Subject: [NEXTEL-1] How Nextel beat the heat Only to face the inferno

From: Marcel <[email-masked]>
Date: Tue, 06 May 2003 13:19:36 -0400

How Nextel beat the heat Only to face the inferno

by Dan O'Shea

Wireless Review, May 1, 2003

New Orleans is sinking, but Nextel is rising above it all. A routine late
afternoon rain pounds the streets of the French Quarter in nature's
noble but futile attempt to rinse these avenues of their sticky residue.
Inside the New Orleans Marriott, University of Kentucky basketball fans
whoop and holler in the lobby lounge while watching their team win the
SEC Championship on a big-screen TV.

Upstairs in a modest ballroom, Tim Donahue, president and CEO of
Nextel Communications, sits stoically upright waiting for a media and
analyst event to begin. He looks like he would rather be downstairs
celebrating, and the success of his company has given him plenty of
reasons to do so. Donahue and many other folks in the mobile industry
are in town for the Wireless 2003 trade show, and it has suddenly
become apparent to much of the industry that Nextel is on top of the
carrier heap in all the ways that matter most. It has the financial results
everyone else desires, the service that other carriers are striving to
copy, and deep traction in the customer market that the rest of the
industry is tripping over itself to enter.

Donahue rises to speak, and his broad face portrays a glow that rivals
his red hair as he outlines a litany of accomplishments.

“We have average revenue per user of $70 per month, which is the
highest in the industry. We have 2.1% churn, which is the lowest in the
industry. Our assumption of bad debt from customers has dropped
from 5% to 3.2%. That makes us the hardest provider to buy service
from. We have 40% profit margins, the highest in the industry. We have
EBITDA per subscriber per month of almost $30, and lifetime revenue
from our users averages more than $3500.

“We're number one in virtually every metric there is for success in this
industry, and I think 2003 will be a fabulous year for Nextel, and an even
better one for the industry than most people have supposed,” Donahue
said.

Meanwhile, one field in which Nextel will continue to aim low is capital
expenses. Because it long ago invested in its iDEN packet network and
has been working with Motorola to tweak vocoder technology to create
excess network capacity, Nextel believes it can continue to lower its
capex budget. It was around $1.8 billion for 2003, and Donahue said he
aims to bring it down to around $1.2 billion for 2004.

“We're going to do more cost cutting, and hopefully then will get better
grades from our friends at the ratings agencies,” Donahue said. The
sarcasm inherent in the statement speaks volumes. Nextel used
cost-cutting and a restructured sales approach to turn a $2.8 billion
loss for 2001 into a $1.5 billion net profit for 2002, and despite all the
industry-leading metrics, there are still many doubters in the financial
community. But for Nextel, that's an old story. It never has gotten the
respect that other mobile providers have garnered.

In the early 1990s, the company — then named Fleetcall — was busy
stringing together specialized mobile radio licenses with the hope of
maturing from a provider of fleet radio dispatch services into a carrier
focused on work group communications. By 1994, it was in the initial
phases of installing a pre-iDEN digital packet network, making it the
first wireless carrier to move toward packet.

Many industry observers thought Nextel's work group strategy was too
niche-oriented to succeed, its packet technology too underdeveloped to
deploy, and also that the company would be overshadowed by national
consumer-focused carriers eyeing what seemed like unlimited growth.

Technology growing pains did cause some hiccups. As Donahue told
Telephony magazine in early 1997, packet service quality during the
initial 1994 rollout was poor, and “people just didn't accept it.” As the
company worked with Motorola to get the network glitches ironed out, it
suffered further perception problems. Even when it finally started
deploying Motorola's newer iDEN architecture in 1996 and 1997, Nextel
was chastised for diverging from CDMA — the dominant North
American standard — to deploy a technology that was basically a
distant cousin of GSM.

“In the past, there have been naysayers in the financial community
where Nextel was concerned. Many of them gave up on us a long time
ago,” Donahue said more recently. Then, softening his previous
statement about the rating agencies, he added, “With our more recent
success, people have started to wake up and get religion.”

It's debatable whether Donahue is correct in his perception about other
people's changing perceptions. Ratings agencies can be fairly fickle.
After a meeting with Nextel executives during a tour of investment banks
and ratings agencies a few months ago, Kaufman Bros. compiled a
report that advised its clients invested in Nextel to sell their stock.

