Subject: [NEXTEL-1] Re: Fortune Mag: Guarding Nextel's Niche

From: [email-masked]
Date: Tue, 16 Sep 2003 11:02:18 -0400

Guarding Nextel's Niche

Blue-collar workers swear by the mobile-phone small fry. Now, with 
competition looming, CEO Donahue needs to keep them happy while 
hooking big business.

FORTUNE
Monday, September 15, 2003 
By Christine Y. Chen 

A little before 4 p.m. on Aug. 14, Nasdaq CIO Steve Randich climbed 
into his Jeep Wrangler in downtown Manhattan. He needed to visit the 
market's data center outside the city and wanted to beat rush-hour 
traffic. As Randich wound his way up the island, an employee's voice 
sounded from the speaker of one of Randich's three cellphones: 
Nasdaq's Connecticut data center had gone out. Looking up, the CIO 
saw the traffic lights in front of him go out too. The blackout of 
2003 had begun. 

Randich pulled over and grabbed the Nextel phone that had broadcast 
the news. He spent the next few hours using the phone's walkie-
talkie function, issuing quick orders to far-flung workers to make 
sure Nasdaq kept functioning. Neither of his other phones worked: 
The stampede of users trying to make calls had clogged their 
networks. What would Randich have done without the two-way digital 
radio service? "I don't even want to think about it," he says. "It 
would have been pretty bad." 

Major blackouts can be major headaches for people like Randich, but 
for Nextel Communications such problems mean opportunity. Long the 
mobile service of choice for construction workers and cabbies, who 
rely on Nextel's Direct Connect-a walkie-talkie service that allows 
immediate contact among multiple users at the push of a button-
Nextel is now pushing hard into the white-collar world. Over the 
past two years it has found customers in companies and public 
agencies worried about terrorism, disasters, floods, hackers, or any 
other event that can disrupt business. And it has redoubled efforts 
to soup up its phones and service even further (more on that later). 

Nextel must move fast because giant rivals are closing in on its 
niche. In the wireless world, where competitors differentiate 
themselves by having the cheapest package of minutes or the coolest 
camera phone, Nextel up to now has been able to use its technology 
to stand apart. The company ranks fifth among the six national 
mobile-phone services, with 11.7 million users, compared with 34.6 
million for the market leader, Verizon Wireless. But by financial 
measures, Nextel excels. Its business users-they make up 90% of its 
customers-spend on average $69 a month, compared with the industry's 
$54 a month. They're more loyal too. The company's churn rate-a 
measure of how many customers defect to other cellphone companies-
stands at 1.6% a month, compared with Sprint PCS's 2.9%. Most 
carriers worry that churn is going to get worse this fall when 
federal rules will allow consumers to keep their cellphone numbers 
when switching carriers. Nextel should be shielded: The company 
sells to big businesses that buy in bulk, and more important, Nextel 
users can Direct Connect only with each other, locking them into the 
service. 

Die-hard fans and hard-to-switch offerings have paid off handsomely. 
Over the past three years, as many other wireless companies have 
struggled to grow, Nextel's revenues have more than doubled, to an 
estimated $9.6 billion this year. The company lost $2.9 billion in 
2001; this year it should earn $1.2 million. Nextel has also managed 
to retire or restructure $4.3 billion in debt in the past two years. 
Wall Street has rewarded Nextel's niche approach. While S&P's index 
of wireless services companies has grown 95%, Nextel's stock has 
increased 175% to a recent $20. 

But now Nextel's peers are invading its turf. For the past few years 
most wireless providers have looked on in envy at Nextel's push-to-
talk. The technology, while intriguing, was difficult to replicate. 
Nextel's service is built around Motorola's iDen network, a digital 
voice and data technology that uses advanced compression algorithms 
to allow walkie-talkie service. Nextel also incorporates radio 
dispatch technology, which can easily handle short-burst 
communications across thousands of miles. Many wireless executives 
complained that trying to duplicate push-to-talk on cellular 
networks was too difficult. It had too much latency-the time between 
speaking on one end and hearing on the other. Businesses would not 
settle for having to wait a few seconds between sentences for a 
herky-jerky conversation. 

