TELECOM Digest OnLine - Sorted: Sprint's Merger With Nextel

Sprint's Merger With Nextel

Marcus Didius Falco (
Mon, 20 Dec 2004 02:49:47 -0500

And then there were four
From The Economist print edition

Why America's latest wireless merger makes sense and its implications

FROM six to five, and now four: the oft-repeated prediction that America s
fragmented wireless telecoms industry would consolidate finally came true
in 2004. In October, Cingular completed its $41 billion purchase of AT&T
Wireless, leapfrogging Verizon Wireless to become the nation s largest
wireless operator (see chart). And on Wednesday December 15th, Sprint and
Nextel, the third- and fifth-largest operators, announced a merger of
equals in reality, the acquisition by Sprint of Nextel for around $36
billion. The combined firm will be called Sprint Nextel.

Both deals were driven in large part by technology, which placed
constraints on who could merge with whom. Unlike Europe, where
wireless operators all use a system called GSM, America s operators
use several different and incompatible standards. Verizon and Sprint
use a technology called CDMA, while Cingular, AT&T Wireless and
T-Mobile have GSM networks (which explains why Cingular and AT&T
Wireless made a logical partnership). Nextel, however, uses a
proprietary system called iDEN, made by Motorola, which has both
strengths and weaknesses. Mobile telecommunications

Its main strength is its acclaimed push to talk feature, which allows
Nextel handsets to be used like walkie-talkies, though the calls are in
fact routed over the cellular network. As a result, Nextel has long been
the choice of construction workers and maintenance technicians; other
consumers love the walkie-talkie feature too. It explains Nextel s
unrivalled customer loyalty and average revenue per user, both key industry
metrics. But as the industry upgrades to high-speed third generation (3G)
networks, which offer both extra voice capacity and fast internet access,
there is no upgrade path for iDEN so Nextel must switch to another=

It has been evaluating two options. The first is another proprietary
technology, called Flash-OFDM, made by a firm called Flarion. This is
sometimes referred to as a 4G technology, but is already available:
Nextel has a small Flarion network running in North Carolina. While it
works well as a wireless-broadband technology for PCs and laptops,
however, the technology is not yet supported in mobile phones. So
Nextel was also evaluating the high-speed version of CDMA, called
EV-DO. Verizon Wireless is already deploying it, and Sprint, after
much dithering, recently announced that it would do so too. For
Nextel, the benefit of EV-DO is that handsets already exist, and it is
possible to implement push-to-talk functionality, on a par with Nextel
s existing service, on an EV-DO network. Customers can therefore be
moved from iDEN to EV-DO without having to give up the feature they
value most. Hence the logic of merging with Sprint, which is also
committed to EV-DO.

The deal makes sense for other reasons too. Nextel has lots of
business customers, an area where Sprint is weak. The combined firm
will have greater economies of scale and more bargaining power with
handset and equipment suppliers. And the decision to spin off Sprint s
regional fixed-line division paves the way for Sprint Nextel to strike
deals with America s cable operators. They want to add wireless
telephony to their service bundles, better to compete with America s
regional fixed-line incumbents, the Baby Bells. Sprint and Nextel
already rent network capacity to smaller operators such as Virgin
Mobile and Boost, so they know how to support such virtual operators .

The merger requires regulatory approval, but that is likely to be
forthcoming, since the deal is smaller than the Cingular/AT&T Wireless
transaction and will clearly enhance competition. Shareholders are
also likely to approve. A rumoured counter-bid for Sprint from Verizon
Wireless, which could derail the deal, seems unlikely not least
because regulators would probably object. But many hurdles
remain. Integrating the two firms various networks will be tricky;
another worry is that the corporate cultures will clash. Nextel has an
entrepreneurial, innovative culture, while Sprint is formal and
conservative, says Raul Katz of Adventis, a consultancy.

Yet perhaps the most significant aspect of the deal concerns not 3G,
but 4G. Between them, Sprint and Nextel own nearly all the spectrum
licences for the unused 2.5GHz frequency band. The combined firm will
be able to use this prime wireless real estate to build a 4G network,
perhaps using Flarion s technology or WiMax, an emerging
wireless-broadband standard. In the short term, the merger helps
Sprint Nextel catch up with Verizon and Cingular in the 3G stakes. But
beyond that, it also gives the new firm a head start in 4G.

Copyright The Economist Newspaper Limited 2004.

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