Subject: [NEXTEL-1] The Evolution Solution

From: NEXTEL-1
Date: Fri, 16 Jul 2004 12:20:07 -0400

The Evolution Solution
July 15, 2004 10:28am
Mobile Radio Technology

Reinvention is the key to staying alive
Mike Cherrington, CHERRINGTON COMMUNICATIONS
Location: Phoenix, Ariz.
Years in business: 9
Number of employees: 2
Annual sales: $330,000
We used to get a lot of calls from people off the street, taxi companies
and locksmiths and the like. That has dropped off quite a bit because
the normal consumer has fallen into the cellular category, particularly
Nextel. They want to have one electronic item hanging off their belt,
and they no longer want to buy and maintain their own systems. They'd
rather tap into the commercial wireless carriers because it saves them a
lot of infrastructure costs.

The exception is the government-type people, who are always going to
need two-way radios. Police and fire departments, for instance, aren't
willing to cede control of their communications systems. If they're
using Nextel and something goes wrong, they have to sit around by the
phone and wait for a call telling them that the network is back up and
running.

In contrast, if they own their own system, they're in control of it,
they have their own technicians, and if they lose a mountaintop, they
know their guy is on his way up there. I don't think they're willing to
give up that control, which presents opportunities for mobile radio
dealers.

But government also has scared off a lot of dealers, primarily because
of the contracts and the bid process, which drives profit margin down.
In the early days, we'd be able to sell them radios at retail prices,
and there would be a 30% to 40% profit margin. Today, as soon as you
start talking government, that 30% margin drops down to about 6%.
The repair business is still a good business for radio dealers. Word of
mouth has really made us successful, and a lot of that has come from
people bringing us their radios and us doing a good job of fixing them.
People remember us and come back to us when it's time to buy a new
radio. Plus, I tend to come off as a technician, not as a salesman,
which ironically helps me when I'm trying to make a sale. I'm able to
build up a trust with our customers because they know that I know what's
going on inside the radio. I feel, and I think they feel, that I'm in a
better position to tell them they need a certain type of radio.
I've also had to tell them at times why their radio isn't worth fixing.
They have to trust that I'm not lying to them because I'm trying to sell
them a radio. This is particularly true when dealing with government
customers, who typically aren't eager to throw anything away.

A lot of dealers, however, shy away from the repair business because
there's a lot more money in sales. We charge $65 an hour when we repair
a radio, but there are only eight hours in a day. Contrast that with
landing a sale for a couple of hundred radios. If we're selling to a
government agency, we can command a price of about $1500 for a Project
25 radio, and some radios cost as much as $3000 per unit. It's easy to
understand why dealers say, “Let's not screw with the service end of
things, let's just sell radios.” We had the same thought. When we first
started, we were strictly repair. But one day, a customer came in, and I
had to tell him I couldn't fix his radio. He asked me how much it would
cost to replace it. That's when the light bulb went on.

We reinvented ourselves at that moment, and to stay alive in this
business you have to constantly reinvent yourself. We do it primarily by
letting the customer give us direction. For example, our customers are
migrating from analog to digital, and we're migrating with them. But
there are categories that bear watching. Battery technology, for
instance, is going to be huge because battery life is the biggest
drawback to every handheld device. If somebody could come up with the
technology to get the same amount of power out of a smaller package,
that would have a profound effect on the two-way business. Once that
happens, it will create a sales boon because everyone will want to toss
away their old stuff.

The wild card concerning reinvention is the FCC, which has a tendency to
abruptly change direction. You can be moving your business in one
direction, and then the FCC swoops in and decides everyone needs to move
in exactly the opposite direction. I can't afford to waste money for six
months and then spend more money to go in another direction. That
worries me.
However, homeland security excites me. That's the big one. There are a
number of entities that previously haven't had their own communications
systems but which are going to need them now. For example, there are two
national parks in Arizona on the Mexico border. No one paid much
attention to them before, but now they're going to have to patrol that
border, and they're going to have to talk on a regular basis with the
U.S. border patrol and the local sheriff's office. A lot of new
customers like that are going to start popping up.

A lot of people are getting out of the two-way business because they
think it's a dying breed, that pretty much everyone will have a cell
phone with push-to-talk capability, and that will be it. But I honestly
don't believe that because when someone pushes the button on a land
mobile radio, they know they'll be able to talk with someone at their
company and they don't have to rely on anyone else. It comes back to the
control issue. They just don't want to put critical communications in
someone else's hands.

