Nextel close to casting off the iDen shackles at last
Published: Thursday 15 April, 2004
Just as they claim to be coming out of their ‘nuclear winter’, the US cellcos are hardly being given the luxury of enjoying their recovering markets, but are instead being plunged into a period of intense disruption at the hands of the markets and the FCC. The merger of Cingular Wireless and AT&T Wireless, the introduction of local number portability, the incursions of Wi-Fi and other broadband wireless technologies, and the increasingly liberal approach of the FCC towards cellular alternatives, have all shaken the business plans of the big players. Now they face the threat that Nextel, only fifth of the big six but the most aggressive and high margin of them all, could receive a major boost to its third generation ambitions with permission to reorganize its scattered spectrum to implement a whole range of new platforms.
After almost three years of debate, the FCC is close to a decision on the so-called Consensus Plan, proposed by Nextel to eliminate interference caused by FCC rules that enabled the cellco to operate in channels adjoining public services frequencies. Nextel has been campaigning to swap the offending bands (16MHz of spectrum in the 700MHz, 800MHz and 900MHz bands) for an equivalent amount of new space in the 800MHz and 1.9GHz spectrum for cellphones, for a charge of around $850m. The advantage for its future plans would be to consolidate many of its frequencies and enable it to implement CDMA or W-CDMA as an upgrade to its current iDen network, which is running out of steam but which is the only platform capable of running effectively on Nextel’s currently scattered spectrum. It would end up with 16MHz of contiguous spectrum in the 800MHz band, in which to continue to offer iDen-based voice services, and 10MHz in the 1.9GHz band, where it could build next generation voice/data services, complementing the WiMAX and Mobile-Fi trials it is running in its MMDS spectrum.
Opponents, notably the largest cellco, Verizon Wireless – backed by the CTIA - have argued that this scheme would amount to a giveaway to Nextel, which built its network in the late 1990s at relatively low cost by acquiring piecemeal spectrum and running Motorola’s iDen technology over it. Verizon has pushed for the new bands to be auctioned and has promised to bid around $5bn. "Given a minimum bid of $5bn on the spectrum, we're hoping the FCC would take a look,” said the company, which claims Nextel should pay to fix the interference problems itself through engineering techniques. It has filed a petition to begin an auction of the 1.9GHz spectrum and to designate the bands for a nationwide broadband cellphone license.
"The fact that Nextel has demanded this spectrum as its price for promising to rectify interference to public safety operations does not justify the Commission's acquiescence in Nextel's demand. The only proper action for the 1.9GHz spectrum is to auction it to the highest bidder," wrote Molly Feldman, vice president of business development at Verizon Wireless, in a letter to John Muleta, chief of the FCC's wireless bureau.
The most likely outcome is that the FCC will approve Nextel’s plan, but will charge a far higher fee, around $2bn. It will still be money well spent, from the point of view of Nextel’s ability to build on its strong customer loyalty and margins and gain greater market share – as well as from the point of view of public safety. It will give Nextel a greatly enhanced ability to launch a creative range of next generation services, and will be a cheaper option than the one it considered some months ago, of bidding for AT&T Wireless.
Not that it has let up on its traditional behavior of accumulating miscellaneous but valuable spectrum at a good price to support advanced services. It built its original network by collecting SMR (Specialized Mobile Radio) spectrum and now is focused on providing more powerful services than iDen can offer through 802.20 or 802.16 networks running in MMDS frequencies, on which it spent $200m last year, including buying the wireless licenses of bankrupt telco WorldCom for $144m in cash, outbidding BellSouth. Those licenses cover 13 regions, including Minneapolis, Kansas City and parts of the south eastern USA, and cost WorldCom about $1bn in 1999. Nextel also added a further $2.7m worth of SMR recently, acquired from troubled wireless data carrier Motient.
It is not only consolidation of its spectrum that will free Nextel of some of the shackles of iDen. Another major factor will be the end of its exclusive supplier relationship with Motorola, the provider of the iDen networks and handsets.
The five-year agreement ended at the close of 2003, (though it has been renewed for one year), and so the US cellco is actively testing alternatives to iDen, on which it has spent almost $15bn since 1995.
