Competitive Intelligence

Sprint-Nextel: Tech Challenges Ahead - But CDMA & Qualcomm are the Biggest Winners

Merger Madness continues this week, following the IBM/Lenovo deal, then Oracle/PeopleSoft, with Sprint and Nextel agreeing to a merger-of-equals that reinforces the third largest mobile telecom provider in the U.S., with a combined 39 million customers - well behind Cingular's 47 million, but within striking distance of Verizon's 42 million - setting the stage for a battle for growth that could pit smaller operators like GSM-based T-Mobile against other CDMA companies such as AllTel in continued consolidation.

Two months after Cingular Wireless announced it would buy AT&T Wireless, Sprint makes a bid for Nextel in a stock and cash deal valued at $35 billion. Sprint CEO Gary Forsee will become CEO of the new company, Nextel CEO Tim Donahue will become chairman, and the company will set up headquarters in Sprint’s Kansas offices. "There is a market that we compete in today that has two very significant, larger players. As we looked at requirements to compete, we liked our prospects by ourselves but thought our prospects together would allow us an even playing field into the future," Forsee told the news conference in New York. Nextel has greater monthly revenue per customer and a lower subscriber cancellation rate than Sprint, but Sprint is ahead of Nextel in developing advanced services and has greater spectrum capacity to support growth.

But, the challenges in this deal come down to the divergent technologies - Nextel's proprietary (and Motorola-dependent) iDEN network is incompatible with Sprint's nationwide CDMA network, so that'll cost billions to upgrade. But it'll help Sprint shed its wireline business and refocus itself on a wireless and business services strategy that appears to be the wisest niche move going forward.

Why'd they do it? Because wireless companies will be partnering with everyone in 2005 — wireline, content, hardware and software companies — and the best opportunities and technologies will go to the ones with the largest market share. So, there's a lot of consolidation potential in the industry due to the huge gravitational pull of Cingular and Verizon.

But alongside the tech challenges, can Sprint-Nextel integrate two different cultures (the product of various consolidations in the past) to compete with Verizon and Cingular? A bigger question exists on whether size really matters anymore? To Sprint, size will matter a lot since it can extract efficiency from consolidation. To Nextel, with an evolving technology gap in radio spectrum, this would accelerate its already successful consumer programs of cell phone as walkie-talkie and an appeal to the youth market. So the synergies are there, but the cultural issues should not be underestimated - 80 percent of M&A deal-failure is due to cultural incompatibliites.

Still, Slate.com's Daniel Gross views this, like the other few big M&A deals announced this week, as mostly defensive:

Sprint and Nextel are responding to the telecom industry's troubles. Even after the bankruptcies of WorldCom and Global Crossing, and the consolidation of AT&T Wireless and Cingular, there are still too many companies fighting over the same customers. The fixed-line business is profitable but wasting. Cell phone companies bent on growth must engage in fierce promotional cost-cutting or spend billions to convince people they need phones that can take photos and play music. Sprint and Nextel are hoping to find an easier path to greater profits: cost-cutting. In their merger announcement, Sprint and Nextel said that by doing everything from using fewer cell sites to slashing jobs, they could save more than $12 billion.

The Red Herring, on the other hand, found it a big win-win for both companies... but an even bigger headache for competitor Verizon:

It came as no surprise, then, that Verizon was alarmed. Yesterday, a day before Sprint and Nextel announced the creation of “America’s premier communications company,” the Street was buzzing with rumors that UK’s Vodafone, which owns 45 percent of Verizon, had given the go-ahead for a takeover of Sprint, speculation that was later denied by the companies. But analysts believe that Verizon is worried. “I think Verizon finds itself like the ham in a ham sandwich,” said Lisa Pierce of Forrester Research. “The new company could close the gap really quickly.”

Sprint Nextel has all the makings of an enterprise wireless powerhouse. Nextel provides the business clout: 80 percent of its subscribers are from the enterprise sector. Albert Lin, an analyst at American Technology Research, said that with more businesses opting for bundled wireless and wireline services, the Sprint-Nextel merger would be a significant force as Sprint offers fixed-line and wireless services as part of the same package.

Plus, Sprint gains a focused, vertical sales force that Nextel has arranged along industry lines. In addition to knowing the Nextel offerings, sales team members also understand the issues facing specific vertical markets, the tools they currently use and their data needs and has produced the industry's highest penetration of both, data and enterprise users. But Nextel's superb customer service is something altogether different from Sprint's rep, where a 40-minute wait to talk to a human is not uncommon. But the hidden gem in this deal is, Nextel avoids having to upgrade its network to new bandwidth standards for data services - a use of capital that can now be better used to consolidate the networks to CDMA.

Still, every one of Nextel's handsets will have to be replaced - but that's something the company would have to do anyway in upgrading its network to higher data rates. The biggest challenge in the upgrade will be to preserve the popular Direct Connect push-to-talk feature, a very sticky differentiator for Nextel. It's a feature people don't want to give up and must continue to be supported through the transition if the combination is to be successful.

And don't think Motorola is about to let its biggest customer off the hook that easily. A new PTT technology, called Next Generation Dispatch, is interoperable with CDMA networks, including CDMA 1xRTT and EV-DO data networks, Motorola said. "The Next Generation Dispatch solution will enhance Nextel's high quality PTT services by driving greater network efficiencies and product flexibility," Nextel CTO Barry West said in a statement. "It will also provide the added benefit of more easily bridging multiple radio access technologies such as CDMA or OFDM." So, maybe that MOT sell-off on this news was a little premature after all.

So, with all this consolidation continuing - T-Mobile might be next, despite the weak dollar making Deutsche Telekom's Euros a lot stronger as acquisition capital - what's to halt the inevitable march toward a new wireless version of Ma Bell?

Regulators, that's who.

The FCC continues to examine proposals to break the companies into pieces to promote competition. Under the mandate of the Telecommunications Act of 1996, the agency is required to develop a plan to have major carriers unbundle elements of their networks to be leased to competitors. The FCC put together three plans, all of which have been whacked by the courts, but coinciding with the Sprint-Nextel merger, the issue was back on the agency's agenda at its meeting Wednesday.

Curiouser and curiouser...

Let's hope regulation can save competition for the rest of us - it'd be even nicer to imagine a single network technology for wireless to ride on - GSM being my preference because of its global ubiquity, especially among the fastest-growing markets worldwide... but that's not a likely proposition with the momentum behind CDMA in the U.S. today.

And, if this merger goes through in the second half of 2005 as intended, CDMA has essentially just won the battle for U.S. wireless networks. With our government's affinity toward Qualcomm (guess what flavor network Iraq is building), versus "Old Europe", means GSM, despite powering most of the world's wireless new networks, isn't likely to dominate anytime in the foreseeable future here in the States.

So, maybe the biggest winner in all of this, is Qualcomm?

- Arik

Posted by Arik Johnson at December 15, 2004 05:02 PM | TrackBack