Subject: [NEXTEL-1] Can Nextel still go its own way when its Direct Connect lifeline faces imminent attack?

From: Marcel <[email-masked]>
Date: Tue, 18 Mar 2003 09:38:10 -0500

Contrarian to the core

Can Nextel still go its own way when its Direct Connect lifeline faces imminent attack?

March 1, 2003
By: Kirk Laughlin
America's Network

Nextel Communications relishes the "odd man
out" label, the one that was slapped on the
carrier during the last few years because it
walked away from the frantic rush to
third-generation (3G) wireless and instead
stood by its stolid iDEN network.

Nextel is still odd in many other ways, and only
recently has it become apparent that the
carrier's technological isolation, product
differentiation, departure from subscriber
recruitment norms and deep attachment to the unconventional are
actually desirable features in a sea of mobile operator sameness.

Executing according to plan has helped. Nextel is virtual king of the
mobile enterprise, having developed extraordinary loyalty among
contractors, fleet operators and service personnel. These customers
constitute the core of an expanding base of Direct Connect subscribers,
who are now able to use the chirping walkie-talkie solution across the
nation. Enterprise customers spend more and walk away less than
consumers, keeping Nextel's subscriber metrics higher than the rest.

Nextel still turns away about two-thirds of
customers who want to sign up at retail stores,
almost always because they don't hit the credit
benchmark. Such shrewd calculations
(delinquent customers could drag down a
sterling $71 average subscriber revenue figure)
are emblematic of a company that is devoted
to staying above the competitive pricing fray
and on a road of its own choosing.

Some industry observers still believe that
Nextel's road less-traveled is a dead end in
disguise. Its recently juiced up 2.5G packet
network, iDEN, has aging legs in the
high-speed data races and Nextel doesn't have
the equipment and device economies of scale
enjoyed by those in the GSM and CDMA
armies.

CEO Tim Donahue, who was recruited by
wireless legend Craig McCaw to run Nextel
seven years ago, is not bothered by the
so-called advantages of bigger operators.
Donahue says one of Nextel's primary
strengths resides internally, where employees seem to thrive under
Donahue's paternal and unpretentious leadership style.

"I'm not burdened with a telephone legacy, and I have also been
influenced by probably one of America's greatest entrepreneurs, Craig
McCaw," says Donahue, from his office in Reston, Va. "I've always been
in an entrepreneurial environment -- where people don't take themselves
too seriously."

Nextel is also free from another burden - indebtedness from costly
network upgrades. Although the carrier is still not profitable, it has cut
debt and notched the best overall operating margins in the industry. The
carrier also claims to have the lowest operating expense per minute of
subscriber use, a reflection of the "major capital efficiency" of Motorola's
iDEN.

Right moves, right time

Nextel's decision to stay on the sidelines throughout
the last three years, instead of committing to 3G, is
increasingly regarded as a timely stroke of pragmatism.
In just the last few weeks, Wall Street analysts have
applauded Nextel's patience by raising their investment
opinions. Some anticipate that wireless infrastructure
costs will continue to fall, putting Nextel in a position to
exploit a low swinging price curve. By comparison, other U.S. carriers
have collectively spent $30 billion on next generation upgrades during the
last few years. In raising its credit rating of Nextel in late January,
Moody's remarked that Nextel has managed a "remarkably stable
operating and financial performance… in the face of an increasingly
competitive wireless marketplace."

It doesn't take long to figure out that Nextel's formula for success is
largely due to Direct Connect, the abrupt and lightning-fast push-to-talk
product that relies on the special sauce residing in the packet-based
iDEN infrastructure.

Pushing to differentiate

Other carriers are aware of this killer differentiator and are developing
push-to-talk challengers. Sprint PCS and Verizon Wireless are both
expected to unveil their solutions some time this year, but many industry
experts believe latency will be an issue.

Donahue and Nextel Chief Technical Officer Barry West have openly
criticized the yet-to-be-released products as unworthy imitations.

"We know our customers just aren't going to put up with the latency
that's inherent in that technology," he says. "We don't think it's much of a
competitive threat to our enterprise customers. [Competitors] probably
sell more on the consumer side, because consumers might put up with
[latency]."