— As told to Glenn Bischoff

The future is rosy — just ask my son
Sal Dragotta, VIKING LAND MOBILE COMMUNICATIONS
Location: Milwaukee, Wis.
Years in business: 40
Number of employees: 9
Annual sales: $1.2 million

We're happy with where our business is right now. We've seen steady,
slow growth over the past few years, despite the impact of outsourcing
and downsizing on Milwaukee's industrial base. We used to add customers
every month; now it's a bit slower than that, but I attribute that to
the economy and the fact that many, many jobs in Milwaukee have gone
overseas. We had some huge plants that would usually tide us over during
the difficult times, but they are now all history. When those plants go,
the smaller companies that feed them — like Viking — suffer.

Transportation is our big specialized mobile radio customer. We also do
a lot of business with a casino in Milwaukee. The rest of our customers
are no longer big customers anymore. While the area's schools as a group
still are a very important customer, each school is independent, and
they are smaller users.

We do a lot of licensing of users. There's quite a market in that. The
second thing to hit the garbage after the package is the FCC
application. So we spend a lot of time tracking down unlicensed users
that end up on one of our channels. While people are afraid of the IRS,
they aren't afraid of the FCC because there are no penalties, no
enforcement. A lot of people who are honest, law-abiding citizens in all
other aspects of their lives don't think about filing a license
application.

We're also doing more AVL. Customers like that feature and they also
like text messaging. We're doing a lot of text messaging. We're trying
to get manufacturers to look at other products, but it's hard.
Store-and-forward would be a nice option. A lot of our in-plant,
in-building system users are going to trunked systems. Major customers
like the casino use a trunked system because it gives them privacy.

We've also been installing radiating cable systems into buildings,
especially for public safety. We're doing really well with building-type
coverage systems for cell phones and wireless systems. When the
architects don't want to address communications, then someone has to put
in a radiating cable system. Some of the new building materials are very
unfriendly to RF. That tinted glass not only blocks sunrays but also RF.
For example, a four-story underground parking garage in downtown
Milwaukee was built, and it doesn't have cell phone coverage.
Ironically, installing RF-friendly materials during construction is
relatively inexpensive.

Currently, Viking is strictly a land mobile business and hasn't ventured
into other avenues such as intercoms or closed-circuit television. Our
biggest asset is a new 500-foot tower that we use and lease capacity to
others. But we're looking at alternatives for the future. We're looking
at wireless Internet services to leverage our RF expertise. However,
Milwaukee businesses have so many other options, led by digital
subscriber line and cable offerings. When you get into the metro areas,
those services are readily available and considerably less expensive for
a start-up. There are a couple of wireless Internet systems in the area
that are struggling for several reasons, one of which is that customers
have to buy equipment up front.

Nevertheless, I'm optimistic about the coming years. I wouldn't have had
my son come into the operation if I didn't think the future would be
positive. He's very competent in both RF and computer. The melding of
those disciplines will be crucial in the coming years. RF is a strange
animal. It doesn't like to behave according to any rules, so it takes a
very knowledgeable person. But when you combine RF and computers, which
is happening at an ever-increasing rate, you end up with a very strange
animal, and it takes a very talented person to figure it all out.

Our biggest problem is cellular. Right now the commercial wireless
carriers are giving away their services. There's no way we can afford to
compete with the advertising power of those entities. But there's a
shakeout coming in the cellular field. And once these people have to
turn a profit, land mobile will make a profit again.
— As told to Doug Mohney

Don't be afraid to take risks, but avoid gambles
Steve Guller, WARNER COMMUNICATIONS
Location: St. Louis, Mo.
Years in business: 42
Number of employees: 25
Though most of our customers today still are in the enterprise sector,
which represented the bulk of our business in the early stages,
government produces more sales revenue, and not just because of the
emphasis on homeland security.
Consequently, government agencies represent a tremendous opportunity for
mobile radio dealers, especially those in public safety because they are
willing to pay for expertise. They are sensitive to the fact that
someone's life is on the line if the communications aren't right. They
also understand that someone who is experienced can provide them with a
more cost-effective communications system over the long term because if
you don't do it right the first time, someone is going to have to go
back and fix it, and that costs time and money. However that opportunity
could well be tempered by the fact that the biggest challenge mobile
radio dealers face today, and will face in the future, is developing
young people with good technical skills.

In the early days, when we would look to hire technical people, there
were plenty of amateur radio operators, who were very enthusiastic. It
was a hobby for them, and they were very interested in making that hobby
a vocation. Today, we don't see young people getting into radio
frequency communications. Consequently, as some of the older technicians
begin to retire, it is going to be a challenge to replace that
brainpower.

