Sprint has a hot-selling phone with the HTC Evo 4G and a fast, next-generation data network, the first in the business to be up and running. The company is hoping to capitalize on that status to overcome a painful spate of customer defections and close the gap between itself and industry leaders Verizon Wireless and AT&T. But the jury is still out, experts say, because of problems Sprint has had in recent years with customer service, the short period in which it may have first-mover advantage and the lack, so far, of a blockbuster application that would keep it ahead.

Early in June, Sprint said sales of the Evo, the first mobile phone with so-called fourth-generation (4G) network capabilities, beat the wireless carrier’s launch day record, previously held by the Palm Pre and Samsung Instinct. “It is terrific to see customers react so positively to this device,” said Sprint CEO Dan Hesse in a statement. Sprint’s 4G service, offered through a partnership with wireless startup Clearwire, is based on the WiMAX (short for Worldwide Interoperability for Microwave Access) telecommunications protocol. WiMAX promises access speeds of one to six megabits per second (Mbps), compared with 3G speeds ranging from 400 kilobits per second to two Mbps. The Evo 4G, which is manufactured by the Taiwan-based HTC Corporation, can use the speedy WiMAX network as well as current 3G networks.

The new-generation phone and network are intended to address capacity problems with the current wireless infrastructure, which is straining under the demand to provide increasingly more data services. The 4G technology will open the door to a wide range of new applications involving rich media such as video, ultimately allowing smartphones to assume more of the functionality of laptops.

The stakes are high for Sprint, which is looking to turn around years of customer losses. By being first with a 4G phone, Sprint can highlight its operating improvements and build some momentum before other carriers enter the market. Verizon is developing its 4G network — based on technology called Long Term Evolution, or LTE — in 2010 with a phone planned for sometime in 2011. AT&T is due to test its LTE system in 2011 with a more aggressive rollout planned for 2012.

But experts at Wharton, noting that Sprint has a limited window of opportunity to make gains on Verizon and AT&T, say that the company needs more than just a head start — and one new smartphone — to pull off a comeback. “Evo has done well so far,” says Kartik Hosanagar, an operations and information management professor at Wharton, adding that “devices can certainly help bring in customers.” But, he notes, “one needs a complete game changer [like the iPhone was in the United States for AT&T] to have a dramatic impact on market share.”

Gerald Faulhaber, a business and public policy professor at Wharton, agrees that Sprint’s new phone and faster 4G network may not be enough to put the company on top. “Sales for the Evo have been brisk, but Sprint has to tell people how WiMAX changes everything,” says Faulhaber. “It’s faster, but Sprint needs a new application to do something wonderful that consumers couldn’t get elsewhere.” But Kevin Werbach, a legal studies professor at Wharton, gives Sprint a fighting chance. “If Sprint can deliver on the promise of 4G as a faster, more robust mobile data infrastructure before its competitors, it could carve out a strong market niche,” he asserts. “To do so, however, it needs a phone to get those iPhone, Droid and BlackBerry users to switch. That’s where the Evo comes in.”

Fighting a Reputation for Bad Service

Sprint also has to overcome its image problem. The company has been working to reverse a reputation for bad customer service going back to 2007 and early 2008, when the company experienced a series of high-profile snafus. It often dropped customers who called service help lines, sparred with a woman who complained about an erroneous $14,000 bill in a dispute that landed on YouTube and took heat for sending disconnect letters to U.S. soldiers serving overseas over roaming charges. Sprint eventually settled these spats, but not before drawing plenty of bad press and losing a lot of customers. As of March 31, Sprint had 48.1 million subscribers, down from 53 million at the end of 2006. Verizon had 92.8 million subscribers as of March 31, followed by AT&T’s 87 million, according to figures from the companies.

Since the string of high-profile complaints, Sprint has been working diligently to lure customers back. It has lowered prices on its family plans and now offers money-back guarantees if new customers don’t like the service. In mid-June, Sprint said that its customer satisfaction scores, as measured by the 2010 American Customer Satisfaction Index, had improved more than those of any other company over the last two years.