Nextel faces a "death sentence" because of the closed architecture of
Direct Connect, says Vik Grover, managing director at Kaufman Brothers,
stressing that comparable solutions will become more favorable because
they will enable interoperability.

2- Near term, Nextel has significant momentum, but longer term,
push-to-talk will become an open product for other carriers, so you'll be
able to do global push to talk with any data network with a 2G handset,"
says Grover, stressing that Nextel is likely to experience market erosion.
"We think the differentiator for Nextel in terms of its proprietary
push-to-talk will eventually fade away."

Grover anticipates competition coming from the likes of start-up Mobile
Tornado, whose solution is said to have a call set up time of about 1.2
seconds, and works on CDMA, GPRS and UMTS networks. The
company reportedly has a trial going with SprintPCS.

Direct Connect enables "sub-second" voice connection by relying
completely on iDEN, and not the PSTN. There are no interconnection
costs and the service has demonstrated its resilience, most notably
during the crisis hours following the Sept. 11 tragedy. More than 90% of
Nextel subscribers use Direct Connect. Competitors may find that the
push-to-talk barrier to entry is high because groups of people have to
adopt the solution indicating, as Nextel puts it, that Direct Connect is an
"affinity sale."

Still, there is reason to believe that customers using one push-to-talk
solution will want to connect to subscribers using a similar product on
other networks, not unlike the establishment of inter-carrier short
messaging, established last year. Donahue says he doesn't anticipate
push-to-talk interoperability "for the foreseeable future."

The basics

Standard voice calling service is an area where Nextel is also trying to
prove superiority, but making a convincing case is difficult. In a recent
survey by the Consumer Union, publisher of Consumer Reports, Nextel
was found to have spotty service availability in two key markets, Los
Angeles and New York. In addition the carrier received low marks for
billing and customer service.

On a national basis, however, Nextel routinely ranks high in overall
network quality. But, can Nextel trump the chest-thumping statements of
Verizon CEO Ivan Seidenberg, who routinely claims that Verizon
Wireless has the best network, hands down?

"I don't disagree with Ivan that he has a good network," Donahue retorts.
"He doesn't have the best network. If you're going to make that claim, I
think you should have a credible third party that endorses it, and Ivan
doesn't."

Seidenberg's network quality claims also lack a connection to pricing,
Donahue points out. "Ivan may say he has the best network, but if you
look at his pricing, he's not asking a premium for it, is he?"

Shedding the image of running a clunky, blue-collar focused wireless
network has been a long process for Nextel. One of the issues hounding
the company has been iDEN itself, which was destined to run dry on
voice capacity until the carrier decided late last year to extend the life of
iDEN. By implementing a 6:1 voice coder this year, Nextel will be able to
carry six cell calls concurrently over a single radio channel, a process
that is expected to extend the efficiency and longevity of iDEN.

Business of business

Nextel is not shy about the fact that it is in business to serve
businesspeople. "The consumer is not that important to us, at least
today," says Donahue.

The company gets away with such frankness because it continues to
clean house in the enterprise, even as other carriers talk boldly about
locking down business customers with slick new data applications.

Nextel may have a network that plods along at anywhere from 19.2 kbps
to 50 kbps, but Donahue claims that business customers don't have a
problem with the data speed. The carrier spends a lot of time crafting data
applications that fit the needs of vertical business segments. Hundreds of
applications, finely tuned to specific industries, are either commercially
available or being developed.

This process, often done in partnership with industry insiders, appears to
give Nextel a critical edge with wireless technology purchasers, many of
whom are already familiar with the carrier. "The CIO will throw you out of
his office if you just sort of sit there and say we have this application that
runs on this phone," Donahue explains. "He'll say, 'How does that help
me be more productive or more efficient in my business?"

The other emphatic point Donahue makes is that there is "no money to
be made" on stock quotes, sports scores and weather. "The money to be
made in data is when you go to an enterprise and you say I have an
application for you, like we just sold to Roto-Rooter. We just sold them
two applications - one is a vehicular location app, and the other is a
work-order flow app."