Other agencies Nextel visited on the tour had more positive reactions,
though a survey of about two dozen investment banks and ratings
agencies last month revealed that 16 rated NXTL a “hold,” four a “buy”
and four a “sell.”

John Byrne, a wireless industry analyst with Kagan World Media (an
agency owned by the corporate parent of this magazine), said other
carriers creating corporate service packages and push-to-talk
applications directed at Nextel's bread-and-butter customers could
lessen the advantages Nextel has held over the rest of the industry.
However, he added, “These new services may not make a difference for
a while. Everybody else is just talking a lot right now.”

But could Nextel's short-term dominance prove a delicate reign in the
long run? In terms of its obvious competitive differentiation from other
carriers, it would be very easy to look at the company and point to one
very clear reason for its recent success and market-topping metrics:
Direct Connect.

With this push-to-talk service, a walkie-talkie-like communications
capability enabled by Motorola's iDEN network and handsets, the
company has cultivated a killer app. No other carrier to date has been
capable of producing this packetized instant voice messaging service
on its own network, giving Nextel a key point of differentiation as it
seeks to make its service an indispensable communications tool for
members of corporate work groups that need some form of always-on,
enterprise-wide access to each other.

However, Greg Santoro, vice president of Internet and wireless services
at Nextel, said Direct Connect is really just one element in an enterprise
services strategy that Nextel has fully leveraged to win over these
customers.

“We have the iDEN network, about 240 applications and enhanced
support that we bring to bear for businesses in vertical industries,”
Santoro said. “We look at an industry's business issues, the economic
problems those corporations face, and we look at how our applications
can help them solve those problems. Direct Connect is just one
application, and we have a lot more value that we can wrap around it.”

Nextel also is building a presence-and-availability engine into its
network that will give corporate users more information about the
whereabouts of their work group mates, as well as the ability to leave
recorded Direct Connect messages. Ultimately, the carrier wants to
integrate voice and data applications so tightly that users can do instant
voice and data collaboration, Santoro said.

To that end, Nextel, which has operated data messaging and other
Internet applications longer than most U.S. carriers, has begun
introducing new data-oriented devices such as the BlackBerry 6510.
Still, Santoro said Nextel's intention is to be incremental in introducing
new devices to its users to keep otherwise-busy enterprise IT
managers from being overloaded with new products to validate for
corporate usage.

“We're not buying into a lot of the gimmicks of new phones because
there can be some real device confusion out there in the market,”
Donahue said. The company is one of the few that hasn't been able to
offer a phone equipped with a digital camera and photo display
capability, but Donahue said Nextel may have one available in six to
eight months. “We certainly haven't been hurt by not offering one yet,” he
said. At the beginning of 2003, Nextel offered only about four different
phones and no data devices, but it now sells about 10 different devices
with various levels of voice, data and Direct Connect capabilities.

Donahue added, “We have twenty-seven business segments that we
focus on in five vertical industries. We tie our distribution of new
offerings — products and services — directly to that segmentation.”

To date, Nextel's killer app and its intense enterprise focus have not
been challenged by other carriers. But that is about to change. With
advancements by several companies to allow push-to-talk capability
over network infrastructures other than iDEN, it's possible that Direct
Connect soon may not be the only such service on the block.

Verizon Wireless announced loose plans for a push-to-talk trial early
this year, and the creation of a push-to-talk interoperability alliance in
February by network gear giants Ericsson, Nokia and Siemens was
endorsed by both AT&T Wireless and Cingular Wireless. Both of these
companies said they are planning to test and eventually sell the
service, though like Verizon they offered few specifics.

This carrier interest is enough for vendors to ready new platforms.
Ericsson announced its Instant Talk solution in March. The solution
employs a presence and availability system from Sonim Technologies,
and the call setup latency for Instant Talk currently stands at about two
seconds, according to Peter Lancia, director of product and technical
marketing for CDMA systems at Ericsson.

Other vendors' push-to-talk capabilities fall in the range of two seconds
to three seconds for call setup. The exact setup time might not seem
worth quibbling about. However, Nextel, which adheres to a quality
standard for call setup of no more than one second, has suggested
that this seemingly miniscule difference will be an important factor in
the market.

