90s, wireless was a luxury and the land line was a staple. Everybody had to have a land line and now the land line is a luxury. I have to have a cell phone and if I can have a land line, I will. So we are not immune but we are more protected from an economic downturn than a lot of industries because people are not going to give up their cell phones. There’s lots of surveys done where if you take anybody under 21, they’d give up their TV or their computer before they’d give up their cell phone. It is becoming that must have. What you do see is on business which we call enterprise, that business shrinks when there is a downsizing because if they lay off employees, they are going to need fewer cell phones. For example here in New York when the banks started having trouble, a lot fewer Blackberry’s on those bank customer accounts; but if you wait awhile they might start to spring up on the consumer side. So we saw a little bit of a downturn if you will in late ’08 and the first half of ’09 but not a severe downturn. I think we are becoming less and less susceptible to economic swings in the mobile industry because we are becoming such a staple.

Ryssdal: When you guys have your Monday morning ops meetings…

Hesse: Monday afternoon…

Ryssdal: Monday afternoon, not morning? All right, you’re not a morning guy. How frequently do the phrases AT&T or Verizon come up? Do you think actively about the leaders in the field?

Hesse: Oh absolutely. All the time and T-Mobile would be the other third competitor. There’s three big national competitors and we benchmark ourselves and compare ourselves and compare rate plans devices against those three all the time.

Ryssdal: All right well given that then, since the gap between you and the industry leaders is so large, is catching up something you are thinking about or are you trying to keep the pace?

Hesse: Well, I just look at having a good successful, viable, growing company that does well for our shareholders. So is Apple one of the biggest cell phone makers in the world? No. Are they number one in computers? No but I think their shareholders have done pretty darn well. You don’t have to be a RIM, you know Blackberry. They’re not one of the big monster guys. They’re not one of the top three but they are a very profitable growing company. So people ask me, “Boy Sprint, boy you’re only 36 billion dollars in revenues, do you think you are big enough to make it?” I think so. I think we are number 57 in the Fortune 500 list. We’re a big company so if you take a look at our stock price in 2009, our stock doubled. It’s up again in 2010 and by the way the stock of all of our major competitors was down in 2009 and down again in 2010. So I just look at improving the company. We’re roughly half the size of Verizon and AT&T and do I think it’s likely in the near future that we are going to catch them in size? No but if I can keep improving our financial performance we’ll have satisfied shareholders and employees.

Ryssdal: So what is it that keeps you up at night, then?

Hesse: I think that, when I’m kept up at night, it’s for a good reason and my mind is constantly thinking of new things, new ways to innovate. My team likes to… I use the word ‘nukes’, it’s not necessarily the best word to use but coming up with nukes, and it’s just thinking because you have to always be on the forefront, so we are first in 4-G, a lot of the offers and rate plans, things that have improved our brand and improved our trajectory in terms of subscribers have been because of innovations that Sprint came out with. So “Simply Everything,” which is the first all “knock yourself out” everything for $100 a month, that was the first any mobile any time which allowed your phones for a given price to have unlimited text, unlimited data and be able to call any mobile phone whether it’s Verizon, AT&T, T-Mobile or Sprint included unlimited for $70 a month. That was an industry-first where now you come into a Sprint store and we’ll customize setup any phone you want, one on one with you. And what I talked about earlier, the 30-day guarantee, we were one of the first so a lot of innovations as well on the technical side and the innovations side.

Ryssdal: You mentioned a couple of numbers there; a $100 a month, $70 a month — that’s like a thousand dollars. That’s a lot of money to spend on a phone!

Hesse: Well, it’s your rate plan and the amazing thing is what you’re going to pay each month is so much more important than the initial price for the phone.

Ryssdal: Oh yeah.

Hesse: So many customers are focusing on what they’re spending when they get out of the store and not multiplying times 24, what I’m going to have to pay each month and you’re right — that’s the big number! That is the big number and that’s what customers ought to be focusing on.

Ryssdal: So is that the reason, I mean if we went outside on 42nd Street here in Manhattan and stopped 10 people and said listen, “Do you love your cell phone company or do you hate your cell phone company?” We’re going to get probably like 10, “I hate them.” I mean, why is it that nobody loves their cell phone company?