Government and business are the two hottest verticals currently, says
Donahue. Nextel recently secured a two-year, $200 million per year
contract with the U.S. General Services Administration, which is part of a
longer-term, $1 billion, government project. About 16% of Nextel's new
customers are from the government sector.

"I think we're going to take government by storm," says Donahue. "I think
that inter-operability in public safety is an absolute must and I think
[Homeland Security Chief] Tom Ridge knows it."

The other enterprise bright spot for Nextel is a recent partnership with
Research in Motion, allowing cross-selling of products, including the
popular BlackBerry service.

Mushrooming interest in Wi-Fi services and technology is also triggering
Nextel to explore interoperability across WLANs and iDEN, according to
Donahue. He says the company is working with Motorola to develop
devices to enable seamless roaming between networks.

3 Recognizing roadblocks

One potential headache that could unfold in the next few years in Nextel's
promise to spend nearly $1 billion upgrading public communications
systems in exchange for bandwidth on the 800 MHz band. The FCC
appears close to approving the proposed swap, despite strident
opposition from some public service agencies.

Nextel put forth the proposal to eliminate interference issues on the 800
MHz band, and faults the FCC for putting the carrier there is the first
place. "[The FCC] put all of us in the same spectrum, so we bang around
against each other. They have to fix it," says Donahue.

Some argue that Nextel's acquisition of coveted contiguous spectrum
may produce lower capital spending over time. Others say the spectrum
swap will add further stress to Nextel's cash flow profile.

Grover issued a "sell" rating on Nextel late last year because of its
balance sheet, competition from push to talk rivals and drawbacks that go
with being the fifth biggest national operator.

"Even though its customer base has been loyal in the past, Nextel
market position is at risk," Grover says.

From Donahue's perspective, Nextel's balance sheet has "never been in
better shape." He also anticipates that 2003 will be the company's best
year ever, even with the potentially disruptive impact of wireless number
portability, which is set to take effect in November.

"I really think that Nextel is pulling away from the rest of the industry," he
says. "We really have something very different and very special, and we
know exactly where we're going with it."

"Near term, Nextel has significant momentum, but longer term,
push-to-talk will become an open product for other carriers, so you'll be
able to do global push to talk with any data network with a 2G handset,"
says Grover, stressing that Nextel is likely to experience market erosion.
"We think the differentiator for Nextel in terms of its proprietary
push-to-talk will eventually fade away."

Grover anticipates competition coming from the likes of start-up Mobile
Tornado, whose solution is said to have a call set up time of about 1.2
seconds, and works on CDMA, GPRS and UMTS networks. The
company reportedly has a trial going with SprintPCS.

Direct Connect enables "sub-second" voice connection by relying
completely on iDEN, and not the PSTN. There are no interconnection
costs and the service has demonstrated its resilience, most notably
during the crisis hours following the Sept. 11 tragedy. More than 90% of
Nextel subscribers use Direct Connect. Competitors may find that the
push-to-talk barrier to entry is high because groups of people have to
adopt the solution indicating, as Nextel puts it, that Direct Connect is an
"affinity sale."

Still, there is reason to believe that customers using one push-to-talk
solution will want to connect to subscribers using a similar product on
other networks, not unlike the establishment of inter-carrier short
messaging, established last year. Donahue says he doesn't anticipate
push-to-talk interoperability "for the foreseeable future."

The basics

Standard voice calling service is an area where Nextel is also trying to
prove superiority, but making a convincing case is difficult. In a recent
survey by the Consumer Union, publisher of Consumer Reports, Nextel
was found to have spotty service availability in two key markets, Los
Angeles and New York. In addition the carrier received low marks for
billing and customer service.

On a national basis, however, Nextel routinely ranks high in overall
network quality. But, can Nextel trump the chest-thumping statements of
Verizon CEO Ivan Seidenberg, who routinely claims that Verizon
Wireless has the best network, hands down?

