EMBARQ Corporation

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EMBARQ Corporation

5454 West 110th Street
Overland Park, Kansas 66211
U.S.A.
Telephone: (913) 323-4637
Toll Free: (866) 404-4637
Web site: http://www.embarq.com

Public Company
Incorporated: 2005
Employees: 20,000
Sales: $6.3 billion (2005)
Stock Exchanges: New York
Ticker Symbol: EQ
NAIC: 517110 Wired Telecommunications Carriers

Spun off from Sprint Nextel, EMBARQ Corporation (Embarq) is primarily a landline phone company, the fifth largest in the United States. It provides more than seven million phone lines in 18 states (especially Florida, North Carolina, Nevada, and Ohio) with local and long-distance phone service. Beset by competition from cell phone companies as well as VoiP ("voice over IP," the delivery of voice information over the Internet) offered by cable television operators and others, Embarq is trying to compensate by selling high-speed Internet access, acting as a mobile virtual network operator (MVNO), buying excess wireless capacity and reselling it under its own brand, and offering satellite-television service through DISH Network. In addition, the company offers wholesale communications services to other carriers, and sells communications equipment and data and networking services to business customers. Based in Overland Park, Kansas, Embarq is a public company listed on the New York Stock Exchange and part of the Standard & Poor's 500 index of the most widely held stocks.

LINEAGE DATES TO EARLY 20TH
CENTURY

Embarq's Sprint roots can be traced back to 1899 when Cleyson L. Brown formed Brown Telephone Company in Abilene, Kansas. His family had moved from Pennsylvania to Kansas to farm, but displeased with this life his father opened a grist mill instead. Brown planned on farming but when was just ten years old lost an arm in an accident at the mill and would turn his attention to business. As a young man he left Abilene to attend business school and manage a creamery until he was called home by his father who had the idea of taking advantage of the same river that powered the grist mill to run a power plant to provide electric lights in town. The younger man would run the new electric company, Abilene Electric Light Works, and do such a good job that the city asked him to start a phone company to provide some competition to the local Bell company, notorious for its poor service. When the Bell patents expired Brown was able to launch his own three-person phone company, taking advantage of the poles he had already erected to carry power lines. He also quickly differentiated himself from the Bell operation, which was still operating as if it were a telegraph office. Instead of delivering telegrams, young boys were employed by Bell to act as operators, talking with customers and patching calls—duties they were not particularly adept at. Brown, on the other hand, hired women operators, who did a much better job serving customers.

In 1903 Brown merged with 14 other companies to form Union Telephone and Telegraph Co. When three other independent phone companies were brought into the fold in 1911, the name was changed to United Telephone Co., which became the second largest telephone company in Kansas. Brown remained involved in electric power as well, and in 1925 formed a holding company, United Telephone and Electric, to house his interests, which at its peak included 68 subsidiaries. About 70 percent were telephone companies, but also included were creameries, grocery stores, gas stations, oil refineries, lumber yards, and newsstands. United Telephone continued to expand even as the stock crash of 1929 triggered a decade-long depression. Telephone assets were acquired in Illinois, Indiana, Ohio, and Pennsylvania. In the early 1930s the economy finally caught up to United Telephone, which like all phone companies began to lose subscribers who could no longer afford phone or electric service. With the health of both the 62-year-old Brown and the company now ailing, in 1934 he was forced out as chief executive. He died a year later.

Business improved for United Telephone in the second half of the 1930s, leading to further acquisitions and a 1939 reorganization that resulted in a name change to United Utilities. Steady growth continued in the post–World War II years, so that by the 1950s United Utilities, doing business in five states, was the United States' third largest independent telephone company. By 1960 it was doing business in 15 states through 13 telephone subsidiaries, and also owned another ten utility companies, providing electric, gas, and water service. In 1966 Paul H. Henson took over as chairman and chief executive officer and began diversifying United Utilities beyond regulated businesses, including North Supply Co., to distribute telephone and electrical equipment, and United Computing Systems, to provide data processing services. To better reflect the changing business mix, the company changed its name to United Telecommunications Inc. in 1972. By the middle of the decade, it had $1 billion in annual sales, controlling 3.5 million telephone lines across the country.

ADDITION OF LONG-DISTANCE
SERVICE: 1984

Like a number of companies, United Telecommunications decided to take on AT&T and become involved in the long-distance telephone business. In 1984 it established a foundation by acquiring U.S. Telephone Communications, a small Dallas-based start-up long-distance company. United Telecom then announced an ambitious plan to build the first national, all-digital, long-distance fiber-optic cable network. It was a costly endeavor, and so in 1986 the company decided to spin off U.S. Telephone to merge it with GTE Corp.'s Sprint long-distance company, forming a 50-50 joint venture called US Sprint Communications Co.

Sprint's origins were linked to the railroad industry, which strung telegraph wires along its tracks in order to provide track information to stations along the line. Sprint was a division of Southern Pacific Railroad called Southern Pacific Communications Corporation (SPCC). The telegraph wires were converted to carry voice, and as communications became more complicated, railroads had to install telephone switches and multiplexing equipment. Thus, by the 1940s an independent railroad communications system had emerged that was capable of becoming a long-distance telephone system. For some time, it remained devoted to rail use, however. In the late 1950s the railroads switched to radio communications and the need for the wired network was limited, so much so that in the 1970s the maintenance costs became too high for the railroads to continue operating it. In 1978 SPCC began offering dial-up long-distance telephone service through its Switched Private Network Telecommunications group. A contest was held to name the service, resulting in the coining of the Sprint name.