This may spur Motorola into more aggressive action on broadband wireless networks, and it has already pledged to work on dual-mode handsets that will support iDEN and any technology Nextel chooses for its next generation. If Nextel abandoned Motorola completely over time, by gradually phasing out iDen, it would leave a big hole in the equipment maker’s finances. Nextel accounted for 8% of its total revenues last year and 18% of its handset sales.
"We cannot be assured at this time of the terms of new agreements with Nextel or Nextel's continued exclusive long term use of iDEN technology in its wireless business as it considers next generation technology options," Motorola said in its annual report filed with the Securities and Exchange Commission .
Nextel has carved out a strong market with enterprises through innovative services such as Push To Talk, once exclusive to iDEN but now offered by other carriers. It needs to continue to be ahead of larger rivals in pushing out new and attractive offerings, and Motorola may not offer the best platform to do that any longer – the iDEN upgrade, WiDEN, is not impressive compared to third party alternatives and its roll-out has been delayed following technical glitches. Nextel is looking to roll out a third generation network at the turn of the year. Its chief evalutions are currently of Flarion – whose Flash-OFDM technology is the basis of a pilot in North Carolina, which went into the commercial phase this week; as well as CDMA2000, WiMAX and IPWireless, with all but CDMA able to run in the underused MMDS spectrum.
Meanwhile, as Nextel marshals its forces, Cingular is also building up to overtake Verizon as the largest US cellco, once its takeover of AT&T Wireless is finalized. Cingular has completed its deal to acquire $1.4bn worth of spectrum from Nextwave. That company, which seeks to provide a wholesale network for carriers, is drawing back from CDMA EV-DO and testing IPWireless kit supporting the data-optimized UMTS TDD technology (see separate story).
At one time, Verizon and the FCC had considered blocking the sale and forcing Nextwave to sell the frequencies at public auction but then drew back from that action. NextWave had agreed to sell the licenses, valued at $5.5bn to $7.5bn, to Cingular, but it still owes the Federal Communications Commission $4.3bn for spectrum that it acquired in a 1996 auction, and on which it failed to make payments. It filed for Chapter 11 bankruptcy protection in 1998 and the FCC repossessed the licenses and re-auctioned them in 2001, but NextWave sued the Commission and reclaimed its licenses after a US Supreme Court ruling, creating a huge upheaval in the US 3G map.
Now that that particular political saga is finally over, the additional spectrum, along with that which Cingular gains through its AT&T Wireless takeover, will give the second largest cellco a far stronger platform on which to improve its quality of service and improve its margins and subscriber base following a period of stagnation.
Nor is the AT&T-Cingular deal likely to be the last in the US. Sprint has decided to re-combine its wired and its PCS wireless stocks, a move seen by some analysts as an attempt to make itself more attractive to bidders. Combined, it should have a market value of about $26bn, making it the US’ fourth largest telco with wireless, local and long distance lines.
Amid all this upheaval, there is one area where cellcos have had a welcome breathing space. Still to have a big impact on the carriers is Local Number Portability (LNP) – the new rules introduced last autumn that allow customers to keep their cellphone number if they change carrier. This change was expected to create a huge wave of defections by dissatisfied users, but so far this has not materialized, according to research by In-Stat/MDR. However, it is expected to become apparent as 2004 progresses, as technical problems with LNP are ironed out and enterprise or consumer contracts come up for renewal. The upcoming merger of CIngular and AT&T Wireless could also increase churn as users fear a decline in quality of service during the consolidation process.
The greatest churn is likely to be seen in the business market, where companies are increasingly intolerant of poor service as they become more dependent on their wireless technologies for critical applications. Among business users, ARPU is 70% higher than for consumer subscribers, and Verizon and Nextel are the leaders in market share in this valuable segment . Verizon leads in the broad business sector – consisting of corporate-liable, corporate-sponsored, and personally acquired phones expensed to the company– although it will be overtaken by the combined Cingular-AT&T. Nextel dominates the most valuable subsector, that of corporate liable users, according to analysis from Yankee Group, with 37% share.
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