"I don't disagree with Ivan that he has a good network," Donahue retorts.
"He doesn't have the best network. If you're going to make that claim, I
think you should have a credible third party that endorses it, and Ivan
doesn't."

Seidenberg's network quality claims also lack a connection to pricing,
Donahue points out. "Ivan may say he has the best network, but if you
look at his pricing, he's not asking a premium for it, is he?"

Shedding the image of running a clunky, blue-collar focused wireless
network has been a long process for Nextel. One of the issues hounding
the company has been iDEN itself, which was destined to run dry on
voice capacity until the carrier decided late last year to extend the life of
iDEN. By implementing a 6:1 voice coder this year, Nextel will be able to
carry six cell calls concurrently over a single radio channel, a process
that is expected to extend the efficiency and longevity of iDEN.

Business of business

Nextel is not shy about the fact that it is in business to serve
businesspeople. "The consumer is not that important to us, at least
today," says Donahue.

The company gets away with such frankness because it continues to
clean house in the enterprise, even as other carriers talk boldly about
locking down business customers with slick new data applications.

Nextel may have a network that plods along at anywhere from 19.2 kbps
to 50 kbps, but Donahue claims that business customers don't have a
problem with the data speed. The carrier spends a lot of time crafting data
applications that fit the needs of vertical business segments. Hundreds of
applications, finely tuned to specific industries, are either commercially
available or being developed.

This process, often done in partnership with industry insiders, appears to
give Nextel a critical edge with wireless technology purchasers, many of
whom are already familiar with the carrier. "The CIO will throw you out of
his office if you just sort of sit there and say we have this application that
runs on this phone," Donahue explains. "He'll say, 'How does that help
me be more productive or more efficient in my business?"

The other emphatic point Donahue makes is that there is "no money to
be made" on stock quotes, sports scores and weather. "The money to be
made in data is when you go to an enterprise and you say I have an
application for you, like we just sold to Roto-Rooter. We just sold them
two applications - one is a vehicular location app, and the other is a
work-order flow app."

Government and business are the two hottest verticals currently, says
Donahue. Nextel recently secured a two-year, $200 million per year
contract with the U.S. General Services Administration, which is part of a
longer-term, $1 billion, government project. About 16% of Nextel's new
customers are from the government sector.

"I think we're going to take government by storm," says Donahue. "I think
that inter-operability in public safety is an absolute must and I think
[Homeland Security Chief] Tom Ridge knows it."

The other enterprise bright spot for Nextel is a recent partnership with
Research in Motion, allowing cross-selling of products, including the
popular BlackBerry service.

Mushrooming interest in Wi-Fi services and technology is also triggering
Nextel to explore interoperability across WLANs and iDEN, according to
Donahue. He says the company is working with Motorola to develop
devices to enable seamless roaming between networks.

One potential headache that could unfold in the next few years in Nextel's
promise to spend nearly $1 billion upgrading public communications
systems in exchange for bandwidth on the 800 MHz band. The FCC
appears close to approving the proposed swap, despite strident
opposition from some public service agencies.

Nextel put forth the proposal to eliminate interference issues on the 800
MHz band, and faults the FCC for putting the carrier there is the first
place. "[The FCC] put all of us in the same spectrum, so we bang around
against each other. They have to fix it," says Donahue.

Some argue that Nextel's acquisition of coveted contiguous spectrum
may produce lower capital spending over time. Others say the spectrum
swap will add further stress to Nextel's cash flow profile.

Grover issued a "sell" rating on Nextel late last year because of its
balance sheet, competition from push to talk rivals and drawbacks that go
with being the fifth biggest national operator.

"Even though its customer base has been loyal in the past, Nextel
market position is at risk," Grover says.

From Donahue's perspective, Nextel's balance sheet has "never been in
better shape." He also anticipates that 2003 will be the company's best
year ever, even with the potentially disruptive impact of wireless number
portability, which is set to take effect in November.

"I really think that Nextel is pulling away from the rest of the industry," he
says. "We really have something very different and very special, and we
know exactly where we're going with it."

http://www.americasnetwork.com/americasnetwork/article/articleDetail.jsp?id=48802&pageID=2

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