There are other challenges that dealers are facing. For instance, we
place too much emphasis on technology and not enough on finding
solutions for our customers. We go to the industry trade shows and we
get caught up in all the whiz-bang things that are on display, but the
reality is that when you talk technology to a customer, their eyes start
to glaze over. All the customer really cares about is, how is this going
to help me? This is as much a challenge for our suppliers as it is for
us.

That's not to say technology isn't important. In fact, it's very
important because it leads you in new directions. You have to be willing
to try new things, and you have to be willing to take a financial risk.
Believe me, we have taken a financial bath on a few things over the
years. The trick is in minimizing the risk, which we do by conducting
risk assessments of the products or product categories we're reviewing.
And we have walked away from things because the risk was too high.
Dealers should be mindful of the difference between a risk and a gamble:
A risk is when the odds are in your favor; a gamble is when they are
not.
Dealers also should listen more closely — and more often — to their
customers because they too will lead them in new directions. Dealers who
refuse to change will fall by the wayside because they won't be able to
adapt to what their customers need. As elementary as it sounds, dealers
have to stay in tune with their customers.

We have fallen into the trap of being surprised by our customers at
times. When that happens, you're not doing your job. It's an easy trap
to fall into. It usually happens when you've gone three to four months
without talking to a customer. Next thing you know, they're calling you
about a competitive product you know absolutely nothing about, and
you're at a huge disadvantage.
Looking to the future, dealers are heading in one of two directions in
terms of sales: commodity or value-added. They have to pick one; it's
too difficult to try to do both. You can be quite successful selling
only radios, if you can be cost-effective. But the greater opportunity
is in value-added sales. More and more organizations are seeking
integrated, coordinated communications solutions.

It used to be that departments would maintain their own systems and
there wasn't a great deal of interest in coordinated communications.
Today, with the heightened sense of security that pervades both
enterprises and government agencies, organizations want top-down systems
that enable personnel to communicate across departments or
jurisdictions. But that brings us right back to the challenge addressed
previously, as the key to selling integrated systems is in having
technical expertise.
— As told to Glenn Bischoff

Despite declines, future promises more upside than downside
Matthew Sickman, MOBILETEL RADIO
Location: Evansville, Ind.
Years in business: 20
Number of employees: 3
Annual sales: $300,000

It's been a rough couple of years for us, but we're hanging in there. We
used to have 12 employees but now are down to three, as the larger
companies we traditionally worked with — such as in the oil and coal
industries — have faltered. The decline in business has driven us into
other areas of wireless beyond land mobile, including data control,
Internet access, security, wireless cameras and digital video recording.

Searching for new solutions, I traveled to Asia and received a warm
welcome from overseas manufacturers. We buy directly from Korea and get
equipment in here at half the cost. We have such a close relationship
with them, when we go to visit with them, it's like they roll out the
red carpet. They call us their best customer, at $100,000 a year, maybe
less.

Currently, we have somewhere around 200 customers across a spectrum of
medium-sized operations, including hospitals, plastics plants, lumber
yards, schools, and churches. Recently we helped three schools get
radios installed. Service-oriented businesses are still strong
candidates for land mobile radio services. Service people will always
want some sort of dispatch capability, so they can contact all their
people at one time. That sector isn't going to go away.

We're optimistic about the future. We know the two-way industry is not
going to disappear. Emergency-management people have found out that
using a cell phone doesn't cut it. You need to have a simplex or a
two-way communications system because once the phone lines are cut, you
don't have communications.

One challenge we're facing, especially with our newer customers, is they
always want to get it done for nothing. Communications is the bottom of
the barrel. They realize it's something they need, but they have other
priorities. Hospitals are always looking for ways to cut costs, for
example. They have no problem buying a dialysis machine for hundreds of
thousands of dollars, but they scream when they buy a radio system for
$3000.

The industry is definitely moving into security; we already see that. We
have a federal agency moving to promote homeland security. People want
to drive down the street and be safe. Police and fire departments are
looking for the best way to protect people. Consequently, I see a huge
demand for security services.

Leasing capacity to municipalities should be another growth area. There
is a town in Kentucky that can't afford to spend big dollars for radio
towers, so they look to me to build their system and rent from me. They
looked at the rental side vs. building and maintaining their own tower
and concluded that rental is more acceptable. Here in the Midwest, we
still have radio channels available. Every day, people go out of
business, so it opens up opportunities.