In 1983 GTE Corporation, the second largest non-Bell telephone company, decided to challenge AT&T in the long-distance business and purchased Sprint from Southern Pacific. Over the next two years GTE invested in expanding Sprint's rundown wire network but far more money would be needed, prompting the joint venture with United Telecom. It was an inviting combination for both companies, since United Telecom was well on its way to having a state-of-the-art digital network in place, and Sprint controlled much needed easements between major cities.

COMPANY PERSPECTIVES

EMBARQ focuses on offering its customers practical, innovative products and competitive pricing.

Together GTE and United Telecom poured billions of dollars into building US Sprint, but United Telecom was more committed to the business. In 1989 United Telecom acquired a controlling 80.1 percent interest in US Sprint and reorganized its operations into a pair of divisions, one devoted to long distance, the other to local service. Two years later United Telecom bought GTE's remaining interest in US Sprint, and changed its name to Sprint Corporation, thus bringing all units under the same brand.

The 1990s brought new telecommunications services for Sprint to market. In 1992 the company began offering Internet service, and a year later it became involved in the wireless telephone business by acquiring Chicago-based Centel Corp., which owned a number of cellular properties under the Centel Cellular banner. The unit was subsequently renamed Sprint Cellular Co. Sprint also picked up local telephone operations in 13 states in the Centel acquisition, and held the distinction of being the only carrier to offer local, long-distance, and wireless services.

With new technology, wireless telephone became more affordable and achieved mass acceptance in the 1990s. By the end of the decade Sprint's wireless customers outnumbered the company's local landline customers. With eight million wireless customers, Sprint trailed only Verizon, Cingular, and AT&T. The trend accelerated in the new century, and all local telephone providers experienced a steady decline in local customers, as many people opted to use wireless phones exclusively. The situation only grew worse with the advent of VoiP service, heavily promoted by deep-pocketed cable companies. Growth was clearly on the wireless side of the business and Sprint, like other telecoms, soon reached a watershed moment, having to decide whether to remain both wireless and landline, or focus on the wireless business exclusively. Because it was a public company, the way investors viewed the situation was paramount. As the New York Times explained in a 2006 article: "Wireless companies, which are growing faster than traditional phone companies, are likely to attract investors interested in growth stocks. But investors looking for steadier returns are attracted to local phone companies, particularly those that operate in rural areas where competition is less fierce, because they usually pay big dividends."

In December 2004 Sprint and Nextel Communications, Inc., a dedicated cell phone company, agreed to a $36 billion merger and announced that the combined company planned to spin off its Local Telecommunications Division (LTD) as a separate company in order to focus on wireless. The transaction was completed in August 2005. Initially called Spinco for want of a better name, the new LTD business was incorporated in 2005 and a management team was installed. Named chairman and CEO was Dan Hesse, a seasoned telecommunications executive who had previously headed AT&T Wireless. Taking over a business with more than seven million phone lines in 18 states, Hesse indicated that the company would be aggressive and innovative, seeking to sell bundles of communications services—local phone, broadband, wireless, and satellite television—to existing customers while reaching out to new ones.

ADOPTING THE EMBARQ NAME:
2006

The company conducted a thorough ten-month process to develop a brand name, working with San Francisco's Salt Branding and interviewing more than 1,000 customers to craft a word that suggested innovativeness and forward thinking. In February 2006 the fruits of this effort were revealed, as Spinco assumed a permanent name and brand identity: Embarq Corporation, represented by a green origami jet. The use of a "q" at the end was to provide the brand with something that would stand out visually and verbally.

Aside from customer acceptance, Embarq had to gain approval from regulators in 14 of the 18 states in which it operated. At the time of the naming announcement, the company had received half the necessary approvals. Holding up approval in several of the other states were the objections of the Communications Workers of America. "We were concerned about this spun-off company, whether it would be a viable entity or not," Union official Jimmy Gurganis told the Kansas City Star. Hesse then met with the union to outline his plans for growing Embarq and was able to reassure them that he had no intention of allowing the LTD to wither on the vine. The two sides reached a labor relations agreement and the Union dropped its objections with state regulators, opening the way for the completion of the spinoff. Sprint shareholders received one share of Embarq stock for every 20 shares of Sprint stock they held.

KEY DATES

1899:: Brown Telephone Company is founded in Abilene, Kansas.
1911:: Company becomes United Telephone Co.
1939:: United Telephone becomes United Utilities.
1972:: United Telecommunications name is adopted.
1984:: Long-distance unit merges with Sprint.
1991:: United Telecom becomes Sprint Corporation.
2005:: Sprint and Nextel Communications merge.
2006:: Local telephone assets are spun off as Embarq Corporation.

In May 2006, shares of Embarq stock began trading on the New York Stock Exchange. If it had been a stand-alone company the previous year, it would have generated $6.7 billion in revenues and $900 million in net earnings, numbers that would have placed it in the low 300s of the Fortune 500. Thus, after the close of trading on May 17, Embarq gained a place in the Standard & Poor's 500 stock index, replacing Applied Micro Circuits Corp., which no longer met the minimum financial requirement to be included.

As Embarq began its independent existence, it still had to contend with declining landline customers. After dropping 4 percent in 2005, the company was well on its way to losing another 5.5 to 7.5 percent in 2006, much of the erosion due to cable competition. As a result, Wall Street was far from bullish about Embarq's prospects. To gain traction with customers, and investors, the company began assembling packages of services to defend its customer base and hopefully build upon it. In addition to DSL broadband service, Embarq began to resell branded wireless service using excess Sprint capacity and satellite television. The company also hoped to tie together technologies. Examples of this type of hoped-for innovation included an integrated voice message box that served both wireless and home lines, and a phone that worked on both cellular and wireless-fidelity networks. Another factor in Embarq's favor was that it mostly served smaller towns and rural communities, which had been underserved by telecommunications companies and offered less competition. Whether a primarily landline company would succeed under contemporary conditions remained to be seen, however.

Ed Dinger