Hesse: Well actually ‘C-Sat’, customer satisfaction among cell phone companies is going up. It is, I mean it’s been steadily increasing. Actually the latest report from J.D. Power for the industry, it’s interesting, the industry C-Sat is up four points. Sprint was up 17 and that was part of the four, so we are actually half of the improvement in the entire industry. So it is getting better.

Ryssdal: But the starting point is fairly low right? I mean you’ll grant me that. Nobody loves their cell phone company.

Hesse: I would disagree with that, I really would.

Ryssdal: You probably love your cell phone company, right?

Hesse: I do.

Ryssdal: Where do you go from here? You got this Evo. You’re doing 4-G. You’re clearly counting on this to take on the iPhone at AT&T. Once this has been out for a year, then what’s going to come from Dan Hesse in spring?

Hesse: Number one will be to continue to build out that 4-G network nationally because as you indicated and as we talked earlier, it’s not in New York yet so making 4-G ubiquitous is extremely important and continue to innovate on devices, continuing to innovate with respect to rate plans, continuing to improve customer service because — even though as I mentioned earlier with improvement of any company in the last two years — we are not close to being the top from an absolute point of view in terms of customer satisfaction as you pointed out. You know wireless companies are not at the top of the heap and that’s my goal so I have an awful lot to keep me busy.

Ryssdal: In doing some research to get ready for our talk, there are some quotes about when you took this job and how some fellow CEO’s in the industry said, “Man he’s got the toughest job in the world turning Sprint around.” Why was that? What was it about this job that made this attractive and why was it so tough?

Hesse: Well the reason that it was so tough was that the metrics in this company in terms of subscribers, revenues, earnings were not only declining but were declining at a decreasing rate, which meant that we weren’t close to bottom. And we also had a lot of debt. The company also was created as a merger of equals. There were a lot of issues that needed to be dealt with that kind of never had been dealt with and it was very difficult for anybody that came from the Nextel side or the Sprint side, but it is a merger of equals to deal with, there are two headquarters, the board was half and half, the management team was half and half, the name was Sprint but the colors were Nextel — all those kinds of issues. So there were cultural issues to deal with. Plus we were competing with probably two of the largest, best-heeled companies in the world. AT&T and Verizon. You put all of that together and it was a difficult job.

Ryssdal: How do you think you’ve done at it?

Hesse: How do I think I’ve done at it?

Ryssdal: Yeah.

Hesse: Well, you know as I mentioned if you were to take a look at…well let’s take corporate reputation. The last two years, the top 10 percent of improvement from the Reputation Institute, I mentioned some of the customer satisfaction improvements. Stock price improvements, actually if you were to take a look at your calendar for the years 2009 and 2010, it puts us in the top 10 percent of the S&P 500 in terms of stock price performance. So there was no question when I got here at the beginning of ’08 that ’08 was going to be a very difficult year. It was just we did continue to decline and there wasn’t a whole lot we could do, just try to speed how quickly we would hit what I would call bottom and then begin to pull in the reins and start to improve. So it’s far too early, it would be like the third inning, “How are you doing?” I think we’ve had a good my first two and a half years. I think from my own personal goals that I have set that I’ve achieved the goals that I’ve set or myself. I think that the board would say the same thing that we’ve had a successful two-and-a-half years but we have a long way to go and we are not nearly where we need to be yet so we look good after three innings.

Ryssdal: What does success look like for you in this company?

Hesse: Success is sustainable top-line and bottom-line growth and stable employment for my people because of that.

Ryssdal: Whether or not you are bigger than AT&T or whether or not you have an iPhone, any of that jazz?

Hesse: No. If something like the iPhone is a means to an end, fine. Again I think that AT&T and Verizon are so large it’s unlikely. My goal isn’t to be biggest, it’s to be best and best isn’t necessarily biggest.

Ryssdal: Dan Hesse from Sprint. Thanks so much for your time.

Hesse: Thank you, Kai. It’s been a pleasure.

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