“Our Direct Connect users have certain expectations for quality,”
Donahue said. “They will not tolerate two or three seconds of latency.
They want no more than one second.”

All in all, Donahue is dismisses the potential that several other carriers
may be poised to usurp one of Nextel's key advantages. Pointing out
that carriers have been talking about the push-to-talk issue for years
without so much as a service rollout, he said, “We're not even sure we'll
see competitors to this service this year. Other carriers have been
planning to do it before, and we haven't seen it yet.”

Despite all the recent harping on push-to-talk, Donahue said it is just
one area in which other carriers will find it difficult to repeat Nextel's
success. With a near-exclusive focus on corporate customers, the
Reston, Va.-based service provider is in tune with business users'
needs, expectations and behavioral patterns, according to Donahue.
He sees well-hyped enterprise strategies from other carriers as
elaborate — and ultimately ineffective — charades by companies
whose core clients are consumers. The consumer customer base, in
his eyes, is one fraught with user disloyalty, absurd price pressure and
bad debt.

“Nextel is the hardest carrier to get service from based on a credit
perspective. We're not in the credit business. We believe you can only
build top-line growth by having customers who want to grow with you,”
Donahue said.

He added that although Nextel is price-sensitive to its customers, the
value to the business user is offering the best class of services. While
consumers will churn based on service price, Donahue argued that
corporate customers won't. As previously indicated, he has the
numbers to back up that statement.

“Other carriers have been focused on consumers a long time, and it'll
be very hard to change overnight,” Donahue said. “We've had ten years
of enterprise experience. We know them inside and out. We don't think
we'll have to give at all on our industry-leading numbers because our
business comes from other carriers. Many of our users are
second-time buyers that have left behind another carrier.”

Donahue said that Nextel also still has room to grow within various
vertical industries. For example, while the carrier has made some
headway selling to government agencies in the past, Nextel plans to
grow business from its government and public safety sector by about
20% this year. The increasing opportunity comes from the fact that
more public safety agencies are seeking more advanced and reliable
mobile voice and data capabilities and can no longer build these
networks and support these services on their own. “The job is too big
for them as services get more complex, and we are really their only
option,” Donahue said. “That's a growing market and a low-churn
market.”

While Nextel's embedded nature and continued growth in the
enterprise business could be a lot to overcome, some competing
strategies do seem to have the right idea. Verizon recently announced
its Wireless Office services suite, which like Nextel's approach, focuses
on vertical industry needs and deploys sales associates with
corporations to package solutions to clients' specific business hurdles.
Sprint PCS has offered a Clear Wireless Workplace package to
enterprises for the last two years.

Jay Highley, Midwest area vice president for Sprint PCS, recently told a
room full of corporate IT executives and managers gathered in Chicago,
“The days of showing you a coverage map, a rate plan and a bucket are
over. We want to find your point of pain as a business, and once we find
that problem, that's where we want to move forward with our service.”

For many carriers attempting to get the mobile hook-up to corporate
customers, the moves come in concert with their evolutions to 2.5G and
3G data networks.

Verizon is tying its intensified enterprise efforts to its deployment of
CDMA1X EV-DO, which might best be described as a 2.75G technology.
The company believes that the ability to offer better data services than
are currently available — including applications that incorporate video
and file collaboration — will give its enterprise pitch an edge.

Amid these network migrations, Nextel continues to hold off on making
a decision about a 3G network technology, or even its next network
scheme beyond iDEN. Because iDEN is comparable in capacity and
capabilities to most other 2.5G network technologies, Nextel has been
ahead of the game for some time. But iDEN may not be capable of
supporting video to the degree that Verizon's EV-DO network is
promising.

Though Nextel was rumored to be closing in on plans to move right to
3G and deploy WCDMA beginning in early 2005, Donahue said Nextel
is currently not looking at that technology. “We're looking at cdma2000
and some other things for the next step,” he said.

Byrne, of Kagan World Media, said Nextel hasn't suffered for a lack 3G
certainty. “It hasn't hurt that they haven't made that decision. They are
doing everything they need to do at the network speeds they have now,”
he said.

Rather than a full-throttle network upgrade driven by data and video
aspirations, Nextel has focused on improving its network capacity —
and voice quality — by inches.

