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Nextel innovating to corner the wireless business market

01 March 1999

Nextel Communications is a leading wireless operator in the US. The company has built up one of the largest digital national wireless networks. An innovative operator, it had 2,000,000 subscribers by June 1998 and plans to double this number by the end of 1999. Chairman & CEO Dan Akerson talks to Global Telecoms Business about the operator's plans.

Nextel Communications is a leading wireless provider in the US. From an operating standpoint, it is considered to be one of only three national carriers in the US, along with AT&T Wireless and Sprint PCS. Nextel is aggressively targeting the business market. The company's digital network now covers more than 65% of the population. It provides service to virtually all the top 100 markets in the US. The company also has a growing portfolio of international investments with a number of operations in Latin America and the Asia Pacific.
Nextel has gained a reputation for innovation, following the launch of its "Direct Connect" service. This enables the user to speak with one person or more at the touch of a button on a Nextel phone. It allows someone access to co-workers instantly to direct projects and meetings at very low cost. This form of instant communication makes this product one of the most unique in the wireless industry. According to Tom Lee, a telecoms equity analyst at Salomon Smith & Barney: "They definitely have a unique technology and a unique product, the "Direct Connect". In the US they are really the sole major national carrier that offers Motorola's iDEN technology. I would say that makes them innovative."
The recent merger between AirTouch and Vodafone has sparked rumours that Nextel could be part of the next large-scale wireless merger. Lee believes, however, that the iDEN technology could be one obstacle to a possible merger involving Nextel: "I have mixed views on Nextel as a merger target. They definitely have a unique set of assets. But in some ways their uniqueness makes them a little more difficult to consolidate. The basic reason being that iDEN technology, while a derivative of GSM, really isn't compatible with GSM. Anybody who acquires Nextel also potentially ends up partnering with Motorola, because there is no-one else who makes iDEN infrastructure.
So anyone looking to invest or acquire Nextel probably has to grapple with two equally difficult decisions. First of all, how am I going to deal with incompatible technologies, if I am trying to develop a global platform? Secondly, am I really only going to be tied to one infrastructure provider?"
In an exclusive interview with Global Telecoms Business, the chairman and CEO of Nextel Communications Dan Akerson talks about the changing nature of the wireless industry and his ambitions for the company.
What are your opinions on the Vodafone/AirTouch merger? Do you believe that such consolidation is healthy for the wireless industry?
I think that Vodafone paid a lot of money and that AirTouch isn't a terribly competitive nation-wide carrier in the US. I presume that a premium was attached to their European operations. Do I think that it is a healthy development in the industry? I really don't know. The biggest telecoms market is here in the US. Vodafone and AirTouch certainly have an international orientation, although I am not all that familiar with the competitive dynamics of Europe, but I don't think that it will have much impact in the US, unless there are further developments that have yet to be announced.
It has been reported that Nextel may be subject to acquisition by a number of operators, including MCI WorldCom. Do you think that Nextel may follow this route, in the interest of shareholder value?
We don't manage the company to be acquired. We manage the company to maximize shareholder wealth. If someone were to come in, we would look at any bid, but we have kind of pulled ourselves up by our own bootstraps and have become one of the few US national carriers. Beyond the standard response, I'm not going to comment on acquisitions or potential combinations with Nextel. We manage the company as best we can and for shareholder value. If anything happens beyond that, we would look at it in terms of how it would benefit our shareholders over the long term against going it alone over the long term.
How do you react to criticism that the proprietary Motorola technology that you use is not up to scratch? How do you view moves by Motorola and Cisco to develop jointly wireless net technology?
First of all I would reject the assertion that the technology is not up to scratch, because the technology that we have offers everything that GSM does plus more. There is no other carrier in the world literally that has a frequency agile technology with an all packetized air interface that offers an integrated service of everything, the latest digital services that can be added and our unique "direct" feature.
We also recently announced an initiative where every phone that we sell in the latter half of 1999 will be an Internet phone. Nobody else is doing that in the industry. The wireless data before then had been this CDPD, which is spectrally inefficient. It is really quite clumsy. What we demonstrated at CTIA kind of blew the industry's socks off, in that every phone is literally an Internet phone.
I can receive and inter-act with you on a real-time basis from London, Hong Kong or Los Angeles on a PC or I can go from telephone to telephone or I can visit any Web page on the Internet. That is a very powerful technology. The very fact that you ask whether it is up to scratch indicates that we have not done a very good job in outlining that.
