Nextel Means Business

Will wireless data and sleeker handsets help the nation’s B2B carrier attract white-collar subscribers and consumers?

The headquarters of Nextel Communications (www.nextel.com) is situated atop a wooded hill in Reston, VA. It's nothing flashy.

But then, Nextel's image isn't flashy either. It may be the leanest-run carrier in the top 10 — operating with 10,000 fewer employees than its nearest two competitors. Even so, CEO Tim Donahue said Nextel still has “a long way to go” toward greater operational efficiency. From the top down at Nextel, everyone means business.

This razor-sharp focus on execution has helped Nextel become the carrier serving the blue- and gray-collar market. With its popular Direct Connect feature, Nextel has carved out a unique niche serving vertical markets.

But recently, the company has broadened its focus to include white-collar subscribers. And wireless data is a big part of that effort. Marketing its service to these segments also has meant the introduction of a slimmer handset and expanding Direct Connect's reach through “horizontal networking” (making Direct Connect available to larger geographic areas).

“Right now, we are about 40% penetrated in our core segments: construction, transportation, field service, medical and a few others. In terms of white collar — large and small businesses — we're only penetrated at 9%. We see enormous opportunity in that sector,” Donahue said.

To attract white-collar subscribers, Nextel has developed a smaller, lighter handset; invested heavily in network coverage, improved voice quality and focused on data services, he said.

Nextel now serves close to 7 million subscribers nationwide, including more than half of the Fortune 500 companies. And in the future, it would like to serve more of the white-collar professionals at those companies.

One way Nextel hopes to capture additional market segments is through its Nextel Online (NOL) wireless data service. Introduced in April, there are currently more than 200,000 NOL subscribers.

The Future Is Data

“If you look to the future of this industry, it is clear to me that data is going to be very, very important,” Donahue said. “The industry thinks that data has gotten off to a slow start. That's probably more right than wrong. I think we've gotten off to a pretty good start, frankly.”

Nextel's wireless data point man is Greg Santoro, Internet and wireless services vice president. “We really want to be the customer's choice for wireless access to the Internet for business,” Santoro said.

Subscribers to Nextel's basic NOL service get access to a walled-garden of 40 sites. NOL Plus provides access to the open Internet, POP3 mail and productivity applications for handset management.

Through its growing application-developers program, Nextel has focused on the wireless data needs of businesses. At its launch, Nextel offered a few applications, such as eDispatch, a Web-based productivity tool for dispatchers, and IBM Mobile Connect (www.ibm.com), which allows users access to e-mail, calendar and contacts. Santoro said Nextel's developers program, which started with 200 participants, now includes about 1,000.

“This past year, customers were really testing the waters,” Santoro said of NOL's debut. “We'd sell a few hundred units into a large account. Now, we're seeing managers putting mobile connectivity into their budgets for the first time. They're actively talking with all of their application providers and asking them, ‘Do you support mobile management?’ and ‘What type of mobility support do you have in your apps?’”

Santoro said most current applications run well on today's network. But streaming media and other high-bandwidth applications will run better on Nextel's 3G network.

Through the use of compression technologies, such as those provided by companies such as BlueKite.com (www.bluekite.com) and Fourelle Systems (www.fourelle.com), Nextel plans to optimize its current network for more robust applications. But Santoro said Nextel has not selected a technology partner yet.

“When we introduce compression, that just makes access to traditional Web content, e-mail and attachments work really well,” he said. “Although the air interface doesn't get any faster, you just get the perception that it's working faster.”

Wireless data is barely a year old at Nextel, and Santoro is pleased with its uptake. But there were some surprises in the early stages, he said.

“We were under the assumption that only the early adopters and high-end consumers would be adopting it,” Santoro said. “But if you actually look at the type of customers who are buying our (data) service, it very much mirrors our base. We've got construction and transportation people buying and using it.”

