In this issue:

• Why is the Value of Nextel So Low?
• Stage Notes
• Behind the Curtain

Headline

Why is the Value of Nextel So Low?

Did Sprint really run it into the ground, or was it inevitable?

After Sprint bought Nextel for some $35B, did they then proceed to devalue this once-hot property down to the current prices which are pegged at pennies on the dollar? The prevailing wisdom suggests that poor management at Sprint, shoddy technical assimilation, and terrible marketing all played a role in killing the value of Nextel, but the reality is far from what people assume: Nextel was a fast train running out of rails before Sprint bought it, and it has simply continued on to the end of the track.

The real fundamental problem with Nextel is that it is using iDEN, a dead-end technology. iDEN is a one-vendor technology that did great things in the 90s, using two-way radio spectrum to launch a cellular phone service that STILL retained the utility of a two-way walkie-talkie. But with only one vendor developing the technology, and only one vendor selling the equipment, progress was slow and prices were high. Nextel made up for it because it was the only kid on the block to offer that fantastic walkie-talkie service that was the life blood of so many blue-collar workgroups and teams.

Motorola squeezed what it could out of the 2G iDEN technology, but never did the development necessary to invent a 3G version of iDEN. Thus, they could offer slight evolutionary enhancements, but iDEN will never make the leap to compete with 3G technologies such as EV-DO or W-CDMA HSPA. This point stands in voice spectral efficiency, and also in data speeds, which are increasingly important. So this is one train on running out of rails.

Another problem is that Nextel originally was a two-way radio service that added phone functions. It’s spectral neighbors, that is, the services that used bordering swathes of FCC-licensed spectrum were other two-way radio services, which in many regions consisted of EMS and first responder personnel. Unfortunately for Nextel, even operating within its licenses, it often caused interference to police, ambulance, and fire brigade radio systems, causing a great deal of complaints officially registered at the FCC. Police, for example, would say that if their cruiser were near a Nextel antenna, they could not use their radios. This problem needed to be fixed, so a massive spectrum deal took place between Nextel and the FCC called the “Nextel Spectrum Swap”.

In late 2004, the deal for the Nextel Spectrum Swap was delivered to congress to become law (see my 2004 post here: http://www.techdirt.com/blog/wireless/articles/20040909/113903.shtml). The deal involved Nextel leaving the 800MHz spectrum it was using, and instead moving into a slice of the 1900MHz band, which is more commonly used by commercial cellular service in the USA. The benefits of the move for Nextel were clear: at 1900MHZ, there are far more suppliers of cellular handsets and equipment, and they would be free of their Motorola vendor-lock. The only challenge would be finding a way of maintaining the quality of their Push-to-talk (PTT) walkie-talkie service without their purpose-built iDEN platform – and doing so in time for the FCC deadlines to vacate the 800MHz band.

That’s where Qualcomm comes in. Qualcomm was a big supporter of Nextel moving to 1900, because in that band, Qualcomm could offer their proven CDMA solution. Qualcomm worked furiously with Nextel and Motorola to invent a high-quality, low-latency PTT service using CDMA, and came up with “Q-Chat”. Q-Chat is licensed exclusively to Nextel in the USA. Thus, Nextel had the spectrum, the almost-ready Q-Chat, and was poised to migrate their users to 1900 CDMA. But there were deadlines, and that is the second fast train running out of rails.

In effect, between the end-of-life iDEN network, and the need to vacate the 800MHz spectrum, Nextel was more of a fast train on a short set of rails, build on the deck of a large ship, which was sinking. And yes, it was just at this time that Nextel caught Sprint’s eye.

With their plan to migrate to CDMA, Nextel looked interesting to Sprint. Sprint already used the CDMA technology at 1900MHz. By buying Nextel, they could gain the brand cachet, the high ARPU subscribers, the greater scale, and the Q-Chat technology for their wider customer base. If you just ignore the part about runaway trains on sinking ships, this looks great.

After the M&A, Sprint tried to migrate Nextel users off of the iDEN technology, and off of the 800MHz bands, but the real kicker is that technology is never ready when promised, and always takes a little longer. Q-Chat wasn’t ready, high-quality PTT on CDMA wasn’t available yet. Dual-band phones that could roam from the shrinking iDEN frequencies to the ample 1900MHz spectrum weren’t available when needed, and so iDEN customers started getting squeezed into smaller 800MHz channels, as required by the FCC in the Nextel Spectrum Swap. Those iDEN subscribers noticed their service deteriorating, more dropped calls, slower response times, etc. – and they noticed it coincided with the Sprint purchase, and naturally blamed it on Sprint. Ironically, Sprint isn’t “harming” Nextel…it’s the only thing out there saving it. It basically offered Nextel a life raft, and that raft is now taking on water, too!

So, I suppose I’ll end the article there. You get the gist. It’s not that Sprint has run Nextel into the ground, it’s just that it overpaid in the first place. Nextel was polished up, looked great on paper, but had a bad future ahead when Sprint stepped in. Then the inevitable happened. If I were a Sprint investor, this story wouldn’t make me any happier. Maybe it makes little difference whether Sprint management overpaid for Nextel or ran it into the ground. Either way, it does little to change the lost shareholder value, or the price of Nextel today.

by Derek Kerton
Principal Analyst, The Kerton Group

Stage Notes

Derek will be speaking at CTIA on the topic of LBS on Sept 11, managing a private meeting of early-stage mobile investors on Sept 9, and available off and on throughout CTIA Wireless & IT Tradeshow in San Francisco Sept 9-12. Email us for an appointment.

About Us

The Kerton Group provides insightful, expert consulting in wireless telecommunications to companies across the entire value chain and around the world. Our analysts' deep, vertical knowledge of the wireless industry delivers a complete understanding of the technology, market, and business issues our clients face today and in the future. The Kerton Group's expertise is internationally recognized in widely distributed industry reports, articles, newsletters, and frequent quotes in national press and industry publications. Our services include strategy, business development, research, marketing, product development, due diligence and technology transfer services. We also run the SPIF, a private investment forum for telecom investors. Our projects, clients and publications are detailed online: www.kertongroup.com.

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