TheStreet.com piece on Sprint PCS / Nextel / Direct Connect / QChat.
July 23,2002
Sprint PCS Making Run at Nextel's Best Feature
By Kenneth Li
Senior Writer
07/23/2002 07:15 AM EDT
Wasn't Nextel (NXTL:Nasdaq - news - commentary - research - analysis) supposed to be dead by now?
Talks of potential insolvency, a mounting debt load, and depressed shares have hammered the nation's No.
5 carrier for months.
But last week, for the first time in recent memory, Nextel convinced Wall Street it was doing better than
fine, thank you very much. Amid an earnings season with companies barely squeaking by reduced
guidance, the company reported its first-ever profitable quarter, beating consensus estimates by a wide
margin, and took steps to pare down its debt, now at $13.4 billion.
But Nextel's one good quarter may not be
enough.
Sprint PCS (PCS:NYSE - news - commentary
- research - analysis) is aiming at Nextel's
defining feature, the Direct Connect service that
lets customers chat on their phones like
walkie-talkies. Sprint is aiming to steal some of
Nextel's thunder, and some of its customers,
as it prepares to offer a servicecalled
Push-to-Talk.
Sprint will be bringing Nextel-like features to an
even wider base of customers, more than 14.6
million of its consumer and business
customers, which could potentially erase
Nextel's technological advantage.
"This is going to be a big negative for Nextel,"
said Kaufman Brothers managing director of equity research Vik Grover. "It's going to be a risk to Nextel's
customer base, it undermines the differentiator of their technology." Grover said retailing and distributor
sources tell him Sprint is planning to roll out a Nextel-like service as early as this fall.
A Sprint executive confirmed the company is working on such a project, but fell short of revealing much
beyond that. "All the carriers are looking into this kind of service and trying to decide what makes sense for
them," said Sprint PCS senior manager of business marketing Kevin Packingham.
AT&T Wireless (AWE:Nasdaq - news - commentary - research - analysis)
executives were more evasive regarding whether they were preparing any
such services, offering only, "It's safe to say that all the major carriers are
looking at Nextel as an opportunity," according to AT&T Wireless director
of small business Chris Ferguson.
If that's true, then Nextel investors beware -- the company may be entering
its toughest phase yet, as it goes mano a mano with companies two and
three times its size.
Milliseconds Matter
Nextel's Direct Connect feature lets subscribers connect to other
subscribers in a predefined calling group from between a half to three
quarters of a second. "You don't have to dial 10 digits and wait for it to
ring," said Nextel spokeswoman Audrey Schaefer. "It's great for bursty
conversations, where you just need to get answers quickly."
How crucial, really, are milliseconds to the bottom line in the cellphone
biz? How about average revenue per user, or ARPU, of 20% to 35% higher
than the rest of the industry, say analysts, with no signs of abating in the
near future? Nextel reported ARPU of $71, and churn of 2.1% compared
with Sprint PCS' $61, and 2.9% churn in the past quarter.
Those split seconds have transformed a sleepy Reston, Va., wireless provider into a major national wireless
carrier with 9.2 million customers and $7 billion in revenue last year. Analysts say that the feature,
combined with the company's focus on courting a higher-margin business customer, ultimately contributed
to its industry-leading metrics.
"While [Direct Connect] is a differentiator and is certainly attractive, Nextel's focus on the business
community is very difficult to emulate for other carriers," said Yankee Group analyst Linda Barrabee. "On
the other hand, Nextel has not been skilled at selling to consumers."
Sprint's Salvo
Analysts point out that Sprint's voice quality very well may be a significant improvement over Nextel's
walkie-talkielike mode, which allows only one user to speak at once. Sprint will be able to deliver what's
called a full-duplex service, much like conventional phones, in which both users can speak and be heard at
the same time.
Sprint PCS' technology makes it "technologically possible" to deliver such services on an existing base of
phones already upgraded to its CDMA (code division multiple access) 1xRTT network, unlike Nextel, which
require special handsets, Sprint executives said.
Little else is known, including exactly what technology vendor or workaround Sprint plans to use. It's hard
to imagine exactly how Sprint plans to upgrade its systems, which executives assured would be a
financially negligible cost, considering the billions Motorola (MOT:NYSE - news - commentary - research -
analysis) and Nextel spent to develop such a system.
"With 3G (third generation) 1x technology, we have capability to offer push-to-talk," Sprint PCS CEO Chuck
Levine told analysts at its second-quarter earnings call last week. As to when it will launch? "The issue is
one of priorities and decision-making regarding which segments will be the most profitable to go after."
Nextel's Future
Up until this January, Nextel has remained mum on its own migration to third-generation networks. Until
now, it has relied on technology developed by Motorola exclusively for the company, making Nextel the
whipping boy of the financial community whenever merger rumors bubble. At least technologically, it's been
regarded as the one target nobody wants.
In January, however, it told investors that it has signed an exclusive three-way partnership deal with
Qualcomm (QCOM:Nasdaq - news - commentary - research - analysis) and Motorola to co-develop a
version of Direct Connect to work on CDMA 2000 networks, called QChat, which will be identical in function
to its current proprietary system.
Nextel will own the licensing rights to the technology, said Nextel spokeswoman Audrey Schaefer. Adding
to some of the confusion is the fact the company is unable to publicly commit to CDMA 2000 as its official
migration path away from Motorola's proprietary iDen technology.
"We're studying what's going on in the 3G environment outside of the U.S.," said Schaefer. "We've not
made a decision to go to CDMA 2000 at this time. We've not finalized a time frame."
But the technology will not be ready for prime time until around 2004, according to a Yankee Group report.
Analyst Phil Marshall writes that QChat as it stands now has "call setup latency times of up to 10
seconds," which are "inadequate."
In the meantime, Nextel is planning to perform software upgrades that will double its voice capacity by the
first half of 2003, the company said. Part of the benefit is it effectively has a 2.5G network without the pricey
capital expenditures associated with hardware-infrastructure upgrades that's weighed down the competitive
landscape. (Nextel claims it can deliver data speeds up to 40 kilobits per second to 50 Kbps.) The move,
and the overall depression in the telecom and wireless sector, buys them some time.
For now, the company still can enjoy the support of the analyst community, at least for another quarter.
"Nextel has been the best carrier selling to the enterprise," said Yankee Group analyst Roger Entner.
"They're second to none. The other carriers have to learn that before we can write eulogies about Nextel."
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