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

From: [email-masked]
Date: Thu, 29 May 2003 11:32:01 -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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