— As told to Doug Mohney

The cocoon, while safe, is no place to stay
Dave Keller, RADIO ONE
Location: Atlanta
Years in business: 7
Number of employees: 11
Annual sales: $1.0 million

Without question, operating a mobile radio dealership today is nothing
like it was in the old days, when you could make a pretty sizeable
margin per radio. With all of the radio shops and dealerships in our
area, for example, it's pretty competitive. There are at least 20 in our
selling territory, and it's probably a lot higher than that because we
cover a lot of counties.

For that reason, differentiation is the key to succeeding in the future.
If everybody is selling the same things, then no one is going to make
any money because we'll be playing a pricing game and undercutting
ourselves to death. The problem with that strategy is that seasoned
sales professionals who have been with their dealerships for a long time
generally are reluctant to change. But they're beginning to see that the
market is changing — primarily because they aren't seeing the sales they
used to see — and they're starting to change, too. The bottom line is
that they're going to have to leave the comfort of their cocoon.
Data is one product category all of us should be looking at. Dealers can
no longer limit their focus to voice systems, partly because they need
to do something that's different than the guy down the street, but also
because the customer more and more is looking for a total solution. They
want to leverage their investment. That two-way radio then looks a lot
more valuable if it's part of a comprehensive solution that allows the
customer to also transmit a job order or instructions to employees.

Also, we're seeing higher-priced portables and mobiles being replaced by
inexpensive units. We're even seeing factories and plants going to
really inexpensive radios that they're buying on the Internet. It's
really tough to compete with that. So you have to pour on the service
like never before, not only to land the customer, but to keep the
customer. You have to pour on the service, because the way things are
today, there's someone right down the street who covets that customer's
business. You also have to learn whatever you can about their business.
You can't just walk through their door and say, “Hey, I've got five
radios here, you want them?” You have to find out what their problems
are, what their wishes are, and what they hate about how their
businesses are operating right now. That will give you an idea of where
you need to go next.

You also have to pay attention to what's going on around you. For
instance, Nextel and the other push-to-talk vendors are a threat to our
future. Nextel has done a great job of moving into our footprint here in
Atlanta. One of the reasons we branched out into software development
with a dispatching system was to give us an edge against Nextel and the
others. It not only gives us a competitive edge, but also enables us to
increase system load, which is an important source of monthly recurring
revenue. It's also something we can offer to other operators, which
opens up new market opportunities for us.

To be sure, doing something like this isn't easy and it doesn't happen
overnight. It took us six months just to get a version ready for a beta
test. That's tough, because you still have to pay for the effort in the
interim. There were times when we wondered just what we had gotten
ourselves into. But once we developed the product, we were very happy we
made the effort. If we had been content to let things roll along as they
had been and been happy to be just a system operator, then we would have
eventually stagnated.

The ability to adapt is crucial. I don't know how long any dealer who's
not paying attention and making adjustments can last. The market and the
technology are changing so rapidly that you have to move pretty quickly.
One thing is for sure: We plan on being here five years from now, but
we're going to look different than we do today.
— As told to Glenn Bischoff

Homeland security is a very good thing
Karl Hosterman, CENTRE COMMUNICATIONS
Location: Bellefonte, Penn.
Years in business: 17
Number of employees: 13
Annual sales: $1.0 million plus

Business is booming for us right now. We're keeping busy with a lot of
on-site equipment, portable radios and handheld radios. The
public-safety sector has been very good since Sept. 11, 2001. The
buzzword of the moment is interoperability. People are upgrading now,
since they have more money, thanks in large measure to the increased
emphasis on homeland security. We've also been getting a lot of work
from enterprise customers — we have somewhere between 200 to 300
accounts — including Penn State University, trucking companies and
construction firms. Trucking companies, for instance, don't want to see
their drivers with cellular phones in their hands; they're looking for
one-to-many solutions.

We're still selling radios — particularly portables — though our
business in that area has dwindled some. We're also still operating
several 800 MHz and UHF trunk systems. Getting UHF trunking was
beneficial for us because we didn't have to fight with any 800 MHz
interference problems.

We used to see a lot of business from very large fleet radio systems, as
people would try to stretch their radio coverage as far as they could.
With the appearance of Nextel and cell systems, that's diminished some,
but we have had some people try cellular and/or Nextel and come back to
us because of the coverage we can provide in rural areas. Being in the
middle of the woods sometimes does have its advantages.

