Wireless War Heats Up As Sprint Grabs Nextel

Promise of lower prices and better services; risk of less competition

The merger of Sprint Corp. and Nextel Communications, unveiled last week in a deal valued at more than $35 billion, is likely to spur deployment of broadband wireless services as three giant cellular providers compete to deliver a new generation of high-speed fixed and mobile wireless data services to businesses. "This merger has the potential to reshape telecom economics and service availability," says Bob Egan, CEO of Mobile Competency, a wireless-industry analyst firm.

The new company, called Sprint Nextel, will be large enough to compete effectively with Cingular Wireless and Verizon Wireless, the industry's largest wireless carriers. Sprint Nextel will have around 40 million subscribers; Cingular, the industry leader, has about 47 million. Sprint Nextel will have licensees for enough spectrum in the right frequency band--2.5 GHz--to offer a unified platform for high-speed wireless voice, data, and video services. "They can redefine last-mile connectivity and offer businesses a wireless alternative to fiber pipes and T-1 lines," Egan says.

Sprint's Forsee (left) will be president and CEO of the new company; Nextel's Donahue will become chairman.

Sprint's Forsee (left) will be president and CEO of the new company; Nextel's Donahue will become chairman.

Photo by Mike Segar/Reuters
Billed as a merger of equals, Sprint, the nation's No. 3 wireless carrier, actually is buying Nextel, No. 5, for stock and cash. The companies had combined revenue of around $40 billion for the 12 months ending Sept. 30 and expect to cut around $12 billion in operating costs and capital investments by combining operations. The company will spin off Sprint's local phone business--7.7 million local access lines in 18 states--but keep its nationwide fiber network. Sprint chairman and CEO Gary Forsee will be president and CEO; Nextel president and CEO Timothy Donahue will be chairman.

"Sprint sees a huge amount of value in Nextel's position in the enterprise market," says Suzzana Ellyn, a wireless-industry analyst with research firm Current Analysis. Nextel has developed a strong position in the business market with its "push-to-talk" feature, which offers walkie-talkie-like capabilities. In addition, Nextel offers more location-based services than other wireless providers, which can help Sprint Nextel differentiate itself in a competitive market, where basic wireless voice services have become a commodity, Ellyn says.

The merger will face challenges. Today, Sprint and Nextel use incompatible technologies to provide wireless services. Sprint says it will keep operating Nextel's network for three or four years, as it upgrades its infrastructure to offer its own push-to-talk capabilities and faster data services. Rivals Cingular and Verizon already have begun to deploy higher-speed data services.

Last week, Motorola Inc., which supplies Nextel's wireless-infrastructure technology, said by the first half of 2006 it will have available a new version of push-to-talk technology that also will work on Sprint's network.

There may be cultural issues, as well. Nextel's management has an entrepreneurial orientation, while Sprint has a phone-company heritage. Analyst Egan likens the union to a group of rappers sitting down with a group of opera lovers. "That could cause a little bit of pain until they get things straightened out," he says.

The merger "sets up three very dominant carriers with pretty solid data offerings," Egan says. He predicts that prices for wireless data services will drop from up to $79 per month per gigabyte now to around $35 by the first half of 2006. At that price, wireless data services could replace DSL and cable-modem data services in the small-business and consumer markets.

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