The Cisco/Motorola development will ultimately lead to voice over Internet, voice over IP for the wireless industry. Where does that put Motorola/Nextel/Cisco? I would guess that over the next 24-30 months there will be less reliance on circuit switching, as to where you see the GSM guys and the CDMA folks. There is a whole different dynamic operating as a result of the Motorola/Cisco alliance. I think that dynamic, tied to our unique technology, really positions Nextel quite favourably.
How do you react to criticism that you are too dependent on one supplier, Motorola? As Motorola is an equity investor in Nextel, is there potential for a conflict of interest, should you wish to buy hand sets from another manufacturer?
No, because we have always had that capability. It is in our contracts. We are not bedded solely to Motorola for hand sets and we have the contractual rights to bring in a second or third vendor if we so desire.
Could you tell us about your digital network? How much is it costing to build? What competitive advantages do you think this network gives you?
As I said, we are the only carrier to have an all packetized air interface. This enables us to introduce a packetized Internet application that our competition cannot emulate, not now and not for some time to come - I would guess for at least a year, maybe two. That in itself represents a huge advantage. The other area of differentiation is that we are building out in most of North America, certainly the US. We own part of Clearnet in Canada.
They are deploying our technology. Obviously we are building out Mexico and several other foreign countries. But at the end of the day footprint counts, especially in the US. At this point, we have the largest digital footprint in the US, bigger than AT&T's and bigger than Sprint's. There are some concerns that we don't do dual mode, but I was looking at a customer survey - one of our customers, a former AT&T customer, said that he couldn't understand why he couldn't or didn't receive his text messaging or voice mail in certain areas and the quality of his service suffered.
The average customer does not know or understand tri-mode phones, dual-mode phones, analogue or digital. They simply want to press a button and be able to communicate. AT&T, Sprint and many of the other RBOCs still have a lot of analogue coverage. We don't make any bones about it. We aren't trying to be all things to all people. We have made a strategic statement to the effect that we are going to differentiate in our product. We want differentiated products.
You have seen that in our "Direct Connect" feature. You are going to see this in data. Later in the year we are going to come out with the Nextel World-wide phone that will operate in 130 countries. That is differentiation. Secondly, we sell the business. We are not trying to be all things to all people. We develop our products. Our distribution channels are primarily focused on the business customer. AT&T, Sprint and some of the other competition tries to be all things to all people. They end up trying to sell the same phone to the soccer mum in this country, as they do to the chief technology officer of a Fortune 500 company. The applications are not the same.
Could you tell us about the Nextel National Business Plan? What services will you be able to offer customers? How do you view AT&T's digital one rate plan? Has this led to the departure of higher-end subscribers?
To understand, we need to go back several years in time. Nextel was the first company to introduce two changes to the industry. This happened almost three years ago - we offered a no-roaming commitment. I think that drove AT&T into the digital one rate.
The second thing we did is really revolutionary: if you talk for two minutes and one second on our competition's network, they charge you for three minutes. If you talk for two minutes and one second on our network, we charge you for two minutes and one second. Again that is because we focus on business and business customers. Business customers are more sophisticated and are not going to pay for something that they don't use. The digital one rate plan is different than what we offer.
Imagine that someone went to Minot, North Dakota. It is right in the middle of nowhere, in the wheat fields of North Dakota. AT&T does not have a network up there - neither does Nextel. What they do is they resell analogues services in the remote areas outside the major urban areas of the US. I should note that AT&T's EBITDA losses widened in the fourth quarter. They dropped by about $85 million and why is that? Because they are charging 11 cents a minute in Minot, North Dakota or any other city where they are reselling analogue.
They are charging 11 cents to their customer and paying 35-50 cents on the premise that this pledge to be anywhere at a flat rate price will be made up in the major cities. Quite frankly, I think they have done that. It is a good business proposition, but again we are selling to businesses in large measures. In all 92% of the traffic stays in their home market. Then we are in 400 cities nation-wide. That is why we don't sell to the consumer. Again this is part of the business strategy.
We segment the business and so business customers will not go to Minot, North Dakota. They will go from New York to Miami to Los Angeles to Chicago to Seattle to San Diego to Kansas City to Washington DC to Greensboro, North Carolina. We are in all those cities. We are not in Minot, North Dakota and neither is AT&T. I don't want to offer a dual-mode phone with a pledge to offer service in every square foot in the US yet. That is a very important modifier.
As I said, we have the largest digital network in the US, but once that network expands - and it literally does every day - at some point we may engage in the same commitment to our customers. For example, let us pick another garden spot, Fargo, North Dakota, where we will provide a service, but on a analogue basis.
