Online Extra: Nextel: Defending a Juicy Niche

Though its successful walkie-talkie-like service will soon spawn copycats, the wireless carrier is busy extending its lead

By Cathy Yang

Nextel Communications (NXTL ) has always preferred to turn left while the rest of the industry marched right. As other cellular carriers chased the booming consumer market over the last few years, the Reston (Va.) outfit stuck to selling its unique walkie-talkie-like service to business users in industries such as trucking and construction.

Now that stubborn streak is paying off. While other carriers are killing each other with price wars in the consumer arena, Nextel reigns in its own cozy niche, scoring the industry's highest average revenue per subscriber and most loyal group of customers. Indeed, the wireless-service provider grabbed the coveted top spot in this year's BusinessWeek Info Tech 100 ranking.

"A long time ago, we staked out our ground and didn't get suckered into less-profitable areas of business," says CEO Tim Donahue. On Wall Street, Nextel's insistence on bottom-line results is a hit. Shares of the two big publicly traded U.S. carriers -- AT&T Wireless (AWE ) and Sprint PCS (PCS ) -- fell by as much as 75% in 2002. By contrast, Nextel's stock, which now trades around $14, rose by 5% during 2002.


  Moreover, during one of telecom's toughest years, the nation's fifth-largest wireless carrier scored its first profit ever, $1.66 billion, in 2002. It collects an average of $71 in revenues per subscriber per month, compared with $50 at other carriers -- and its 2.1% monthly customer-defection rate is the lowest in an industry that averages a 2.6% monthly churn.

Nextel's party, however, may soon get crashed. Rivals have caught wind of its winning formula. AT&T Wireless, Verizon Wireless, and Sprint PCS plan to introduce competing walkie-talkie-like services later in 2003, as they refocus on deep-pocketed corporate customers to help them climb out of the morass of their consumer businesses. "They have Nextel envy," says Roger Entner, wireless program manager at Yankee Group. "They're all gunning for it, and many a hound is a hare's death."

Of course, it will take time for the competition to materialize. Nextel has at least two years before others' technology catches up, says Legg Mason Wood Walker analyst Craig Mallitz. Nextel's decade-old Direct Connect phone, made by Motorola (MOT ), links users within a second at the push of a button. That's a convenience construction workers, salespeople, and many others will pay a premium for. Today, competing technologies involve at least a four-second delay to set up a call.


  Plus, as rival technologies are being developed, Nextel is fast expanding its Direct Connect product and network. On June 2, it launched nationwide Push-to-Talk, enabling users to hook up cross-country, instead of just regionally. And it continues to expand popular premium wireless-data applications, such as the @Road service, which helps truck-fleet operators locate vehicles through a global positioning satellite system.

Although only 20% of its 10.6 million subscribers use wireless data today, they pay more than $90 in revenues a month on average and defect at half the rate of other customers. By 2010, 5.5% of Nextel's revenues per user could come from wireless data, up from 1% today, says analyst Mallitz.

Nextel is also wooing new users among the white-collar workforce, government employees, and even young consumers. Government workers -- including first responders on the front line in homeland security -- are one of its fastest-growing sectors. And Nextel will decide later this year whether to pursue the 18- to 24-year-old market if its California and Nevada trials with Australian-based consumer marketing outfit Pipeline Holdings pan out. By hawking Nextel phones via surfer shops and music stores, such as Billabong and Wherehouse, Nextel is testing whether it's worth risking its business-oriented brand image to capture the potentially high-margin youth market.


  In the end, though, Nextel's biggest decision centers on whether to move to a next-generation network. While major rivals are well on their way to building faster third-generation networks based on the industry's latest standards, Nextel again is bucking the trend. It insists on sticking with its current network, based on Motorola's proprietary iDEN technology, until at least 2005 or until consumers ask for applications requiring that costly investment. "We're not seeing the demand now," says Nextel Chief Operating Officer Tom Kelly.

Most analysts agree with Nextel's go-slow strategy. And when the time finally comes for it to pursue a next-generation network, Nextel will be able to afford one, now that it has paid down $3.8 billion in debt as of this year's first quarter.

For Nextel, success means it's now in the industry's crosshairs. But with its healthy head start on a unique technology and a time-tested focus on the business market, this cellular player is likely to stay ahead of the yapping pack -- and that should pay off for Nextel investors.

Yang is a writer in BusinessWeek's Washington bureau

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