Subject: [NEXTEL-1] Once deemed ugly duck, Nextel spreads its wings

From: [email-masked]
Date: Mon, 02 Aug 2004 14:24:24 -0400

Once deemed ugly duck, Nextel spreads its wings

By Ken Belson
The New York Times

August 2, 2004

RESTON, Va.

In most industries, the sixth-largest player would be considered an
also-ran. In the cell-phone world, the sixth-largest carrier, Nextel
Communications, is the one to watch. 

Nextel's rapidly improving business has defied skeptics, who have long
seen the company as a scrappy, but distant, contender. 

Created in 1987 when its predecessor, Fleet Call, started buying
spectrum licenses used by radio dispatchers, the company teetered
financially for years. It has few ties to telephone giants like Verizon
and AT&T. And its offbeat "Push To Talk" service, which lets cell phones
double as walkie-talkies, was considered too cute to be a threat in the
turbulent mobile phone market. 

No longer. 

In the form of flattery that comes with success, Nextel has become a
target for attack, having captured a significant piece of the lucrative
corporate market, thanks largely to the push-to-talk service its rivals
once derided. The big carriers now covet Nextel's business, which has
strong growth, low subscriber turnover and the highest per-customer
revenue in the industry. 

Last month, the Federal Communications Commission also handed Nextel a
big victory when it approved a $4.8 billion plan that allows Nextel to
acquire highly desirable 1.9-gigahertz spectrum in exchange for ceding
parts of its old spectrum to public safety agencies for use in emergency
communications. The new spectrum will allow Nextel to offer more
advanced phone services as well as expand its push-to-talk network. 

"We face lots of challenges, but the network we have wins more than
loses," Timothy M. Donahue, Nextel's president and chief executive, said
in an interview at the company's headquarters here. 

Donahue has reason to be confident. The walkie-talkie service, which is
embedded in all of the company's 13.4 million phones, is probably the
main reason corporate and government workers make up two-thirds of
Nextel's subscribers. Such users account for about a third of other
cellular providers' customers, according to analysts. 

The walkie-talkie function, it turns out, is well-suited to hospital
employees, factory floor managers and other workers who need to have
short, frequent conversations. So unlike rival companies, Nextel has
focused on signing up blue-collar workers by, for example, designing
phones sturdy enough to withstand heavy use. And competitors have a hard
time stealing Nextel's business clients because the walkie-talkie
function works only among Nextel users and is not compatible with other
systems. 

The advantages have made the company's customer turnover the second
lowest in the industry, after Verizon Wireless. 

Though business clients are on average more costly to lure because of
higher marketing expenses, they are bigger spenders than noncommercial
consumers. Nextel subscribers spend $70 a month, 30 percent more than
the industry average. 

"Other carriers have Nextel envy," said Roger Entner, director of
wireless and mobile services at the Yankee Group, a research company in
Boston. 

Verizon Wireless, Sprint and others have introduced walkie-talkie
phones, and are taking aim at Nextel's business clients. But those
services have not succeeded in winning many customers, analysts say,
because the technology is not as good and the competitors have fewer
business-specific data services, like access to a multiple-listing
database for real-estate agents or a global positioning service to let
dispatchers monitor and guide their trucks. 

Nextel executives acknowledge that the FCC decision on the spectrum swap
is likely to be challenged in court. "I don't expect our good friends at
Verizon to roll over and play dead," said Robert Foosaner, Nextel's
senior vice president for governmental affairs and chief regulatory
officer. 

But according to industry analysts, the odds are that the plan, which
was three years in the making, will not be reversed. If it stands,
Nextel could use the new 1.9-gigahertz spectrum to sell third-generation
services without having to patch together smaller bits of spectrum. 

For the most part, Nextel will continue to rely on its proprietary
technology, called iDEN, for Integrated Dispatch Enhanced Network. 

With a firm foothold in the business market, Nextel is also making
inroads into the consumer market. The walkie-talkie service has become
popular with young urban users, who have added the verb to Nextel to
their lexicon. This year, Nextel also began a 10-year deal to sponsor
the NASCAR circuit. The company also has opened 600 Nextel retail
outlets in the past three years, and will add 200 more this year. 

The efforts have paid off, despite intense competition. While Nextel is
still the smallest of the six major carriers, its subscriber numbers
have grown 54 percent since 2001. Revenue has almost doubled in three
years, to $10.8 billion in 2003. Analysts expect revenue to grow 23
percent this year and 11 percent in 2005, as Nextel steals customers
from its rivals. After more than a decade of losses, profits have grown
steadily since 2002. 

By adding higher-spending subscribers, Nextel expects to generate $1.7
billion in free cash this fiscal year, up from $1.3 billion in 2003. The
company also has reduced its debt levels; Standard & Poor's in March
raised Nextel's credit ratings to one notch below investment grade, or
BB+. 

Still, skeptics remain. They note that spending by Nextel subscribers
has largely peaked, albeit at a higher level than for its competitors.
The company also will have to spend several billion dollars to move
public safety agencies into the spectrum it will vacate, and to move
into the 1.9-gigahertz space it will receive in return. 

More broadly, the cell-phone market is reaching saturation, which means
carriers must spend more to attract a shrinking number of consumers who
do not already have phones. Verizon and others with stronger finances
may be better positioned to bid for those potential customers, analysts
say. 

Even with the extra 1.9-gigahertz spectrum from the FCC spectrum swap,
the bulk of the company's phones will still run on the iDEN network,
where speeds are significantly slower than those of other
third-generation technologies. At the moment, that is no great
disadvantage: not many data services exist that require high-speed
connections. But that might change if, for example, video streaming is
introduced. 

"The existing iDEN technology does not have a clear path to a pure
third-generation network," said Dmitry Khaykin, who covers the
telecommunications industry for Salomon Brothers Asset Management. "They
do not have to be concerned now because there aren't a lot of bandwidth
needs, but longer term they should be." 

Other analysts say that Nextel could team with other carriers to share
spectrum, or buy more outright to bolster its network. Some go further,
suggesting that Nextel bid for another carrier so it can become a
telecommunications conglomerate. Among those mentioned as potential
merger partners for Nextel are Sprint, which is both a long-distance
carrier and a wireless provider, and MCI, which has just emerged from
bankruptcy protection. 

Donahue, though, said Nextel had no interest in looking for a partner.
The company's independence, he said, has allowed it to think more
creatively than its bigger, more bureaucratic competitors. 

"We intend to be a stand-alone business for a long time," Donahue said.
"We have to keep that sense of David and Goliath."

http://www.rockymountainnews.com/drmn/technology/article/0,1299,DRMN_49_3080673,00.html

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