Though on the road to recovery, Sprint hasn’t quite turned the corner. For 2009, the carrier lost 1.13 million net subscribers, an improvement on the 4.58 million customer defections in 2008. And while it has cut that number even further this year, the company is still in the loss column, down 75,000 net customers for the quarter ending March 31.

Saikat Chaudhuri, a management professor at Wharton, says that the industry’s history should give Sprint hope. “The good thing about this industry is that with every new generation of technology there’s an opportunity to make a comeback,” notes Chaudhuri. “It’s not guaranteed that if you do well in one generation that you’ll continue to do well.” Indeed, the telecom sector is chock-full of comebacks, Chaudhuri adds. For instance, the Droid handset put Motorola back in the game after being a no-show in the smartphone market. And Palm briefly resurrected itself with the popular Pre device–only to have that success stall later.

How Valuable Is the First-Mover Advantage?

The key question is how resourceful Sprint will be in capitalizing on its head start in 4G. Experts at Wharton say that a first-mover advantage is real, but that there are multiple variables that determine its impact over the long run.

Rahul Kapoor, a management professor at Wharton, recently published a paper in Strategic Management Journal which found that a firm’s first-mover advantage from a new technology is greatly affected by the “ecosystem” in which the technology operates. In other words, a given innovation does not stand alone — a number of players need to build on the core innovation. “4G is a much improved technology from 3G, but it isn’t just about Sprint,” asserts Kapoor. “First-mover advantage is dependent on other players in the ecosystem.” For instance, Kapoor says, Sprint “needs content creators, developers and others to offer products and services to make the best use of 4G. If those adjustments aren’t synchronized, there will be less of a first-mover advantage.”

The Evo is powered by Google’s Android operating system and its app marketplace. New applications designed specifically to take advantage of 4G would rely on the army of Android software developers. Sprint needs to “hit that sweet spot where it nails the hardware, software and infrastructure to compete,” says David Hsu, a management professor at Wharton. The problem? The company must “create a value proposition that will move me away from an existing service,” Hsu adds. “The competitive landscape is fierce and Sprint has no leverage on the Android side because it’s a common platform” on multiple phones and carriers.

What Sprint really needs is a compelling new use for a phone that can utilize 4G speeds, notes Hsu. Features like video chat and real-time video could get new customers to join Sprint, he says, but it’s unclear how large the demand is for those services. Sprint’s Evo offers video chat, but Apple’s iPhone 4, its newest 3G model, just introduced FaceTime, a similar feature that allows two iPhones to host a videoconference over Wi-Fi. (Wi-Fi provides coverage for a range of 300 to 400 feet; Evo’s system, WiMAX, permits access for up to 30 miles.) “For Sprint to succeed big with the Evo, it needs to convince users that data-intensive services like video chat and live streaming are compelling,” says Werbach.

Faulhaber acknowledges the need for differentiated services if Sprint is going to make a comeback based on 4G, but says that the company needs an entire package to woo customers from AT&T and Verizon. “Technology itself never gives you a competitive advantage,” says Faulhaber. “Most consumers want to know about the service or what Sprint is providing. It’s about the new and exciting, not the technology. What is Sprint delivering to people?”

Some analysts believe that Sprint’s Evo can now compete with Apple’s iPhone 4 and Verizon’s flagship Android devices such as the HTC Incredible because of its faster network, unlimited data plans and key new features, such as video chat. “The main advantage of the Evo in our view is the potential for true unlimited data usage for heavy users, particularly in 4G markets,” Deutsche Bank analyst Brett Feldman said in a research note.

The Competition Isn’t Far Behind

But those advantages may prove ephemeral because Sprint doesn’t have much time before its rivals introduce their own 4G services, say experts at Wharton. Sprint’s 4G lead may last only a year or two at best. Verizon’s 4G technology, based on LTE, will be faster than Sprint’s network when it launches in the next year. “I don’t believe any first-mover advantage for Sprint is sustainable in the long run,” asserts Hosanagar. “First, it will take a lot more than a 4G network to change Sprint’s poor brand image. Second, there’s the issue of technological uncertainty [WiMAX versus LTE]. It’s not clear if Clearwire/Sprint will stick with WiMAX. A switch to LTE may not be trivial.”