But we are very concerned with the customer base we address today and any complaints by the demanding business traveller, for example: "Why didn't I get my text messaging for a day or two hours? Why didn't I get my voice mail?" and ultimately as we roll out our data products, "why didn't I have data access?" This occurs, because they are located in the more remote areas of the US and don't have access to digital technology. We want to have a greater footprint and more market reach, before we make that stretch. I think that why we segment. If I had more of a consumer strategy such as AT&T, I would say that the digital one rate is a really good programme, but it is costly - and I think this showed up in AT&T's financials this past quarter.
Nextel has invested in a number of international markets. How do you view the opportunities in Mexico? How many subscribers do you currently have? What levels of revenues do you receive from your operations in Mexico?
First of all, we don't break down customers or revenue on an individual country basis. We have built out Mexico City and plan to build out other cities: Monterrey; Guadalajara and Teowana. We want to build out major metropolitan areas, especially along the US border. If I would look at our total international next year, I would say that our sales should be in the $150-180 million level. We do not make public projections, but those are good round numbers.
We only launched last June/July, so I think that is good progress given where we are. In percentage terms, our international investments are growing quite well, but we exited the year domestically at a $2.5 billion run rate. So when you think about that, we only launched our services in the US in September 1996 and literally 27 months later, we are at the $2.5 billion run rate.
How do you view opportunities in the Asia Pacific? Could you tell us about your operations in China and Japan? Do you plan to scale up your presence in the Asia Pacific?
In China we have an equity investment - it is in a GSM system and only in Shanghai. It does not conform with our world-wide technology strategy and differentiation of services. So I don't think that is a long-term play for us. It is quite difficult to do business in China.
In Japan we are in with a group of other companies including Motorola and a Japanese partner that owns a nation-wide licence. W are quite pleased with progress to date. We have rolled out service in Tokyo. I think that Osaka is next. That will continue to build.
We own a company in the Philippines. We have built out Manila. We started out operations in the late summer and we have the option of a national licence in Indonesia, but given the upheaval we have not initiated service or any construction, until we can better assess economic developments in the country.
In a recent interview, George Schmitt, the president of Omnipoint, referred to the benefits of GSM over CDMA. What do you think?
We use iDEN which is an improved version of GSM. If you make a pure cellular call on our service today, we have this packetized air interface and we make a decision at the cell site - depending on how the call comes in, we know whether it is a direct connect call or a dispatch call. We know if it is a data call, but we primarily know if it is a cellular call. If it is a cellular call, we are GSM. If it is a direct connect, we have done that call down to circuit switching, so it will go through a wireless switch. We use the same load that you do in Europe and that George Schmitt would use here in the US with Omnipoint. But if it is a direct connect call, it stays in the packetized form and goes through a metro packet switch and we traverse the network and the call that way. Ultimately, it is my belief that we will evolve to pure packetized voice, data, fax and video over Internet Protocol.
There are advantages and disadvantages to both GSM and CDMA. We think that a hybrid of GSM provides the product differentiation that Nextel has been able to deliver and no-one else has. Quite frankly, this goes back to the legacy of this industry which was a duopoly or in Europe where it was one, two or three companies. It is a different world in the US today, where you have anywhere from four-six competitors.
BT and Microsoft recently announced an alliance to push wireless Internet. How do you view such developments? In your opinion, what will be the most popular wireless data applications?
I think that the potential of wireless data is huge, provided that it is based on Internet protocols. Until now wireless data has been a monumental flop. The operators put together the CDPD. It is slow and cumbersome. It is spectrally inefficient and has never sold. But if you get on with a packetized data with Internet applications, it is different. We literally demonstrated that if you pull up American Airlines and you are on the way to the airport, you can pull up your Nextel phone, jump on the Internet, put in your flight number when you pull up the American Airlines Web page and literally tell whether your gate was shifted. It can tell you if the plane was 15 minutes late and you can even confirm your seat assignment. These are powerful applications to the sophisticated business traveller.
As I was saying before, the same phone won't be sold to everybody, because the applications are different. Soccer mums aren't going to use it that much, because they are not the corporate road warrior, as we refer to them here in the US. BT/Microsoft is interesting. I don't think that Microsoft is the most capable Web partner. Our selection of Netscape was a bit more insightful, but that is what makes horse races and stock markets: differences of opinion. Irrespective of how it all works out, BT and Microsoft are both very capable companies. They will offer competitive products. Wireless data has huge upside potential.
