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Spotlight goes on Nextel

By Anitha Reddy
The Washington Post

WASHINGTON — Nextel Communications Inc. has in the past had merger talks with WorldCom Inc., AT&T Wireless Services Inc. and other potential partners, but they led nowhere.

Now the question is: Will Cingular Wireless LLC’s $41 billion bid for AT&T Wireless, a deal that would result in the nation’s largest cell phone company, force Reston, Va.-based Nextel into a marriage with another carrier?

Susan Kalla, an analyst for Friedman, Billings, Ramsey Group Inc., says yes. She gives Nextel at most two years before it succumbs to a merger or acquisition. Combinations like Cingular Wireless and AT&T Wireless will achieve enough cost savings to “put smaller players like Nextel at a competitive disadvantage,” Kalla said. “Nextel will be forced to do some consolidation.”

Viktor Shvets, an analyst for Deutsche Bank, says not necessarily. “When niches come under pressure there are two things you can do,” he said. “You can either try to become better and better at what you do, or you can bulk up and become a much larger carrier.”

Shvets agreed that Nextel’s target market — businesses — will inevitably become more competitive and less profitable. But he said the company can survive as a stand-alone player. “The niche itself will not disappear; it will just splinter into more niches,” he said.

Audrey Schaefer, a Nextel spokeswoman, declined to comment on future strategy. “Of the six national players, five of them basically compete on price,” she said. “Nextel has taken a different avenue.”

Nextel’s trademark service has been its walkie-talkie, which allows users to reach people by pushing a button to talk instead of dialing phone numbers. The feature first attracted construction workers and truck drivers, but eventually became popular among professionals who need to be in constant communication with customers and co-workers. Over 90 percent of Nextel’s 12.3 million customers are businesspeople, according to the company.

That has enabled it to avoid many of the price wars that other wireless carriers have used to lure customers. As a result, Nextel has the highest average revenue per customer per month in the industry, $71, and the lowest customer turnover rate, 1.4 percent.

But Verizon Communications Inc. and Sprint Corp. launched their own “push to talk” services last year, to compete with Nextel. The new services are suffering from technical difficulties but analysts said the two carriers could eventually rival Nextel in price and quality.

Moreover, the next round of competition among wireless carriers will focus on high-speed Internet services that will transform cell phones into the next laptop, an area where Nextel does not have a clear advantage, analysts said.

Analysts said Nextel could pursue two strategies. It could become a specialty player, offering businesses increasingly sophisticated wireless services, such as remote access to company databases or live video feeds over its networks. Or it could evolve into a broad wireless company, possibly by merging with Sprint.

Shvets said Sprint is the best partner for Nextel because it has a strong customer base and is rapidly penetrating the business market. Sprint and Nextel also each own half of a higher-frequency spectrum, so a merger would give them more capacity to serve new customers. But the deal would also be messy, Shvets said, since Nextel would have to buy all of Sprint, not just its wireless unit.

Unlike regular cellular phone service, Nextel subscribers can use the walkie-talkie feature only to contact other Nextel subscribers. That makes it harder for individuals to switch services and can provide an incentive to sign up for people who want to talk to existing customers on the walkie-talkie service.

The company’s strategy has nurtured rapid growth.