The picture is similar on the device side of the equation. Sprint’s phone had the limelight for about two weeks. Then, on June 7, Apple CEO Steve Jobs unveiled the iPhone 4. Preorder demand for the device was so strong that Apple and AT&T were straining to keep up. Apple said that it sold more than 600,000 iPhone 4 devices in one day. In addition, Verizon plans to introduce a new Motorola Droid smartphone on July 23 to follow up on the strong sales of its HTC Incredible. (The new model will be an advanced 3G phone; Verizon’s 4G entrant will not be unveiled until next year.)

Bob Brust, chief financial officer of Sprint, conceded that the competition among new devices is strong. Sprint has plans for follow-up 4G smartphones beyond the Evo. Speaking at an investment conference earlier in June, Brust said Sprint is in “a competitive landscape which we hope will be mostly fought with service, network quality and handsets.”Faulhaber notes that Sprint has had trouble competing on all three of those fronts, however. “Sprint hasn’t managed to get the customer service or coverage right,” says Faulhaber. “And devices may not be that big of a deal. Sprint was the first one to have the Palm Pre and it didn’t do much with it.”

The challenge is to put all the moving parts together to become a true contender. “The smartphone battle has so far been a story of Apple versus everyone else,” Werbach states. “The iPhone is the clear market leader, although Research in Motion has a solid position [with the BlackBerry] and Android devices are coming on fast. In the minds of users, the iPhone’s Achilles heel is the carrier partner, AT&T. That creates an opening for Sprint and others, such as Verizon, if they can marry good service with a good device.”

Chaudhuri agrees. “With the right branding and pricing combination, Sprint can come back,” he says.

The Elephant in the Room

But the elephant in room with Sprint’s 4G plans is the company’s bruised image, Wharton experts say. “Companies with a reputation for poor service have a real problem,” notes Faulhaber. “These reputations last and it takes years to [recover from] that.” Indeed, J.D. Power & Associates in March rated Sprint last in wireless customer care among the major carriers, but its score of 721 on a 1,000-point scale was better than the 704 it got last year and wasn’t far behind AT&T’s score of 733 this year. Verizon and T-Mobile led the rankings with scores of 753 and 752, respectively.

Hsu says Sprint has made strides to overcome the image problem. Besides focusing on more family-friendly pricing and money-back guarantees, it has launched a number of subsidiary brands that are putting the parent company in the background. Sprint has used the new brands (including Assurance Wireless, Boost Mobile, Common Cents Mobile and Virgin Mobile, which it recently acquired) to concentrate on prepaid phone service. This type of service targets lower-margin customers who pay for minutes in advance instead of signing long-term contracts billed each month. The prepaid market isn’t as profitable as targeting higher-end markets, Hsu points out, but Sprint may have other motives. “Sprint is big on this Evo device, but the company has been creating other businesses and brands in case Sprint does not do well over time,” Hsu notes. “It’s not impossible for the Sprint brand to come back, but it makes sense to obfuscate it in case something goes wrong.”

Chaudhuri cautions, however, that having all of those subsidiary brands may make it necessary for Sprint to refocus. “What customer does Sprint really want to go after?” asks Chaudhuri. “I want to see more strategic clarity.” Kapoor and Faulhaber assert that the launch of Evo and 4G service may allow Sprint to talk more about the improvements it has made to the business, including its gains in customer service as well as its differentiated pricing plans. “Sprint can use this 4G opportunity to enforce multiple messages at the same time,” says Kapoor.

The one wild card is timing. Experts at Wharton say there are no rules about how long it takes for a company to turn around a poor reputation for customer service. On the bright side, Sprint’s launch of the Evo at least gives it a chance to change the conversation. “The Evo is a good start for Sprint,” says Hosanagar. “But it will take much more than one Evo to turn around its image.”

Werbach concurs. “With Verizon and AT&T entrenched as the big two U.S. carriers, Sprint needs a real home run or a strong differentiator to secure its future,” he says. “The Evo is a nice