December 13, 2004
Why we think this is important
By 2H06, we expect wireless data use prices to collapse to the $35/Gigabyte range as the competitive landscape begins to take shape. CIO's and IT managers should brace themselves for wide adoption by individuals and specific business unit culture at these price points – inline with what has happened in the WiFi space.
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We believe that by 1H06, Sprint-Nextel will have a high-speed wireless data network capability (CDMA2000 1xEV-DO) on par with Verizon, despite Verizon's early lead, largely due to the fact that Sprint-Nextel starts with uniformly new infrastructure at 1.9 GHz then Verizon did. We also believe Sprint-Nextel will be aggressive because the new, maverick blood invigorates them and because they need to prove to investors and enterprise customers that they're serious about DO.
It's exciting for many reasons, including:
- The complementary nature of the two customer bases – Nextel is the dominate player in the SME and blue-collar sectors, where it has the highest average revenue per subscriber. Sprint is a leader in the consumer and large enterprise markets. The combination would have the broadest base of consumers and small, medium and large businesses.
- Spectrum dominance – Two resources are necessary to build a dominant carrier: spectrum and capital. Of the two, spectrum is the scarcer resource. Sprint already has enough spectrum at 1.9 GHz to support extensive growth for 10 years. This spectrum bankroll will be bolstered by 10 MHz of contiguous spectrum at 1.9 GHz that Nextel was given by the FCC last summer as part of a controversial spectrum swap. Nextel and Sprint also are the two dominant owners of spectrum at 2.5 GHz. Nextel holds 2.5 GHz licenses in 60 of the top 100 markets, while Sprint holds licenses in 93 markets. In 2003, Nextel outbid BellSouth for MCI's and Nucentrix' 2.5 GHz spectrum, doubling BellSouth's bid on MCI's licenses. That willingness to spend shows that it wasn't an impulse buy, suggesting that Nextel viewed this spectrum as a cornerstone for its future. This band is already approved for fixed, point-to-multipoint wireless solutions using technologies such as the fixed/portable version of WiMAX. Considering that many countries have already approved the use of the 2.5 GHz band for mobile services, we believe the FCC will take similar action in the U.S. within 24 months, or else risk a significant trade and service barriers for U.S. service and equipment companies.
It's disruptive – We believe the endgame in this deal is to use wireless as a unifying broadband services delivery platform for voice, video and data. Considering the combined spectrum strength, there are any number of prospective technologies the Sprint-Nextel entity could employ to make this vision a reality, including Flarion's OFDM technology, which Nextel has been testing. Competitive wireline alternatives, including xDSL, cable and fiber will continue to struggle with technical, economic, and physical barriers. Although this transformation won't happen overnight, the long-term ramifications to the underlying economic and services fundamentals of the telecom landscape could be significant. The Sprint-Nextel alliance could create an attractive alliance with cable companies, which are still looking to fill in the pieces missing from their own bundles.
It's disturbing – On some levels, we have a merger of two unequals, particularly in customer care, marketing and employee cultures. Nextel has good customer care; Sprint does not. Nextel is known for innovative marketing, while Sprint's efforts have been less-than-memorable. Maverick visionaries who thrive on risk have propelled Nextel to its success, while Sprint's management includes telco traditionalists who are notably risk-averse — though deserving of our respect for their focus and clear strategy. Although some would argue that challenges are rooted in bridging the technology chasm that exists between the companies, we believe the contests will be more about the inbred cultures and operational issues. International roaming will remain service gap for Sprint-Nextel as it represents a small but growing group of premium business subscribers.
The deal is provocative – In the short term we believe the combined entity will keep both brands and transcend the technology issues. In Canada we have seen this with the Telus Mobility acquisition of Clearnet. The deal does provoke thought as to the future of push-to-talk (PTT) services, which Nextel brands as Direct Connect. Perhaps little known (or forgotten) is that back in January 2002, Nextel licensed the exclusive right to a PTT technology known as QChat from Qualcomm. Motorola committed to working on a service gateway between its iDEN network technology and CDMA – the respective core technologies for Nextel and Sprint. We believe this would provide existing Nextel subscribers with a better coverage option, intra-network connectivity to friends, family and business associates. Existing Sprint subscribers would get a high performance PTT service as Sprint retires its existing PTT science experiment.
Enterprises are well advised to keep a watchful eye on the combined company's ability to execute against the high marks we give the vision of this merger. In the short term, business clients should expect pre-emptive discounts and service bundles by competitors – in particular by Cingular and Verizon. In the long term, the potential of this merger could redefine the economic fundamentals, access availability and services bundling of a significant portion of the telecom landscape, especially for SMEs and SOHOs, but not before 2007.
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