Subject: [NEXTEL-1] Always A Next Test for Nextel

From: [email-masked]
Date: Wed, 15 Oct 2003 23:11:46 -0400

Always A Next Test for Nextel

Walkie-Talkie Rivals Push Reston Firm
By Yuki Noguchi
Washington Post Staff Writer

Thursday, October 16, 2003; Page E01

Nextel Communications Inc. defies those who think it's charting the wrong
course, or won't be big enough to survive.

For 16 years, the Reston firm championed a walkie-talkie service that all
its major competitors are now copying. It recently doubled network capacity,
despite predictions it would tap out the radio spectrum required to carry
its traffic. Nextel, the nation's fifth-largest mobile phone carrier, grew
despite the squeeze on the economy, posting profit for the first time last
year. Past talks with potential merger partners, including serious ones with
WorldCom Inc., led nowhere, and it has become an important Washington area
employer, with a local workforce of 2,000 and $8.7 billion in revenue last
year. Analysts are expecting it to announce another profitable quarter
today.

"People have been saying that Nextel will run out of spectrum for years,"
Nextel Chief Operating Officer Tom Kelly said testily, as if he's been asked
that question too many times. "We have plenty of spectrum for 10 years, at
least."

So why, then, is the company facing another round of skepticism about its
future?

In part, it's because Nextel's signature service -- its walkie-talkie
feature that lets users push a button to talk to other Nextel users -- is
under attack by rivals. Its largest competitor, Verizon Wireless, rolled out
a copycat feature in August. Sprint PCS and AT&T Wireless are planning to
introduce their own versions next year.

Meanwhile, Nextel is the only major cellular carrier that hasn't laid out a
plan to offer high-speed Internet service on its network. Also, regulators
are stalling on a Nextel-backed plan to exchange its existing spectrum for
more valuable airwaves, in return for eliminating cell-phone interference
with public safety systems. And finally, a new rule allowing consumers to
keep their phone numbers when switching providers is expected to touch off
even more price wars and competition in the industry.

Yet Kelly, in an interview last week, declined to indulge in any speculation
about Nextel's future plans about spectrum, mergers, technology choices or
competitive plans. "It is not in our best interest to discuss that," he
said.

That doesn't put a stop to the probing.

"For Nextel, the challenge is: How in the world are they going to be
competitive with these other, larger carriers?" said Albert Lin, a telecom
analyst with American Technology Research. Unlike most wireless carriers,
Nextel doesn't have the backing of a large parent company or affiliate that
can help market a package of combined services like local, long-distance and
high-speed Internet services, he said. It also can't match the marketing
muscle of rivals, he said.

In recent years, it managed to stay largely above the competitive fray,
thanks in large part to its trademark product -- the walkie-talkie -- which
is used by well over 90 percent of its subscribers, who pay a premium for
the privilege.

Walkie-talkies are more than just a feature, they're the foundation of
Nextel. Begun as Fleet Call Inc. in 1987, Nextel spent years buying spectrum
from a series of small walkie-talkie carriers around the country, cobbling
together slices of airwaves that eventually made up a national network. The
technology Nextel uses in its network is also unique; it was developed by
Motorola Inc., which now supplies more than 95 percent of Nextel's phones.
The walkie-talkie feature allowed Nextel to play up its image as a
"workhorse" phone service -- one that appealed to construction workers,
delivery truck and taxi drivers willing to pay more for Nextel's sturdy
radio phones that let them talk without having to dial numbers. So even
though its rivals are bigger -- Verizon Wireless has about 35 million
customers, three times Nextel's 11.7 million -- the average Nextel bill is
fatter, at about $70 a month, or roughly $8 to $20 more than the average of
other companies.

That's why Verizon Wireless's introduction of its walkie-talkie service
struck at the heart of Nextel and was tantamount to a declaration of war -- 
one that is being fought by both companies in court.