In addition to providing users with wireless access to the Internet, NOL offered the first packet-based, 2-way messaging service, which can be used in a dispatch environment to send directions. Being packet-based, the service doesn't have the character limitations of SMS, Santoro explained.

Room for Improvement

Although NOL provides subscribers with many services, including wireless access to e-mail, Santoro admitted that customers aren't yet signing up in droves.

“We know that people see the limitations of the current handsets,” he said. “They're not reading e-mails in any large way, but they're getting alerts on e-mails. And if my assistant makes a change to my calendar, I can get access instantly. Or, if I need to look up a contact, I can do that. Those are things from a mobile-office standpoint that the service can accomplish to increase your productivity.”

Ken Hyers, Cahners In-Stat Group (www.instat.com) senior mobile commerce analyst, said Nextel's data service was one of the first to market, and has the potential to offer real value to subscribers.

“I've seen a lot of opportunities for the data service to serve their traditional customer base — creating affinity groups for example,” Hyers said. “That said, I've not been impressed with the appearance of how data is presented on the phones.”

He said the menu is difficult to use, data is presented only on three lines and the typeface is hard to read.

To be fair, Hyers and others agree that all wireless data services have room for improvement.

“Data right now in the wireless environment is primitive,” he said. “It's got a long way to go.”

Technology Shift

One of the ways to improve the wireless data experience is through network enhancements. And Nextel will expand capacity for data through a major technology shift for 3G.

“My big question is, what are they going to do for capacity to add more customers? And if they really expand their data services, how is that going to affect capacity?” Hyers queried. “I have heard it rumored that they're going to go to 1X.”

That rumor was confirmed by CTO Barry West, who said Nextel had chosen CDMA 1X as its migration path for 3G.

West explained that contrary to popular belief, Nextel does have enough spectrum for its current needs. And through a combination of compression techniques, gaining new spectrum through acquisitions and its newly announced 3G migration path, he said Nextel will continue to expand.

“They have been really smart about how they deal with spectrum shortages,” Hyers said. “But at a certain point, if they continue to grow at the rate they have, they're going to hit a ceiling.”

Nextel won a large chunk of spectrum in the 1998 SMR auctions.

“We are about 96% through moving everyone else out of those upper 200 channels,” West said. “The significance of that is we now have 10MHz of contiguous spectrum virtually everywhere in the United States.”

Nextel today averages about 20MHz in the 800MHz and 900MHz frequencies nationwide.

“After some of the recent deals, people have been wondering what in the heck we're doing,” he said. “We're actually buying 900MHz and integrating it, or trunking it, with our 800. The iDEN system will work on 800 and 900. So our intention is to migrate ourselves out of the upper 200 channels and progressively make it available for CDMA 1X.”

West said Nextel's commitment to CDMA 1X did not mean that it would abandon iDEN.

“We don't intend to retire our iDEN equipment,” he explained. “Our existing data network is currently performing much better than GPRS is in Europe. So we have a good 2.5G standard now. For some people, that's enough. You have voice services, data services and Direct Connect all in the one unit, and 2-way messaging as well. The only thing we can't do on the iDEN network is broadband data. Having said that, we're working on compression as well and will launch that around the middle of the year.”

Currently Nextel subscribers get an effective data rate of about 15kb/s to 20kb/s. With compression, this will be multiplied by five, yielding a rate of 75kb/s to100kb/s.

“There are a couple of drivers to the technology change,” West said. “One, the world is going CDMA. You're really an ostrich if you're sticking with a TDMA technology for two reasons. The development effort that is going to be available to work on TDMA networks is going to decline.”

West said CDMA 3G networks can handle four to five times the voice capacity in the same spectrum. Whereas Nextel's iDEN technology equals the efficiency of IS-95, 1X will be a 300% improvement.

“When you add that to an improvement in the link budgets for the system as well, it's a very compelling economic case to go to the 3G 1X platform,” he said.

Pouring Hot Java Over WAP

With an eye to the future, Nextel will release new phones later this year that support Java. This will greatly expand the number of developers working with Nextel.