Do you think that Calling Party Pays is necessary in the US for wireless to compete effectively with wireline? Do you think that the FCC will have to set some guidelines before this service becomes popular in the US?
In the US, things are viewed a little bit differently. I lived in Europe for three years and went to graduate school in the UK. I think that it is sheer lunacy for a government to tell an industry how to be competitive. If the FCC were to set guidelines, I think that it would be misdirected.
If Calling Party Pays makes sense, and if it is necessary to compete against wireline, it will happen. But quite frankly, all it does is shift the cost. Personally, as a consumer, I would not see where it would be all that attractive. Obviously, we watch developments here very carefully and do some work internally with respect to Calling Party Pays, but I adopt more of a "wait and see" approach.
How do you view pre-paid? Have you started introducing this concept to reduce bad debt levels? What levels of churn has Nextel been experiencing?
Reportedly we have the lowest churn rate in the industry by quite a bit. How do I view pre-paid? We primarily sell the businesses. Therefore we don't have bad actors in our customer base, but it is not like consumers. So that makes our customer base a little more attractive and a little less likely to be poor payers. So we have not introduced a pre-paid product. I know that some of our competition has.
For example, small companies such as Omnipoint have. Maybe some of the larger ones have. Obviously, we can do a check on Dunn and Bradstreet. As we can do credit checks on businesses much more easily than we can do on individuals, our credit history is better than our competition. This is based on publicly disclosed financials. It is something that we continue to watch. If we were to see some more slippage, we might be more interested, but we don't feel that it is necessary right now.
In view of intense competition in the wireless market and the inevitability of pricing wars, do you think that average revenue/subscriber is likely to fall? What steps is Nextel taking to maintain revenue levels?
I think that in the UK it is not quite double what it is here. That should tell you something. You guys basically have an oligopoly over there. Everybody kind of co-operates. It is not that way here. We have already sustained pretty dramatic price cuts. As you suggest, there may be more. At the end of the day, rationality prevails. These are multi-billion dollar networks that we are deploying and you must service your debt. You must provide a reasonable return to your shareholders. So the pricing in this country has probably dropped by over 50% over the past two years and will probably drop more. It is inevitable.
At this stage I think that we are reasonably close to the long-range average cost curves, but we are not there yet. So there will be some more pricing activity. How do we try to protect against that? The integrated hand set with more features than everybody else seems to work. For example, the average revenue/unit in this country across our industry is just under $40. Our average revenue/unit is $70. How do we do that? We sell to businesses that are mobile work users and tie them together in virtual private networks on this "Push to Talk" feature and roughly our customers are using the phone as a absolute necessity to conduct their business. More minutes of traffic traverse our network. Obviously you get that advantage of spectrally efficient service with digital.
That is why we stay focused on business and on the urban areas to date, although we have coverage on most major inter-states in this country as well. But that is to facilitate the business customer. So while the industry has dropped anywhere from 6-10% over the past three-four years, our annual average revenue/unit has actually increased. Our churn is the lowest in the industry.
Can you describe the new service that Nextel plans to offer customers, providing them with a personalized Internet "gateway"? Does such a move represent the first signs of convergence between mobile, voice and data services with the Internet?
I believe that is true. I would go further. It is a milestone event. A cellular phone that you can inter-act - literally we put a predictive 40,000 word speller. You can have your hand set. If you start spelling the word organization, by the time you get to the third letter, the thing starts guessing what the letters will be. Literally someone trained with a telephone touchpad can tap, I have been told, 35-40 words a minute. Personally I can only get up to about 20. Nextel will never be found in the dictionary. But it will learn 700 words unique to your own usage. So the inter-activity with the Internet is going to represent a huge paradigm shift for the wireless industry. It is going to occur everywhere, any time and anywhere.
How successful has Nextel been in raising capital? Do you aim to raise any funds this year?
We raised $9 billion over the past 30 months, including our line of credit. Last year we raised $2.9 billion. We are not in the market today.
How does Nextel Partners interlink with Nextel? What is the importance of Nextel Partners? What is the experience of the management team at Nextel Partners and how does their work dovetail with that of Nextel Communications?
We own 34% of Nextel Partners. We gained an equity position by transferring our spectrum in what I will call less urban, more rural secondary and tertiary cities, such as Magellan, Texas or Omaha, Nebraska. Here the strategy was that the company had to be very closely aligned. Obviously we are on the board, as we own a little over a third of the company. We needed to control consistency in marketing the message, the marketing positioning, brand recognition, the brand proliferation within this country, as well as network quality, network operating parameters, statistics, the integration, so that it is seamless to the Nextel Partners group. That will all be part and parcel to the arrangement.
