Don't Underestimate Sprint Nextel's Challenges

The answer to the latter question, not surprisingly, is "no." The new company, which represents a "merger of equals," will be called Sprint Nextel. Undoubtedly, there will be winners and losers among those people currently employed by the two companies, and many lost jobs, but those involved in the merger planning have made significant efforts to accommodate both sides. The company's new president and CEO, Gary Forsee, comes from Sprint; the chairman, Timothy Donahue, from Nextel. The COO, Len Lauer, comes from Sprint; the CFO, Paul Saleh, from Nextel. Executive headquarters will be located in Reston, Va., Nextel's home base; operational headquarters will be located in Overland Park, Kan., Sprint's turf.

Clearly, there are a number of potential benefits to the two companies and their stockholders, and possibly to their customers as well. Nextel and Sprint already lead the industry in average monthly revenue per user (ARPU) at $70 and $62, respectively (2Q 2004). Significant operational efficiencies will be achieved through the merger in infrastructure, marketing, sales, support and general administrative costs. The new company's overall spectrum position is greatly enhanced, and it will be the only cellular company to have significant spectrum assets in both the 1.9- and 2.5-GHz bands--prime real estate in this business. And potential market and service synergies exist as well. Nextel has strengths in the small and midsize business markets; Sprint has more strength in consumer markets. Nextel brings significant business mobile applications expertise to the table, and Sprint has one of the largest IP networks in the world.

But don't underestimate the challenges. Unlike AT&T Wireless and Cingular, which both used identical technologies, Sprint and Nextel provide services on fundamentally incompatible network infrastructure. Not surprisingly, the new company will jettison Nextel's Motorola-based iDen network technology in favor of Qualcomm's CDMA, the technology used by both Sprint and Verizon Wireless. Interestingly, both the Chief Strategy Officer, Tom Kelly, and the Chief Technology Officer, Barry West, come from Nextel. That's some pretty interesting corporate political maneuvering.

The merger is expected to close in the second half of 2005. It's too early to figure out the technology migration plan for existing Nextel customers, but it's unlikely to be a smooth one. Recognizing one of the unique Nextel assets, the companies promise to migrate push-to-talk to the new CDMA network, though it should be noted that Verizon hasn't had an easy time introducing such a service on its network. It was particularly interesting that the merger announcement stated that push-to-talk would be migrated to Sprint's EV-DO network. First, Sprint doesn't currently offer EV-DO service, and second, EV-DO is fundamentally a data-only service. Does this imply that customers will need to wait for the arrival of EV-DO-capable handsets, which currently don't exist, to get the new service? Yes, this will be interesting.

From a broader perspective, this merger is good news for the overall U.S. cellular market. After AT&T and Cingular tied the knot, creating a company with about 47 million subscribers, it was inevitable that smaller players like Sprint and Nextel would need to make some moves. Combined, Sprint Nextel will have about 36 million customers, assuming the company can hold onto them--not an easy thing in an era of number portability. Verizon, the second largest U.S. carrier, has about 41 million customers. Between the three, there will likely be significant competition in the U.S. market as well as robust nationwide coverage and operational efficiencies. While some might argue that more companies would provide a better competitive landscape, the scenario that unfolded this week seems better for competition than a Verizon acquisition of Sprint, which was also a hot topic of recent rumors. The odd-company-out is T-Mobile, with about 16 million subscribers in the United States.