Subject: [NEXTEL-1] INSIDE TRACK: A bridge over the generation gap

From: Marcel <[email-masked]>
Date: Mon, 04 Nov 2002 18:03:05 -0500

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INSIDE TRACK: A bridge over the generation gap

By Alan Cane

Financial Times; Nov 04, 2002

Now here's a novelty: a wireless operator in the devastated telecommunications sector whose optimism about the future seems to be justified by its numbers.

Really? The Nasdaq-quoted Nextel is still making a loss and its share price, at just under $9, has fallen from a high point of more than $80 in mid-2000. No operator, however, has been able to evade the market downturn and Tim Donahue, chief executive, feels confident enough to claim: "We are one of the bright spots in telecoms these days. By every industry metric you can think of, we are ahead of the competition."

Figures from the brokers Merrill Lynch confirm his contention. While the average US customer is paying his or her telecoms operator $50 (ý32) a month, Nextel is raking in $71. Churn, a measure of the number of customers leaving a network for any of a number of reasons, is only 2.1 per cent, compared with the US average of 3 per cent. The lifetime value of a Nextel customer, Mr Donahue claims, is $3,500, compared with an average $2,200 for companies such as Cingular and Verizon.

But, you could well ask: "What is Nextel?" The company has no presence in Europe and no intention of establishing one. Its operations are pretty well restricted to the US but even there it is hardly a household name, for the simple reason that it has no trade with residential customers.

Its focus is business, utilities and the emergency services; large organisations that can make use of its combination of services: conventional cellular voice telephony, data transmission at speeds in the "2?G" category and a unique capability called "direct connect".

2?G is used to describe mobile phone services that come somewhere between today's GSM standard and tomorrow's all-singing, all-dancing multimedia services. The Nextel network operates at between 15,000 and 20,000 bits of information a second, compared with 9,600 bps for GSM. New software is planned that will give apparent rates of 30bps to 50bps.

Direct connect, however, is Nextel's secret weapon, the capability that endears it to customers such as the MGM/Mirage hotel group in Las Vegas and General Motors, and which rivals will find difficult to replicate.

It is a modern take on the old walkie-talkie systems, which have always enjoyed popularity in the US. Nextel handsets, a little bigger than conventional mobile phones, sport a large button on the side. Press the button and you can talk immediately to another Nextel user or to 10,000 or more. @Road, for example, a US transport logistics company, combines Nextel technology with satellite geographic positioning to give its customers better control of their vehicles.

Mr Donahue says: "Dispatchers know the location of every truck. Regardless of the time of day or day of the week, they can keep better track of their vehicles and send the truckers better information - a new bill of lading, for example, or a change in delivery schedules.

"For that kind of application," Donahue continues, "we'll get something like $13-$16 a month per vehicle for fleets of 6,000 to 10,000 long-haul trucks."

No other US operator can offer a comparable service at present and Mr Donahue believes the cost and complexity will deter new entrants: "We do not see anybody on the horizon having anything as robust as we have. Some will introduce what they think is direct connect but it will have a problem with latency. When you push the button, there will be a delay of about six seconds before connection. My customers will not put up with that."

The company has about 10m customers already and expects to add a further 2m this year. Revenues came in at just under $8bn in 2001, with earnings before interest, tax, depreciation and amortisation of $3bn. The company turned earnings positive last quarter and expects to have positive free cash flow in early 2004. "Or sooner," Mr Donahue says.

If Nextel continues to fulfil its potential, it will be another feather in the cap of Craig McCaw, the serial entrepreneur and visionary who created the US cellular industry.

He took control of the three-year-old but failing Nextel in 1995, persuaded Motorola, the US telecommunications manufacturer to clean up the company's flaky technology and refocused the group as a supplier of specialist services rather than a competitor for conventional wireless companies.

As O. Casey Corr put it in his biography* of Mr McCaw: "The base-market opportunity was not existing cellular users or the average housewife but the 17m-18m two-way radio users in mobile work groups [such as] truckers and newspaper photographers."

Or, as Mr Donahue puts it: "We look for large business deals. We stay away from consumers who are always looking for a better price, for more minutes of airtime in their bucket."

Mr Donahue, a long-serving associate of Mr McCaw, was appointed chief executive in 1999. Mr McCaw, with other executives from his Eagle River investment vehicle, retains a seat on the Nextel board. Its chairman is William Conway, managing director of The Carlyle Group, a Washington-based buy-out specialist with strong defence industry connections. William Kennard, formerly US Federal Communications Commission chairman and another Carlyle executive, is also on the board.

In spite of the group's reluctance to become involved in the consumer market, Mr Donahue sees some potential in the youth market for what he describes, by analogy with text messaging, as "voice instant messaging". Trials are being carried out in California but, he says cautiously: "We are very disciplined in our approach. I have to see a return on the business plan."

Telecoms aficionados will see an instant resemblance between Nextel's technology, called iDEN, and the European equivalent, Tetra. Tetra is being developed for European police and emergency services, but an attempt to create a commercial service, Dolphin, went into administration last year (it has since been acquired by US-owned group Inquam).

Mr Donahue comments: "The technology is not as good and I don't think the Dolphin folk understood how to go after the business user. They got into the swamp with all the other wireless carriers. It is the kiss of death to compete with those guys without having the public understand you are very different.

"If I were ever interested in Europe, I would test market thoroughly first - in Denmark, perhaps, or France. Europe is different because it does not have the history of two-way radio the US has."

* Money from Thin Air, by O. Casey Corr, 2000, Crown Business Publishing

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