“When we launched, we had a few hundred developers in the program, primarily focused on WAP applications,” said Greg Santoro, Nextel Internet and wireless services vice president. “Those companies that really thought through the WAP standard and built it around the capabilities of the phone — those applications work very well. There weren't a lot of those until the last couple of months.”

There are nearly 1,000 companies in Nextel's developer program. With the introduction of Java technology later this year, however, that number will increase substantially.

“The Java environment will allow what are essentially millions of coders who know how to code Java start to build apps for the phone,” he said.

Last fall, a consortium of 20 wireless companies completed the Mobile Information Device (MID) profile. Based on the Java 2 Platform Micro Edition (J2ME) (www.java.sun.com), the MID profile will enable graphical interactive services for wireless devices, including personalized stock quotes, location-specific traffic, and weather reports and games that can be downloaded and played offline by users.

“With Java, you have the ability to actually store programs on the phone,” Santoro explained. “The kind of user experience, the type of apps you can build and the number of things you can do goes up dramatically.”

Comparatively, WAP applications are more labor-intensive to create, he said. And many more developers are familiar with Java than with WAP. But Nextel's wireless data strategy will continue to include WAP and Java.

Currently, most Java applications have to be loaded via a cradle. But soon, carriers will be able to provision new applications over the air.

“You'll be able to go to a Web site just like you do with a Palm today, and buy and load (an application) onto the phone and use it,” Santoro said.

The ability of Java applications to operate offline will increase network efficiency, West said. Creating and sending a file only requires one network page.

“This allows you to use local storage, maybe collect some data on a few screens,” Santoro said. “The performance is better, and there's a better user experience. Then, when all of that information can be collected on a phone, it can be set up all in one session, rather than having to constantly go back and forth like WAP.”

What's Next for Nextel?

When asked if Nextel would consider an acquisition offer from another carrier, CEO Tim Donahue gave the standard “no comment” response. But he did offer some thoughts on the recent flurry of mergers and acquisitions.

“When parties look to consolidate, they do it for a couple of reasons,” Donahue said. “One, they do it for spectrum. If you put spectrum together from two companies, you increase your opportunity to build out these new 3G networks faster. And two, I think it's customer scale.”

Verizon gained massive economies of scale through its combination of GTE, Bell Atlantic and AirTouch.

“We're the only remaining independent player that's out there,” he said. “But we're very, very comfortable in our position.”

On the other hand, Nextel has gained spectrum and efficiency through deals with Arch Communications (www.arch.com) and Chadmoore Wireless (www.chadmoore.com).

“Those deals are all designed to acquire more spectrum so we have enough to continue to run our business,” Donahue said. “Deals like Chadmoore are wonderful for us, because it's spectrum at very, very good prices. We will continue to look at those on a regular basis.”

Over the past few years, it has been rumored that AT&T (www.attws.com) and WorldCom (www.worldcom.com) wanted to acquire Nextel. And just recently, there has been speculation that Virgin Mobile (www.virginmobile.com) was considering a bid for Nextel or Sprint PCS.

Ken Hyers, Cahners In-Stat Group senior mobile commerce analyst, said Nextel's heavy business usage leaves its network relatively open on nights and weekends.

“While I don't think Nextel's a good fit, the fact that they do have those nights and weekends open might fit well with Virgin's strategy of going after the consumer segment,” he said.

The other two carriers that had been eyeing Nextel are unlikely to make a second go of it, Hyers said.

Nextel's recent commitment to CDMA 1X as its 3G-migration path may affect the interest of other foreign carriers, Hyers said. But foreign carriers looking to enter the U.S. market will be watching the outcome of the VoiceStream merger.

“The other problem is, if Nextel is committed to following a 1X path, that would make a foreign carrier — other than one from Korea, maybe — less likely to want to look at them,” he said. “Because they would be looking for a company whose technology matches their own. And WCDMA seems to be the main standard outside the U.S.”