Sizing up the Sprint/Nextel deal

The $35 billion Sprint/Nextel Communications merger announced last week answers a lot of questions for those who wondered when further consolidation of the wireless service market would happen. The formation of the third-largest wireless provider (behind Cingular Wireless and Verizon Wireless) also raises a new set of questions, which we take a whack at here.

The $35 billion Sprint/Nextel Communications merger announced last week answers a lot of questions for those who wondered when further consolidation of the wireless service market would happen. The formation of the third-largest wireless provider (behind Cingular Wireless and Verizon Wireless) also raises a new set of questions, which we take a whack at here:

Why would Sprint want to merge with Nextel?

Nextel, despite the fact that it has a proprietary network based on Motorola's iDEN technology, is highly valued for a few reasons: its annual revenue per subscriber (ARPU), its low churn rates and its high concentration of business customers.

What's the big deal about ARPU?

This figure represents how much customers spend with their wireless service providers, and Nextel always has led the pack. In the third quarter, Nextel reported that its ARPU was $69. Sprint's was $63, Verizon Wireless' was $51.58, and Cingular's was $49.78. Nextel has been able to nab a nearly $20 premium per user vs. Cingular primarily because of its high ratio of business to consumer customers (80% vs. 20%). Business users tend to spend more for features, applications and reliability.

What about churn rate?

Nextel also has the lowest churn, which represents the percentage of users who leave their carrier per quarter. Nextel's rate in the third quarter was 1.5%. Verizon was a close second, with 1.7%, with Sprint and Cingular picking up the rear with churn rates of 2.7% and 2.8% respectively. Churn is a key metric used to gauge customer satisfaction.

What does this mean to Sprint customers?

Sprint is merging with a company that has a lot of experience with business users and likely will take a page from Nextel's book. Nextel has more than 10 years of experience in dealing with business users in specific vertical markets offering applications and services that meet their needs. Sprint and other wireless providers have been accused of simply taking consumer offerings and repackaging them for business users.

What do Nextel customers get?

Sprint is deploying high-speed 3G gear based on Evolution-Data Only (EV-DO) over its Code Division Multiple Access (CDMA) network. It says the upgrade will be complete by late 2006 or early 2007. Verizon Wireless is adopting EV-DO. Meanwhile, Motorola is working on a gateway and dual-mode iDEN/CDMA phones that would support Nextel and Sprint customers on each service provider's network.

So does iDEN go away?

Yes, eventually. Nextel says it will continue to invest in its iDEN network through 2007, until its customers' voice traffic can be supported over Sprint's network. But Nextel says it might use the network after 2007 to support its push-to-talk service, which is far more mature than Sprint's.

Why does Nextel's network plan only extend to 2007?

Nextel has agreed to give up rights to its licenses in most of the 800-MHz band and all its licenses in the 700-MHz band due to interference with public safety radio. In exchange, the FCC has promised replacement spectrum at 1.9 GHz. The result is 10 MHz of spectrum, which will put Sprint Nextel in an envious position with "enough spectrum to support extensive growth over the next 10 years," says Bob Egan, president of consulting firm Mobile Competency.

What about Sprint's traditional land-line business?

Sprint says it will spin off its local division post merger. Although there wasn't much talk about its traditional interexchanage carrier (IXC) business last week, Sprint says it will continue to offer enterprise users voice, data and IP services. "It would be a big strategic mistake to de-emphasize its IXC business," says Lisa Pierce, a senior analyst at Forrester Research. Sprint needs to reassure customers that it will continue to make its landline business a priority, she says.

Why is Sprint's IXC business still important?

Business users are what Sprint Nextel wants, therefore this division needs to thrive, says Keith Waryas, research manager at consulting firm IDC. "Only about 20% of U.S. businesses have corporate liable wireless service contracts," he says. "Corporate liable" refers to a single contract that covers all of a company's wireless users. That means Sprint will continue to go to its wire line customers to drum up new wireless contracts, he says.

Things sound pretty rosy. What is Sprint/Nextel lacking?

International coverage. Analysts agree Sprint/Nextel will not be the first choice of business users who frequently travel abroad. AT&T Wireless, now owned by Cingular, has extensive roaming agreements overseas. T-Mobile owns T-Mobile Germany and offers far-reaching international coverage.

Are there overall industry benefits for all wireless users?

Bob Egan, president of consultancy Mobile Competency, says yes. "Business users can expect wireless data prices to collapse," he says. Today users pay about $70 for 1G byte of wireless data per month. Egan says he expects that monthly price to drop to about $35. He says business users can expect Verizon Wireless and Cingular to fight aggressively for their contracts before the Sprint-Nextel deal is final.

Can the Sprint Nextel deal fall apart?

Anything is possible. Shareholders will again vote on the deal in a few months leaving the door open for other companies, maybe even Verizon Wireless, to make a bid. Verizon Wireless declined to comment.

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