Why Rivals Want Nextel's Number
Nextel Communications Inc. is almost always out of step with the wireless industry. The Reston (Va.) company was a wallflower during the boom years. But as rivals struggled in 2002, Nextel took off. Its unique cell phones, which double as walkie-talkies, are hugely popular in trucking, emergency services, construction, and other trades. Average revenue per user is tops in the industry. And it has been profitable since last year, unlike rivals such as Sprint PCS Group and AT&T Wireless Services Inc.
Now, the competition is out to take the No. 5 carrier down a peg. Sprint, AT&T, and Verizon Wireless all plan to launch competing walkie-talkie-like services by yearend. These three larger rivals say they'll leave Nextel's Direct Connect service in the dust by selling "push-to-talk" radio as part of a comprehensive suite of business services, including high-speed wireless Internet access for laptops. Scoffs Sprint PCS President Len Lauer: "Nextel is a one-trick pony."
Nextel CEO Tim Donahue vows the company will continue to best larger rivals: "It's surprising Mr. Lauer would take such a simplistic view of the company that has outperformed his on every metric." Donahue says Nextel focuses "on all fronts, not one." The company, he predicts, can maintain the edge it held in 2002, when revenue grew 24%, to $8.7 billion, and profits, boosted by investment gains, reached $1.7 billion. On Apr. 23, Nextel reported a higher-than-expected first-quarter profit of $208 million on sales of $2.4 billion. Nextel said it would meet or exceed estimates for the year.
The battle should be fierce, but the odds favor Nextel. The company holds a technological lead on its rivals, and is pushing the Direct Connect service into steady government contracts. It has cut $3.8 billion in debt, making a future $2 billion network upgrade more affordable. Most important, its $67-per-month average revenue per user leads the industry. Analyst Craig Mallitz of Legg Mason Wood Walker Inc. predicts that while Nextel's lead will likely narrow in coming years, it should maintain an edge.
Its technology is a prime reason. After years of development, Nextel's Direct Connect link between two phones can now be made in one second. That's at least four times faster than what competitors have achieved in field trials, a key in markets like emergency services. Rivals say they can catch up quickly, but analysts think it could take two years to reach Nextel's current standard. That should give Nextel time to take its technology to the next level. It has an exclusive deal with Qualcomm Inc. and Motorola Inc. that will allow its walkie-talkie service to operate over next-generation high-speed networks overseas, enabling transatlantic push-to-talk.
Nextel is reaching beyond its blue-collar base, too. Donahue thinks the walkie-talkie service may appeal to 18- to 24-year-old consumers. He's testing a youth-oriented marketing campaign in California with an Australian telecom marketer called Pipeline Holdings LLC. And Nextel is working to tap the homeland security market.
Nextel also is expanding its wireless data service. It's introducing 10 new data applications a month, including the @Road service, which helps fleet operators locate vehicles with a global positioning system. Only 20% of Nextel subscribers use wireless data, but those that do pay more than $90 on average.
While wireless customers often view service as a commodity and shop on price, many of Nextel's 10 million customers see service as essential. Roto-Rooter Services Co. in Cincinnati uses it to coordinate 1,700 plumbers nationwide. Its chief information officer, Stephen R. Poppe, says the typical plumbing job is completed online in 15 or 20 minutes faster because software on Nextel phones speeds billing.
With three big competitors at its heels, Nextel has a major fight ahead. No one will come through unscathed. But Nextel, which has shown unexpected tenacity, may continue to confound its rivals.
By Catherine Yang in Washington