Generally, cellular phone systems have nibbled away at our business over
the years, but we believe land mobile radio services have held their
own, primarily because conventional two-way radio is a very efficient
way of communicating inside factories, apartment complexes and the like.
Why should a building manager have to go through a tower in order to
talk to the maintenance guy in the basement? People are becoming more
efficient in their communications.

Our repair business also has eroded as equipment has evolved. We still
service radios on site, but far fewer of them. In fact, we don't see
many repairs other than batteries. With extended warranties, it's easier
to send radios back to the manufacturer. Our business also has been
negatively affected by the price of radios, which has come down
tremendously. Some paging markets have dried up, and high-power
base-station equipment doesn't seem as prevalent as it used to be.

Looking to the future, we're anticipating a migration to IP-based
systems. Most radio systems or communications systems will basically be
an IP addressable-type system at some point. It's coming, but it might
be a while before it gets to us. It wasn't until 1989 that we got
cellular phone service here, so we're usually eight or nine years behind
the curve. We're going to put the time to good use. We've already been
experimenting with unlicensed bands and Internet access because we have
to make it work for ourselves first before we can go out and sell it to
others.

In an IP-based world, computer technicians will become more important,
but the basic fundamentals of RF are going to be there and RF
technicians are going to be there. The big question is, in what numbers?
The number of people who understand the basics of RF has been shrinking
over the past few years. The people that made radio work are dying off;
the radio engineers of the '20s and '30s are going or gone. Somebody is
going to have to learn it all over again. The future depends on it.

— As told to Doug Mohney

Rumors of our demise are greatly exaggerated
Bob Samo, SILVERADO AVIONICS
Location: Napa, Calif.
Years in business: 40

Like many mobile radio dealers, we have evolved over the years. As we
evolved, we went from trying to do everything for everybody to doing a
few things extremely well for a smaller segment. The bottom line was the
motivating factor. We found it difficult to make a decent living when we
were spreading things so thin across all of those market segments. We
learned you couldn't be all things to all people. We also found we can
serve our customers much better when we concentrate on a few specific
segments.

Serving the customer is the key. I like to describe it as the Toyota
principle. In the early stages of their television ads, the message was,
“You asked for it, you got it.” You have to keep your ear very close to
the market you feel most comfortable in because it's the only way to
learn what the customers in that market are looking for, or at least
figure out what will make their operations more efficient. Then you have
to make sure they get it, in one form or the other. It sounds like a
cliche, but I don't think every dealer is doing it.

The future of the land mobile radio dealer doesn't only rest with
technology or an alliance with a specific manufacturer, but rather with
the dealer's ability to find a market, or if one can't be found, to
create one.

Here in the Napa Valley region of California, there are all kinds of
things a dealer can get involved in. There's telemetry for water
irrigation systems. There are hundreds of wine caves that need radio
coverage inside the caves and hundreds of buildings that need
in-building coverage.

There are all kinds of technologies out there, and dealers need to find
the ones that make the most sense for them, and then be passionate about
them. Do that and customers will beat down your door. Waiting for the
phone to ring or for a customer to walk through the door won't get the
job done. You have to go after the business, regardless of market
segment.

While we are sales driven, we believe that maintaining strong repair
support is imperative. You could send the radio back to the
manufacturer, but that doesn't generate the best public relations. If
possible, dealers should repair the equipment on site and return it to
the customer in the least amount of time possible. Of course, there are
only so many hours in the day, and finding a balance between sales and
the repair aspect can be difficult. One of the more challenging aspects
of a strong sales capability is to avoid the trap of taking on more
business than you can support. But, it is difficult to walk away from
dollars that are sitting there.

We've read all kinds of doom-and-gloom articles about the future of the
conventional land mobile radio dealer. I don't believe dealers are
doomed. The public-safety sector, with all of the interest in homeland
security, looks particularly rosy. Wireless broadband also represents a
tremendous amount of potential.

Also, we've been hearing a lot of complaints about the cost of Nextel's
service, and we think a lot of business and industrial users are going
to come back to the smaller private sector dealers over the next few
years, because of the expense of the commercial services.

Of course, the advent of new competitors in the push-to-talk sector such
as Verizon Wireless and Sprint could drive prices down and mitigate the
opportunity, but the point is that dealers need to look for
opportunities that make sense for their geographic area. Also, dealers
should look to compete in places where others aren't doing a good job
and broaden their perspectives, things that don't always come easily or
naturally, because we dealers tend to be quite conservative. But for
those who do, this won't be a dead profession.
— As told to Glenn Bischoff

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