Subject: [NEXTEL-1] Nextel's Success Comes From SMR Roots

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Date: Mon, 02 Dec 2002 12:40:05 -0500

Nextel's Success Comes From SMR Roots
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Nextel's Success Comes From SMR Roots

By Sue Marek
December 2, 2002

Wireless Week
© 2002, Reed Business Information, a division of Reed Elsevier Inc. All Rights Reserved.

After a decade of financial and technological ups and downs, Nextel Communications has emerged as one of the leading nationwide providers of wireless services with a stronghold in the enterprise market and the highest average revenue per user in the industry. On the eve of the 10-year anniversary of Nextel's Direct Connect service,
Wireless Week Senior Editor Sue Marek spoke with Morgan O'Brien, vice chairman of Nextel Communications and pioneer of the Direct Connect service.

Wireless Week:
How did the concept of Direct Connect develop?

Morgan O'Brien:
In 1987 and 1988, when we were still known as Fleet Call, we had started to have some success at consolidating the industry in the top markets. But we got concerned that the technology we were using, which was analog and 20 years old, was not going to be able to stand up to the competitive introduction of digital services on the cellular side. And we foresaw a world much like the world we are living in today in which major wireless companies with digital technologies would be able to provide increasingly less expensive airtime minutes. We realized if we stayed with the old technology, we would never have survived competitively.

We looked around and talked to a bunch of vendors and ultimately we signed a contract with Motorola. It was very much Motorola leading us through the choices that we would have and coming up with what is our product today–a combination of Direct Connect, interconnect, two-way messaging and digital.

It was always our plan to stay with our core customers–our business customers who wanted the push-to-talk capability. But we decided to combine in a single handset many different types of functionality and that would be our competitive edge.

WW:
What have been some of the challenges in Nextel's 10-year history of Direct Connect?

O'Brien:
By far the biggest challenge was to be the new kid on the block. We sort of backed into our position in the marketplace. The FCC didn't sit down and invent enhanced SMR. We took on the concept and rearranged it and went to the FCC and got their permission. It made it much more difficult for us because we had to stitch together frequencies that were operated by thousands of different business owners. For us to get a spectrum position sufficient enough to compete with the other guys required 10 years of acquisitions.

Also, with Motorola we had to develop a proprietary technology and we had to go through the pain of different generations of the technology. I think we have been terrifically successful doing so, but it wasn't without pain and risk.

We also had to educate the market to the benefits of push to talk. It's not intuitive at all. You have to be demonstrated it and see it and use it to understand the benefits. When you're introducing color TV, it's very easy to explain the concept of moving from black and white to color. But if you're comparing a mobile device that has Direct Connect with one that doesn't, it's not as evident.

WW:
What role did Craig McCaw play in Nextel?

O'Brien:
The company was started in 1987 and Craig's investment was in 1995 so we were around a long time before Craig was our investor or even our friend. Craig was our opponent in the early days because he was running McCaw Cellular.

Around 1994 it became apparent that the first generation of our technology, which was called MIRS, was going to need a pretty significant overhaul and despite the best efforts of Motorola and Nextel engineers, it wasn't performing the way we wanted it to. While that was unfolding our whole on-again, off-again relationship with MCI as an investor unfolded as well. When MCI pulled out of their investment citing our technology, the stock market became very grouchy. We were in crisis mode. Into that crisis stepped Craig McCaw.

The way I portrayed it to our board at the time was that there was really only one person that I knew of who had the ability to see why Direct Connect could survive in a cellular world and the money to back up that perception. We were very lucky to have him. He facilitated the rebirth of Nextel.

WW:
You have been at the forefront of Nextel's rebanding efforts. How you respond to critics of that plan?

O'Brien:
What I say is that anybody who studies the problem–and I have studied the problem for over two years–understands that this is a big problem and that it's getting worse. What it comes down to is an irreconcilable technology difference between the way public safety uses its frequencies to provide services and the way CMRS providers use digital to provide services. We're saying that there's a problem, it's getting worse and we definitely couldn't sleep at night if we thought we hadn't done everything we could to try to fix the problem long term. After many months of studying this we came out with a white paper about a year ago. We know that what we propose will cause a lot of work, but we can't think of another way to fix the problem. We think something must be done and we are offering $500 million to fix the problem. We have not flinched from that number because it is going to be very expensive to do this. But in the end, there are numerous benefits.

WW:
Do you think there's going to be a lot of consolidation in the wireless industry?

O'Brien:
I think there are tremendous economies of scales in the wireless business. I have always said that there won't be fewer than three and there won't be more than five nationwide wireless providers. The FCC wouldn't want fewer than three and the market won't be able to support long-term more than five. Where will Nextel end up? I don't have a clue. But if you're asking how I would vote if the topic came up here, I would vote to stand by ourselves. I think of us as in a different place and in some ways a different business than the others.

WW:
Are you concerned about the Direct-Connect-like services that other carriers are talking about introducing?

O'Brien:
When we first introduced this concept in 1993, if you had told me that we would have until 2002 all to ourselves, I would have said that was wildly optimistic. I think, knowing what I know about next-generation plans, it will be a very long time before a product that looks and feels like ours and is a true competitor to ours will be out there.

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