Subject: [NEXTEL-1] Nextel's Push To Talk Profits

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Date: Mon, 30 Jun 2003 18:08:34 -0400

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Home > Technology > Networks

Marketing

Nextel's Push To Talk Profits

Kurt Badenhausen, 06.30.03, 12:27 PM ET

NEW YORK - Nextel Communications made history June 19 when it signed on to be the title sponsor of what will be known as the NASCAR Nextel Cup, starting with the 2004 season. Nextel replaces the current sponsor, Winston, which has been the title sponsor for 33 years.

More on Nextel Communications

Tear Sheet

The 10-year contract for a reported $700 million to $750 million is the largest sponsorship deal in the history of sports, dwarfing other pacts like Nike's
(nyse:
NKE -

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-

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) 13-year deal for $440 million with English soccer club Manchester United and Winston's current $200 million five-year agreement with NASCAR. Nextel
(nasdaq:
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-

people
) beat out other companies like McDonald's
(nyse:
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people
), Coca-Cola
(nyse:
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-

people
) and Visa, which were all reportedly interested in signing on as the title sponsor.

But the question that investors must ask is this: Can Nextel make a profit on this deal? At the press conference announcing the agreement, Nextel stated that the deal would not negatively affect its bottom line. A closer look at the numbers shows in fact there could be a tremendous upside to the deal for Nextel. In the first quarter of this year, Nextel generated an average of $67 in revenue per customer. Its 11.1 million customers produced $2.2 billion in service revenue for the quarter.

Now, suppose Nextel signs up 1% of NASCAR's 75 million fans as new customers as a result of the NASCAR deal. This is a conservative estimate considering the huge marketing opportunities Nextel will have to sell its service to the 6.7 million people attending NASCAR events each year, as well as the millions of other fans around the U.S. who follow the sport closely. If Nextel gets these 750,000 new customers, that means $600 million in revenue a year for the company.

Assuming that Nextel's EBITDA margins of 38% in the first quarter stay constant (they've hovered around 40% the past six quarters), Nextel could generate $230 million in operating profit annually from its NASCAR sponsorship, triple its investment. In fact, Nextel needs to sign up and keep around only 250,000 new customers to reach a break-even point on the deal.

For those who think that NASCAR is only for rednecks with a jones for speed, think again. NASCAR is the No. 1 spectator sport in the U.S. It has the highest television ratings in sports besides the NFL. More than 70 Forbes 500 companies participate in NASCAR, more than any other sport.

And when it comes to fans loyal to their sports sponsors, NASCAR fans are a marketer's dream. At 72%, NASCAR fans are almost twice as likely as baseball and basketball fans to buy a sponsor's product over a non-sponsor's product. According to Rhode Island-based Performance Research, NASCAR's numbers dwarf those for football fans (20%) and fans of the Summer Olympics (15%). Nextel's signing up 1% of NASCAR's 75 million fans doesn't seem so far-fetched when you consider these numbers.

In addition to signing up more customers, the Nextel brand should prosper greatly from this deal. Joyce Julius, an Ann Arbor, Mich.-based research firm, estimates that Winston received $160 million worth of television exposure during NASCAR races last year as a result of its sponsorship. And that doesn't include the millions of dollars in television, print, radio and Internet exposure Winston received outside of the 36 race telecasts.

The agreement will help Nextel create a tremendous brand awareness for itself as rivals like Verizon Communications
(nyse:
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) and Sprint
(nyse:
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) look to invade Nextel's "push to talk" market, according to SG Cowen telecom analyst Thomas Watts. (Verizon's Verizon Wireless unit sued Nextel on June 27, alleging that it improperly obtained prototypes of Verizon's new wireless telephone handset, which functions like a walkie-talkie.)

Also, consider that Nextel won't be shackled as Winston and its parent, R.J. Reynolds Tobacco
(nyse:
RJR -

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people
), have been in recent years because of restrictions placed on tobacco companies in terms of television advertising and marketing to teens. On the TV side, ratings of NASCAR broadcasts on News Corp.'s
(nyse:
NWS -

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people
) Fox network and General Electric's
(nyse:
GE -

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people
) NBC have tripled since 1990 while other sports like hockey, baseball, and basketball have seen ratings plummet in recent years.

Add it all up and Nextel looks like a winner in its race around the track.

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