In June, Verizon Wireless sued Nextel for "corporate espionage," claiming
Nextel officials took possession of two unreleased Verizon phones and then
tested them hundreds of times without Verizon Wireless's permission. Nextel
denied any illegal activity and vowed to defend itself in court. Last month,
Nextel countersued, claiming Verizon Wireless misrepresented the quality of
Nextel's network in its recent advertisements.

While both suits make their way through the legal process, Nextel is trying
to trademark its phrase "push to talk" to block its use by others in the
industry. It has dismissed Verizon's walkie-talkie service as slower and
inferior, and Kelly said competition won't force Nextel to cut prices to
keep customers.

"As far as a price war is concerned, that's the stupidest thing a wireless
carrier can do," he said.

Meanwhile, analysts say it's not clear how Nextel will be able to match
competitors with new technologies.

It will be harder for it to develop products that stand out for being newer
or better than the competition, Lin said. Though the proprietary Motorola
technology served Nextel well in the past, it won't be cheap or easy to
upgrade to the types of technology other wireless carriers use, he said. "At
some point, Nextel will transition from being the leader to looking like one
of many, to one of the technology laggards," he said.

Verizon Wireless recently launched super-high-speed Internet access on its
network in pilot markets in Washington and San Diego. Cingular Wireless and
AT&T Wireless are planning rollouts of a different type of high-speed data
service next year.

That could undermine Nextel's grasp on the business customer, said Brian
Marshall, vice president of mobile services at Fairfax consulting firm
American Management Systems Inc. "The reasons to buy Nextel as opposed to
Verizon go down. The question becomes: 'Why get a Nextel phone when we could
get this?' "

The primary problem that analysts and some sources close to the company
identify is spectrum -- a scarce resource that becomes more valuable as the
use of wireless technologies increases. Nextel's spectrum is a hodgepodge of
airwaves licenses accumulated from the mom-and-pop operations it purchased
at its founding. Nextel's 800-megahertz spectrum interweaves with a host of
other users in the same frequency band, including the public safety radio
users. That has caused interference with public safety systems and periodic
outages in emergency systems around the country. Analysts say the
inconsistency of its spectrum also limits Nextel's ability to develop
high-speed wireless Internet services.

"The bear story on Nextel is whether they have enough spectrum," says Susan
Kalla, an analyst with Friedman, Billings, Ramsey & Co. They aren't offering
high-speed Internet access, and their efforts to secure the scarce resource
haven't panned out, she said. "They've got a long-term problem."

Nextel so far has two potential plans to get new spectrum: One is a $144
million bid it has placed to purchase high-frequency spectrum from WorldCom,
which can be configured to transmit high-speed Internet services if the
Federal Communications Commission approves it for that use. It is also
lobbying the FCC to accept a plan that would allow Nextel to essentially
exchange its existing spectrum in the public-safety band for more valuable
spectrum in a higher frequency, in return for contributing $850 million to
the relocation of all users in the 800MHz range.

Insiders at Nextel said executives were infuriated when Motorola sent a
letter to the FCC suggesting a technical fix that could preempt the spectrum
swap Nextel desired. Although Nextel is still its largest customer,
Motorola, they said, was trying to curry favor and potential business with
some of Nextel's competitors.

The FCC denied that the process has been delayed. Solving the interference
issue is difficult, complex and still undecided, said Edmond Thomas, chief
of the FCC's engineering and technology division. "Alternatives are being
discussed every day."

Nextel executives pooh-pooh the idea that they lack enough spectrum to
compete in wireless data, and they contend rivals are pushing a high-speed
Internet technology for which there is currently little demand. Text
messaging and other data applications still account for less than 3 percent
of wireless companies' revenue, they said.

"We are as involved in developing data and data applications as anyone in
the industry," said Nextel's Kelly. But it's still too easy to hack into
wireless networks and compromise security when using it for the Internet, he
said.

It's not wise to invest billions of dollars in something that may not pay
off, he added. "I don't think speed is the issue with data. At the end of
the day, people are not that interested in paying for things that they can
stop at their office or their desktop and get for free."

 http://www.washingtonpost.com/wp-dyn/articles/A32177-2003Oct15.html

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