Nextel's increasing success overcame their reluctance. In mid-
August, Verizon Wireless introduced a push-to-talk feature it calls, 
fittingly, Push to Talk. Sprint PCS says it will introduce a walkie-
talkie function before the end of the year, and AT&T Wireless and 
Cingular both say they'll have one by the beginning of 2004. All 
those companies claim they can beat Nextel at its own game-because 
they run on larger networks, because they offer more choices in 
handsets, and because they're able to choose among multiple vendors 
for equipment while Nextel is married to Motorola. "For white-collar 
and maybe even consumer markets, the other carriers can offer a more 
compelling solution than what Nextel can provide," says Phil 
Marshall, a wireless analyst at research firm Yankee Group. 

But then again, Nextel is used to being the undderdog. The company 
started as a two-way-paging outfit whose service was used mostly by 
truckers. In 1995 cellphone pioneer Craig McCaw invested $1 billion 
in the ailing company and turned it into a wireless and walkie-
talkie hybrid. Direct Connect worked only regionally at first (since 
July it's been offered nationwide), but that was enough for Nextel 
to build a following among companies with dispatch-service needs. 

As Nextel expanded, however, it piled on debt. By the end of 2001 
the balance sheet showed $16 billion in debt. Few paid it any 
attention during the boom. But when the stock market plummeted in 
spring 2000, Nextel crashed as well, dropping from a high of $80 to 
a mere $3 in July 2002. 

CEO Tim Donahue, who rose to the position in 1999 after serving as 
president and COO, knew he had to make big changes. As the sixth 
child of the 12 in his Irish Catholic family, Donahue was used to 
competing for attention-and he needed it now from Wall Street. To 
start, he sold off the company's majority stake in its international 
business, NII Holdings, which carried $2.7 billion in debt (it 
promptly fell into Chapter 11 bankruptcy). 

Then he began streamlining. Instead of finding a way to manage 
Nextel's 14 billing systems, he outsourced the project to 
Chesterfield, Mo., IT-services firm Amdocs. Instead of building cell 
sites, he found contractors that could do it more cheaply-saving 
Nextel an estimated $90 million over the next two years. And he 
reduced the cost of acquiring customers by cutting out middlemen. In 
the past 2 1/2 years Donahue has opened 600 Nextel stores around the 
country and expanded Internet sales. Two years ago only 9% of the 
company's business came from those low-cost channels; now it's 29%. 

To build revenues Donahue urged his salespeople to make themselves 
indispensable to customers. First, he told them to push deeper into 
companies; 80% of FORTUNE 500 companies use Nextel, but far from all 
employees inside those firms have the phones. He also reorganized 
Nextel into groups to target specific segments, like government, 
transportation, and utilities. Employees were to work on developing 
useful tools or partnering with other companies to create 
technologies for those specific industries. 

Many of those new applications are just now coming to light. Roto-
Rooter in Cincinnati has been a Nextel customer for nearly a decade. 
For most of that time the nation's largest plumbing company used 
Nextel devices for their walkie-talkie function, dispatching 
plumbers to mend busted pipes or unclog drains. Nextel brainstormed 
on what other devices plumbers could use and found an answer. It 
partnered with GM, GPS software maker Gearworks, and BlackBerry 
maker Research In Motion (RIM) to develop a PDA with voice, data, 
walkie-talkie, and satellite-positioning capabilities, along with 
the ability to track Roto-Rooter's trucks. More than half of the 
plumbing company's 3,600 employees now use the phones as digital 
assistants. Roto-Rooter CEO Stephen Poppe says that by the end of 
this year his workers will be able to bill and process credit card 
payments on the spot with Nextel devices. 

