Subject: [NEXTEL-1] WSJ-Motorola, Nextel Marriage Is Showing Signs of Strain

From: [email-masked]
Date: Thu, 29 May 2003 09:42:39 -0400

Motorola, Nextel Marriage Is Showing Signs of Strain

By JESSE DRUCKER
Staff Reporter of THE WALL STREET JOURNAL

They have been together for more than a decade, but
now,
according to some investors and analysts, Motorola and
Nextel are
feeling the seven-year itch.

For more than 10 years, the Schaumburg, Ill.,
telecom-equipment
maker and the Reston, Va., wireless carrier have
enjoyed a mutually
beneficial -- and dependent -- relationship: Motorola
Inc. develops
gear for Nextel Communications Inc.'s unusual wireless
network,
while Nextel is required to buy all its devices from
Motorola or its
licensees, making it Motorola's biggest phone and
infrastructure
customer. Motorola was also an early Nextel investor,
remains a
huge shareholder and has the right to nominate two
directors to the
carrier's board.

But the interests appear to be diverging, and the
impact could weigh
on both stocks: Nextel soon will face additional
competition, in part
because of new Motorola technology; Motorola, in turn,
could lose
high-margin business from its biggest customer.

The signs of possible strains: In March, Motorola sold
off or hedged
nearly half of its stake in Nextel. This month,
Motorola sent a letter
to the Federal Communications Commission throwing water
on a
Nextel proposal to improve its radio-wave spectrum
holdings --
prompting a pointed response from Nextel. And in a move
that could
hurt Nextel's core business, Motorola is expected soon
to supply
phones to Verizon Wireless, a venture of Verizon
Communications
and Vodafone Group PLC, equipped with a
walkie-talkie-style
feature that will directly compete with Nextel's
"push-to-talk"
technology, its greatest competitive advantage.

Both companies insist the relationship is fine.
"There's nothing that
should be construed at this point as anything other
than a great
successful relationship, and one that's showing
increasing traction in
the marketplace," says Leif G. Soderberg, senior vice
president and
director of corporate strategy at Motorola.

"In every relationship, you have ups and downs, but the
net-net has
been a very good working relationship," says Tom Kelly,
Nextel's
chief operating officer.

Both companies have a lot at stake in the matter. Its
shares roughly
flat since the beginning of the year, Motorola would
like its stock to
catch up with better-performing rivals and the broader
market. The
shares are off roughly 50% since a year ago, weighed
down by the
continuing slowness in telecom spending and questions
about its
sluggish performance in several key areas. Nextel would
like its
stock to avoid any dents; the shares are up 30% since
the year
began, roughly tripling in the past year.

Nextel's walkie-talkie style is popular with business
customers and
has helped make Nextel's average-monthly-user revenue
easily the
highest among U.S. wireless carriers. It is little
wonder that rivals
would want the technology. While recent announcements
by Verizon
Wireless and Sprint PCS that they will have the
technology before
year's end haven't seemed to hurt Nextel shares, even
some Nextel
boosters believe that, in the long term, it could cause
Nextel to lose
its competitive edge.

Analysts say it makes sense for Motorola to accommodate
Verizon
Wireless, which has 33.3 million customers, compared
with Nextel's
11.1 million. But supplying push-to-talk gear to
Verizon Wireless
could indirectly hurt Motorola, since sales of the
technology used by
Nextel have accounted for nearly a quarter of the
revenue in
Motorola's infrastructure division. Nextel could turn
to a Motorola
rival -- say, Lucent Technologies Inc. -- for a
different technology
for the future.

"It's sort of a Catch-22" for Motorola, says Paul
Sagawa, an analyst
for Sanford C. Bernstein & Co., an independent
investment-research
firm, who rates Motorola a "market perform." Motorola's
Mr.
Soderberg says the company has no choice but to offer
the
push-to-talk technology to Nextel's rivals, because "as
other ways of
deploying push-to-talk become available, we can't stand
still."

Still, those phones that Motorola sells to Nextel cost,
on average, a
third more than typical Motorola cellphones, according
to Gartner
Group, a technology-consulting firm. And even with
those sales,
Motorola's cellphone division -- its biggest -- posted
only a 4%
profit margin for the first quarter, and that was after
several quarters
of restructuring. (The company blames the disappointing
margins on
severe acute respiratory syndrome in China, an enormous
market for
Motorola.)

Also weighing on Nextel's future: the successful
resolution of its
proposal before the FCC. There, Nextel is seeking a
reallocation of
radio-wave spectrum to clear up interference problems
between its
customers and public-safety agencies. Rivals resisting
the move
contend it would unfairly give Nextel more capacity.

On May 6, Motorola told the FCC that an alternative
solution was possible. Nextel sent a sharp reply to
the FCC, maintaining that several of the assumptions in
Motorola's letter "do not withstand scrutiny."

"I would have been happier if they hadn't filed it,"
says Nextel's Mr. Kelly. But he adds, "It's not unusual

for partners to disagree."

Complicating matters: Motorola's right to nominate
directors. As Motorola competes "with some or all of
the services we offer," Nextel notes in its most-recent
10-K filing, its nomination rights "could give them
additional leverage if any conflict of interest were to
arise." Some analysts think Nextel's push into
offering service to government agencies means it would
compete with Motorola's profitable two-way
radio business. Messrs. Soderberg and Kelly both say
there isn't much conflict, because government
agencies purchase Nextel service to complement, not
replace, their radios.

http://online.wsj.com/article_email/0,,SB105415821461686700,00.html?

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