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Qwest opts for experience over aggressiveness
Some analysts are concerned that Ed Mueller lacks the innovation needed for growth.
By Andy Vuong. Staff Writer
Denver Post
Monday, August 20, 2007

Qwest's recent selection of Ed Mueller as chairman and chief executive won praise from analysts focused on steady profits and free cash flow, but left others wondering if the board of directors is a bit gun shy.

Instead of picking an aggressive, up-and-coming executive like Motorola's Greg Brown to take the company to another level, the board went with a more conservative, old-school telecommunications veteran.

Perhaps the effects of the Joe Nacchio era still exist.  Nacchio, a relentless visionary who nearly ran Qwest into bankruptcy amid his pursuit of breakneck growth, was sentenced to six years in prison last month for illegal insider trading.

"Maybe from the board's perspective, they don't want to be visionary," said Eric Paulak, a Boulder-based telecom analyst with market research firm Gartner.  "They see a nice turnaround story, they like the steady returns."

"Boards are never content"

Mueller, 60, came as the top choice of his predecessor and friend, Dick Notebaert, the man credited with leading Qwest's turnaround but criticized by some for his lack of vision.

"If that's the way they want to continue, fine.  It will be a very conservative chug-along company," Paulak said.  "But it's not going have much growth."

Frank Popoff, Qwest's lead director, scoffed at the notion that the board is content with the status quo.

"Boards are never content," Popoff said Friday.  "We're always looking for the right balance of growth and operational improvement.

"We know that we can't stand still, so we really have to balance the two options.  That's something that Mr. Mueller is looking at," Popoff said.

Though he doesn't have plans for drastic change, Mueller said last week he is working on a grand vision for Qwest, but won't reveal those ideas until the company is ready to execute.

Whatever direction Mueller takes the company, he is in a no-lose situation, said Pat Comack, an independent telecommunications analyst.

"If Qwest turns over, I don't think anybody is going to blame Ed Mueller," Comack said.  "This natural industry evolution combined with the lack of Qwest's vision -- lack of spending, especially for video -- has positioned this guy to be trampled by the cable companies."

Though Mueller has 34 years of telecom experience, he hasn't worked in the industry since 2002.  He was previously CEO of cookware company Williams-Sonoma.

"The good news is he has a very deep background in telecommunications.  Of course, he's been out of it on a full-time basis for four or five years," said Lisa Pierce, a senior analyst with Forrester Research, a market research firm.  "Things have changed since then."

Specifically, phone companies are in a fierce battle with cable firms to be the all-in-one service provider for residential customers.  Larger Baby Bells AT&T and Verizon are in a better position to compete with cable because they have cash-generating wireless arms and are pursuing broad video initiatives.

Denver-based Qwest resells those services through partnerships with DirecTV and Sprint Nextel.

"DirecTV and Sprint make money on their TV services and their cellular services, and Qwest just becomes a conduit.  They're not the ones who are making the big profit," Paulak said.

Mueller said Qwest, which provides local phone service in 14 states, will continue its wait-and-see approach on video.  He said the company would be open to acquiring a wireless asset if it made economic sense.

Saddled with debt

It's tough for Qwest to make a big move on either front because, despite its financial improvements over the past five years, the company is still saddled with about $14 billion debt.

An area Qwest could focus on for growth is business services, leveraging off its nationwide, fiber-optic communications network.

"This is where he needs to be a bit more visionary," Paulak said.  "This is where he needs to look at making some selective acquisitions, or some bigger partnerships with large consulting companies like IBM or Accenture."

Mueller replaced Notebaert on Aug. 10, and the transition has been "seamless," said Qwest spokesman Nick Sweers.

Mueller will likely spend the next couple of months studying the company from the top down before making any announcements on changes.

"He's got a honeymoon period.  But then there's going to be a time when he has to make a decision about the company's future," Comack said.

Staff writer Andy Vuong can be reached at 303-954-1209 or avuong@denverpost.com.

http://www.denverpost.com/business/ci_6665322