The plumber's tool is snaking its way into the white-collar world 
too. For the past nine months some 2,500 employees at IBM Research's 
facilities in Yorktown, N.Y., have been testing a Nextel system that 
allows handsets to use both cellular and Wi-Fi networks, indoors and 
out. That enables employees to keep talking even while hopping in 
elevators or running between buildings, and saves IBM money by 
keeping on-campus calls riding on its corporate Wi-Fi system. To 
create the service, Nextel teamed with a startup in Seattle called 
RadioFrame, which had developed essential antenna technology. (It's 
no accident that the companies ended up together: Craig McCaw is a 
major investor in both; RadioFrame's CEO Jeff Brown and founder Rob 
Mechaley are, like Donahue, veterans of McCaw Cellular.) Using the 
system, IBM has been able to replace the pagers and walkie-talkies 
its employees strapped to their belts. And it's using the technology 
to give visitors easy access to the web, says IBM Research's 
director of IT, Albert Schneider, who has been a personal user of 
Nextel for more than three years. 

The Nextel/RadioFrame creation isn't just for IBM employees. The 
researchers at the labs are trying to figure out how IBM might use 
the service for its customers. The company is now working to make an 
even more powerful handset by combining Big Blue's own products and 
software-think, say, instant messaging and calendar programs-with 
Nextel's network. 

For Tim Donahue, the burgeoning businesses offer not just a chance 
for new revenue in the face of competition, but a new way to 
position his firm: "No one's given us any credit," he 
says. "Everyone thinks of us as a niche company for cab drivers and 
construction workers." 

Not that Donahue is giving up on his old customers. He wants to keep 
them happy as well. The other area of major growth for Nextel is the 
government sector. Some 10% of Nextel's users are already government 
workers, and Donahue expects that part of the business to grow by at 
least 20% this year. Today, that business is largely centered around 
emergency-service providers. Employees in the New York City police 
department, the Denver police department, and the Charlottesville, 
Va., fire department are typical of those who swear by Nextel. The 
company frequently donates phones and network equipment during 
emergencies, as it did on Sept. 11, 2001, and after the blackout. It 
doesn't usually take long before many users in such crises become 
paying customers. "Once people get hooked, they're hard-pressed to 
give [the phones] back," says Donahue. 

Now Nextel is expanding to the feds. First the FBI joined Nextel, 
then the DEA and the CIA, and most recently the staff at the U.S. 
Senate. "It became almost viral in nature," says Donahue, whose 
voice rises excitedly whenever he talks about public safety. "This 
country desperately needs a nationwide network that will serve as a 
communications system in case of national emergencies." It's not 
surprising that he has commercial motivations too. "It isn't 
necessary to study it for 24 years. It is here, it is operating, it 
is available today, and it's called Nextel." 

There's a reason for impatience. To contend with his giant rivals, 
Donahue needs to keep finding ways to stay different. Nextel also 
has to fend off startups like Fastmobile, which offers a competing 
service it calls voice instant messaging. Although Fastmobile's 
target market is consumers, not businesses, it's still a 
threat. "The push-to-talk gets more hype than it probably deserves," 
says Fastmobile co-founder and vice president Harry Eschel. "It's 
useful in terms of how folks stay in touch, but it's not 
everything." 

Perhaps not. But then again, Nextel isn't really trying to be 
everything. "I think that five of the carriers are competing on 
price and one on product and services," says Donahue. "I still like 
to view us as a small, aggressive, entrepreneurial company battling 
deep-pocket phone companies." They can come on his turf, but he 
doesn't plan to enter theirs. Don't look for Nextel to start hawking 
colorful phone plates or funky ring tones for the 'tween down the 
street. But when she starts a citywide lemonade-delivery service, 
well, Donahue might just come calling. 

http://www.fortune.com/fortune/techatwork/articles/1,15704,485831,00.html

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