It is beginning a network-wide installation of Motorola's 6:1 vocoder to
enhance voice capacity throughout its network. This implementation will
culminate in the fourth quarter this year. Along with the use of new
software to assist in frequency planning and congestion relief, the
carrier is doubling its voice network capacity, said Barry West, executive
vice president and chief technology officer at Nextel.

West was proud to say that these measures kept Nextel from having to
spend precious dollars from its capital expense budget on new base
stations — one way for Donahue to keep the promises about keeping
capex in check.

“The vocoder is the most significant contributor to our network capacity
increase, something we were working on with Motorola for about three
years before we got it to work correctly,” West said. “It means we won't
need to move to a new generation technology purely for capacity
reasons.”

For anyone who would still question the scale of Nextel network, West
said the 16,300-cell site network covering 240 million pops handled 72
billion minutes of usage last year and 62 billion Direct Connect calls.

The network's brawn gives Donahue the confidence to shirk
industrywide trends toward building 3G networks. “We'll make a final
decision about that later,” he said. “Customer behavior should dictate
when that will happen, and we'll decide about that when our customers
tell us they need something more.”

Finding frequencies for friendlier skies

Nextel's success has come at a cost for some of its wireless spectrum
neighbors. As the company's customer base has grown to 11 million
users, the operation of its iDEN network at the 800 MHz frequency has
led to signal interference with private microwave networks and public
safety agencies.

Nextel has proposed a plan to reallocate discrete swaths of spectrum
within the 800 MHz band to each of these networks, including Nextel's.
The carrier has pledged about $850 million to a spectrum reallocation
and re-tuning program, which it has said would take between three and
four years to administer. While the plan has won over several public
safety spectrum owners, the Cellular Telecommunications & Internet
Association opposes the plan because Nextel also is asking that it
receive a conciliatory 10 MHz of extra spectrum at the 1.9 GHz band.

“There is some opposition, but the seven largest public safety agencies
are on board with our proposal. We hope to see the FCC rule in favor of
the plan sometime in June,” said Bob Foosaner, senior vice president
and chief regulatory officer at Nextel.

There have been other suggestions for mitigating the interference
problem, including moving some of the interfering networks to the 700
MHz band. But much of that spectrum is currently owned by television
broadcasters, which have legal rights to it until 2006.

The CTIA alleges that Nextel's seemingly noble idea is a cloak over its
efforts to get free spectrum that it might eventually use for 3G
networking. Nextel CEO Tim Donahue maintained that Nextel is simply
seeking a resolution. “Ours is the only plan out there,” he said. “No one
has an alternative plan, and we have to come up with some way to
provide relief from this interference at 800 MHz.”— Dan O'Shea

Will long-time partners part?

In March, Motorola — which to date has been Nextel's only network
infrastructure supplier as well as a major equity investor — announced
that it was selling $325 million worth of its Nextel stock to increase its
own corporate cash holdings. The sale still left Motorola with a 9%
equity stake in Nextel, but rumors were flying that this was the
beginning of the end for the long relationship between the two
companies.

Nextel CEO Tim Donahue insisted that is not necessarily the case. For
starters, “It was clearly a balance sheet issue for Motorola that drove
them to sell the stock. It doesn't represent the dimming of anyone's
confidence in Nextel.”

The two companies have been partners for more than 10 years, first on
the fleet calling technology that defined the early operation of Nextel.
They then collaborated to refine the proprietary network technology that
evolved into iDEN, as well as on push-to-talk service, new devices and
Internet capabilities.

Most recently, Motorola and Nextel worked diligently for three years to
fine-tune a vocoder architecture that will improve Nextel's network
capacity. Barry West, executive vice president and chief technology
officer of Nextel, said that project experienced some ups and downs
because “the performance wasn't good enough, but then a Motorola
engineer figured out how to make it work.”

Donahue said, “No one knows more about radio than Motorola, and
Motorola has been a marvelous partner to Nextel. Would I like to see
lower prices from them that give us better handset margins? Sure. But,
I have nothing bad to say about them.”

However, as Nextel studies 3G technology choices and eventually
makes a decision about what to deploy, Donahue said Nextel will be
open to working with vendors other than Motorola. “The single-source
days may soon be over for us. Having multiple vendor choices is a
positive thing for us economically.”— Dan O'Shea

http://wirelessreview.com/ar/wireless_nextel_beat_heat/index.htm

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