We seated the company with executives from Nextel Communications and also attracted some very good people from other companies in the wireless industry. This accelerates the proliferation of our technology and standards to a wider footprint in the United States, which I think is very important.
Why is Nextel Partners completing the build-out of secondary and tertiary properties where Nextel started construction? Why doesn't Nextel complete construction? What are the build-out plans?
Nextel plans to spend about $1.6-1.8 billion this year. Nextel Partners is now funded to the tune of $750-850 million. We didn't start building in the Omahas of the world, but obviously we think that it is important that the secondary cities should be built out. And it was really related to speed of market. We felt that the Nextel Partners group could get us into those markets faster than we could, in view of the multiple projects that we have in our own bailiwick.
What is the time span for repayment of outstanding debt? How do you plan to lower debt-servicing costs?
We have a tiering of various issues that play out over the next three, five or ten years. We refinanced $750 million of high-yield debt last year to a lower coupon rate with better payment terms. As we see opportunities to do that in the market, we may be willing to do some recapitalization of our balance sheet. But if we are able to continue making the progress in the market that we have experienced in the past, we will be able to service and repay our debt when it falls due.
What role does Craig McCaw play in Nextel's development? What is Nextel's role in a grouping that comprises NEXTLINK Communications and Teledesic?
Craig is on the board. He is the chairman of the operating committee, so we talk periodically. He is intimately involved and aware of what we are doing and why. He is a very big and strong resource for me personally as well.
In terms of our role with the other telecoms interests that he has, they are tangential. This is a publicly traded company. The public owns 80% of the company, while Craig McCaw and his family holds the other 20%. We act in the interest of all our shareholders, so we have very little to do with Teledesic. As you probably know, NEXTLINK is a competitive local exchange company. We use them where we can, if it makes sense from an economic point of view. If it doesn't, quite frankly we use a competitor of NEXTLINK.
How do you view developments with regards spectrum? How do you view the comments by the Industrial Telecommunications Association (ITA) that Nextel's call for the unconditional granting of 54 waiver requests to convert licences classified as private mobile radio services to commercial mobile radio services could set "a dangerous precedent, giving Nextel virtually unfettered access to licences allocated for another service"?
You will get a predictable response from me. Obviously we are attacking the old rules and the old regiment. Some of these rules, specifically those that apply to the ITA, allocated service not on a wide area basis, but on an individual site basis. The spectrum was not contiguous and therefore in my opinion it was under-utilized. People priced the product as "all you can eat for a flat rate", which would be described by an economist in this digital age as economically irrational.
Nextel is one of many of the new age wireless telcos, attacking the old regulatory regime. Naturally that upsets the apple cart. But in terms of breaking spectrum loose for the benefit of corporations and the public in general, it should be done. When I hear someone from the ITA say that we are asking for these waivers, I will tell you that some 400 waivers have been provided to our competition. I believe that we should be treated in the same way as the ITA treats the competition.
What are your hopes and ambitions for the company over the next two-three years? What global trends do you expect to emerge in the wireless arena?
Over the next two-three years we hope to continue to penetrate the US market and attain at least free cash flow status: in other words we can fund all our internal operations, which we are doing today, as well as all our capital, without accessing capital markets. We hope to continue the build-out of our international properties. At some point in time we want to be one of the two or three best wireless carriers in North America, extending throughout the Western hemisphere and to be one of the few great wireless telcos world-wide.
In terms of world-wide trends, we will see more consolidation. There will be a move towards wideband wireless and more sophisticated features. Wireless in general will be bundled with a broad array of telecoms features that are global, rather than national in a regional nature.
Several years ago, Nextel was kind of an afterthought. People didn't even consider us as a real viable threat. I can tell you that the AT&Ts and Sprints of the world now perceive us as a strategic competitor. We have come out of the pack without any regulatory help, and without the deep pockets of an integrated telco.
If I were to characterize Nextel, I would say that we are the scrappy upstart that gets very few breaks and has carved out its own niche. At the same time I think that we have delivered customer growth in underpinning customer metrics, such as ARPU and churn and we are leading the industry. That makes us worthy of note, because we have delivered operationally. The question is, over the next couple of years, where does it take us? You asked us a good question. Will we get gobbled up? I don't know the answer to that question. Sam Ginn thought that was the right path to follow. There are a lot of variables in any equations like that.