In the world of big-time telecom, the Baby Bells have been hogging the spotlight as they bulk up to compete against an onslaught of new technology -- and their arch-rivals, the cable companies. For competitors hovering outside the Bells' territory, that sends a stark message: Team up or get smashed. Sprint Corp. (FON ) and Nextel Communications Inc. (NXTL ) chose the former, announcing on Dec. 15 a $35 billion deal to merge into the third-largest wireless powerhouse. With a market capitalization of $70 billion, the new Reston (Va.)-based Sprint Nextel hopes to gain the girth it needs to go up against the two leading Bell-owned wireless giants -- Cingular and Verizon Wireless -- and the wherewithal to forge ahead into the broadband future. "This is about creating the next-generation communications company," says Sprint Chief Executive Gary D. Forsee, who will head the combination.
Indeed, the deal leaves Sprint Nextel poised to play a pivotal role in the coming convergence between traditional and wireless phones, Web access, and video services. As the Bells race against the cable operators to sell consumers everything from voice to data to video, both sides need wireless phone services to sweeten their bundle of offerings. The Bells already own their own wireless companies -- but cable companies don't. Sprint Nextel can provide a ready-made wireless offering for cable's four-fer pack. "The cable companies are clearly looking for a wireless play," says Nextel CEO Timothy M. Donahue, who will be chairman of the new company. "This [merged] company is going to be remarkably successful in attracting partners."
For the longer term, Sprint Nextel envisions a bolder course: Competing in its own right against the Bells and cable operators in the market for converged services. The two wireless carriers together own enough airwaves, stretching coast-to-coast, to offer voice, data, and even video over next-generation wireless broadband technology, such as the much-ballyhooed, upcoming WiMax standard.
That grand vision aside, the immediate driver for the deal is survival. Cingular, a joint venture between SBC Communications Inc. and BellSouth Corp., vaulted into the No. 1 spot in the wireless universe with 47 million subscribers after its October acquisition of AT&T Wireless. And Verizon Wireless' tagline -- "Can you hear me now?" -- echoes in competitors' ears as the No. 2 player hits 42 million users and growing. Sprint, a distant third with 20 million customers, and No. 5 Nextel, with 14.5 million, need each other to hold their own. While Sprint has local and long-distance businesses in addition to wireless, it doesn't have the scale to compete over the long haul with the Bells. And though Nextel has the wireless industry's highest margins, its focus on a unique niche -- push-to-talk service to business users -- is too narrow to sustain an independent company as the industry consolidates.
Together, Sprint Nextel will have 35 million customers, as well as business models that could mesh smoothly. Sprint, which will spin off its local phone business as part of the merger agreement, focuses on consumers, a complement to Nextel's business users. "They're yin and yang," says former Nextel CEO Daniel Akerson, now a managing director at the Carlyle Group. "They'll be the best, biggest, and baddest pure wireless play in the U.S." Precisely because Sprint and Nextel barely overlap, federal regulators are likely to give the deal the green light.
Each party in the new duo can help the other expand in new markets. Nextel, for instance, needs Sprint's innovative know-how in creating new wireless data applications in mobile music, video, and games to go after the youth consumer market with its Boost Mobile brand. Then, Sprint can expand in the business market by helping to bolster Nextel's attempt to equip corporate campuses with communications services. Sprint's long-distance networks, along with Nextel's wireless offering, give companies a more complete offering.
The deal also lets each company solve the other's technological headaches. Nextel uses a special wireless technology that no other carrier uses. Without Sprint, Nextel would have to build an entirely new network to offer customers e-mail and video services that zip along at speeds up to 300 kilobits per second. By piggybacking on Sprint's digital network, Nextel can save much of the $2 to $3 billion it would otherwise spend to build its own next-generation infrastructure, analysts say.
For Sprint, Nextel's appeal is a bigger chunk of the airwaves. Sprint's current spectrum isn't big enough to carry music downloads, video games, and other data-heavy services. The combined company's bandwidth will rival those of Cingular and Verizon Wireless. "Getting the spectrum was essential for Sprint," says Phil Cusick, wireless-services analyst for Bear, Stearns & Co. (BSC ). What makes the deal especially sweet: Nextel has struck an agreement with federal regulators to swap its old spectrum for new airwaves better suited to faster broadband speeds and better penetration inside buildings. Faster broadband can deliver consumers more video gaming and richer content wirelessly. And better reception in buildings will position Sprint Nextel to sell businesses a new type of go-anywhere wireless phones that workers can use reliably either at their desks or on the go.
In consumer markets, Sprint Nextel could also thrive as a wireless wholesaler for the cable giants. Cable companies, with digital lines able to reach 96% of U.S. households, are ahead for now in the new race to offer converged telecom and entertainment services. The Bells are just starting to build ultra-fast fiber networks to homes and neighborhoods to offer voice, data, and video. But the Bells have wireless to grab back the lead -- and cable doesn't. "Cable executives are petrified," says one media investment banker. That's why Comcast (CMCSA ), Time Warner Cable (TWX ), Cox, Charter, and BrightHouse Networks (Advance/Newhouse's cable holdings), have formed a consortium to assess their wireless options. For now, they'll likely buy wireless services from a partner rather than purchase a wireless operator outright. That's a ripe opportunity for Sprint Nextel.
Eventually, the new company could move beyond a sidekick role to the cable industry. In the longer term, Sprint Nextel's ownership of another slice of spectrum, allocated specifically for wireless broadband, could make it a full-fledged competitor to the Bells and cable. The merged company could be among the first to blanket the country -- reaching 85% of the population in the nation's top markets -- with this untapped spectrum. In a few years, Sprint Nextel could decide to deploy a variation of WiMax technology in those bands to offer a suite of data, voice-over-Internet, and even video services -- creating a new broadband powerhouse.
Realizing that vision will be expensive, though, and it will require rapid adoption of new technology. By merging, Sprint and Nextel have bought themselves time, and perhaps enough scale to play with the big boys -- for now. But in a telecom world ruled by the Bells, scrappy competitors like Sprint and Nextel remain underdogs. Alone or together, they still face a tough fight.
By Roger O. Crockett in Chicago and Catherine Yang in Washington, with Tom Lowry in New York