Subject: [NEXTEL-1] Solomon Smith Barney on ALLTELL's Touch2Talk

From: Marcelrf <[email-masked]>
Date: Mon, 29 Mar 2004 15:48:17 -0500

ALLTEL - Favorable Market Test of Touch2Talk, Which Competes against
Nextel’s Push-To-Talk Service

Implication - Our conclusion is that ALLTEL’s T2T service powered by
Kodiak has the potential to offer meaningful competition within the
push-to-talk market. We do not claim our test to be exhaustive or
scientific as it was performed over a single day in a single market
rather than over multiple days or weeks, but we were pleased with the
ease of use, voice quality, and speed of volley. Call setup was about
2-3 seconds regardless if we made a local T2T call or long distance to a
different market, and the call volley was very robust.

We found the consistency and reliability of the service to outpace our
tests of the packet based solutions that were commercially rolled out or
displayed at trade shows. We recognize the need for ALLTEL to make a
wider variety of handsets available over the single handset offered
today. More handsets are supposed to be available on CDMA before
year-end and Orange, which offers a GSM version of the service
in Europe, has an ambitious goal of 12 devices by year-end. Bottom-line,
keep an eye on the development of this solution for AT and the prospect
for others to adopt the product with 2 national carriers currently
trialing the product.

Details - We had an opportunity to test the commercial Touch2Talk
service in Charlotte, North Carolina. The company is offering a Kyocera
3250 color phone that we found to work well with respect to voice
quality. The application did take about a minute to initialize after we
turned on the phone. Importantly, on-network T2T sessions (both local
and long distance) worked well, and we liked the call presence
information. Menus were easy to understand, and the ability to use
standard 10-digit phone numbers to use the T2T feature provided easy
user-entry and on-the-fly usage.

The only part of the service that may need some fine-tuning was the
ability to call phones off of the ALLTEL network and onto a roaming
network. Currently, a T2T session may only be originated from a customer
that is on-network, but the call can be sent to a user that is either
on- or off-network. The roaming phones did take extra time to initialize
and log onto the system. Once the roaming phone was able to log into the
network (shown by an icon on the phone’s display), T2T sessions from the
on-network phone to the off-network phone worked in similar fashion to
the on-network sessions. As this feature is fine-tuned with ALLTEL’s
roaming partners, the ability to deliver T2T calls off-network should
improve the coverage footprint. Clearly, a majority of PTT sessions are
local or regional in nature, rather than national. Also, we understand a
version upgrade is in the works that would allow roaming phones to even
originate T2T sessions that would further increase the product’s
competitive position.

Currently, we believe 2 carriers may be trialing the Kodiak solution,
including Cingular. With time to mature the offering, we can see this
service offering viable competition against Nextel. Importantly,
Alltel's service, which uses Kodiak's circuit-switched application,
would benefit by added handset variety and adoption by other national
carriers that would offer a greater network effect. We do expect more
phones to become available during ’04. Also, we would expect the
off-network call setup to improve as the company has more time to work
on compatibility issues with its roaming partners. Roaming phones in our
test were on the Verizon Wireless network. At the publication of this
report, we did not try the group T2T feature, but did have an
opportunity to review the setup of groups that was very intuitive.

The most controversial part of the solution is the use of an entire
voice circuit, but this is the secret sauce that makes the T2T session
both reliable and resistant to the latency problems found on the
packet-based solutions. The Kodiak solution takes up a full voice
channel and keeps the circuit open for a time set by the carrier of
between 10-30 seconds to maximize the volley experience for users. Yes,
the solution from a capacity standpoint is less efficient than Nextel.
Our response based on our understanding is – So What? The chatty nature
of T2T service even after the incremental hang time of the service
should still average in length an interval significantly shorter than a
typical voice call. In addition, the use of a circuit channel enables
off-network roaming that we believe can significantly expand coverage
beyond the offering carrier’s borders. We believe carriers that can
charge extra for either the T2T application or usage can earn an
incremental return on the voice minutes and take share of customers that
proven to have higher usage and ARPU characteristics.

For ALLTEL, we believe this product can add incremental revenue growth
opportunities. ALLTEL offers three T2T plans that can be added to a
Freedom Plan. The $5 per month entry-plan includes 100 T2T minutes
between 2 parties plus 50 T2T minutes of group calling. The $10 per
month mid-level plan includes 500 T2T minutes between 2 parties plus 100
T2T minutes of group calling. ALLTEL also offers a $20 per month plan
that includes unlimited T2T plan between 2 parties plus 100 minutes of
group calling.

For Nextel, the prospect of PTT competition is not new, and we do
believe marketing, at which Nextel excels, will remain a critical
component to the company's future growth. We believe our forecasts
reflects growing competition with time, and would continue to look for a
better entry point into the stock as we expect a seasonally slower 1Q
and do not believe the pending investment cost in spectrum/network are
fully factored into the stock. We maintain our Hold (2S) rating and $30
target price on NXTL.