WASHINGTON-Nextel Communications Inc.’s proposed $159 million buyout of Pittencrieff Communications Inc.-a deal that could give one firm half of the 2.2 million dispatch customers and access to most of the U.S. population-could become a key antitrust test case in the new wireless regime of regulatory and technological convergence.
Nextel said it plans shortly to file for antitrust approval with the Federal Trade Commission, which will coordinate with the Justice Department which agency reviews the acquisition. Nextel is the largest dispatch radio company in the nation; Pittencrieff is ranked second.
“It would depend entirely on how they define the market,” said Robert Litan, a former Justice Department antitrust official who now heads economic studies at the Brookings Institution.
“If it is really specialized (the market), it could be problematic,” he said.
Steve Virostek, a wireless analyst at Economic and Management Consultants International Inc., said a Nextel-Pittencrieff combination would not necessarily push other dispatch firms out of the market. He said mom-and-pop specialized mobile radio operators, for example, could benefit if Nextel customers refuse to convert from analog to digital equipment and decide instead to switch to another service provider.
“It’s all about choice and what the customer wants,” observed Virostek.
But it may not be that simple. Analog Nextel customers may have other choices in given markets, but if their equipment is not compatible or interoperable with alternative SMR systems, they would have to buy all new radios.
In an antitrust settlement with the Justice Department in 1994 involving the purchase of Motorola Inc. 800 MHz SMR channels, Nextel was required to divest many of its 900 MHz channels and a handful of 800 MHz channels. Since then, Nextel acquired scores of new licenses permitted under the Justice accord in the 900 MHz SMR auction earlier this year. And the MacLean, Va., firm is expected to be a top bidder for 800 MHz SMR channels.
Not only is Nextel bigger today than it was when Justice reviewed the Motorola deal two years ago, it is fiscally stronger. Billionaire cellular pioneer Craig McCaw last year pledged to invest $1.1 billion over six years and, more recently, Nextel obtained $1.66 billion in bank financing.
Wall Street also is showing renewed confidence in Nextel. After a roller coaster ride over the last few years that left the stock in the low-to-mid teens, making some shareholders angry enough to file a class action lawsuit, Nextel is close to $20 a share today.
As such, the proposed Nextel-Pittencrieff transaction poses a challenging antitrust case for government regulators and antitrust officials in the context of new commercial mobile radio service.
It’s unclear whether Justice will review Nextel-Pittencrieff.
George Baranko, a Justice antitrust attorney who worked on Nextel-Motorola, declined to comment on Nextel’s proposed purchase of Pittencrieff. Another Justice attorney who reviewed the case along side Baranko did not return a call for comment.
In addition to antitrust review, the deal needs Federal Communications Commission approval. The FCC’s review is broader than Justice’s or the FTC’s, but involves limited antitrust oversight.
In the past is any indicator, Nextel may have an easier time at the FCC than at Justice or at the FTC. When it approved the transfer of SMR licenses from Dial Page Inc., a large SMR company with significant holdings in the South, to Nextel in 1995, the FCC rejected a claim that because 800 MHz SMR was a discreet product market within CMRS the transaction would be anticompetitive.
In another case, the FCC did not require Nextel to divest any Motorola SMR properties.
Instead, the FCC adopted a broad product market definition of CMRS that included dispatch, paging, cellular, personal communications services and interconnected business radio.
“You have to look at us as a wireless company in the wireless industry,” said Paul Blalock, a Nextel spokesman. Nextel, which markets to high-end mobile business users, offers digital dispatch, messaging-conferencing and wireless telephony to customers. Most are dispatch customers and most are using analog equipment, but Nextel wants to convert as many 800 MHz customers to digital service as possible. Nextel, despite early claims that have since been recanted, does not plan to compete head-on with cellular or PCS operators.
The agency’s rationale was that all CMRS providers are permitted to offer dispatch service and can modify existing infrastructure to add that capability “with moderate investment.”
Alan Shark, president of the American Mobile Telecommunications Association, disagrees. Shark said integrating dispatch into analog cellular systems is complex, though perhaps less so than with digital cellular and PCS systems.
Shark said he has mixed feelings about the blockbuster deal. AMTA would be losing its second biggest member, but he says the trade group remains financially strong.
“It’s like a tree that keeps getting pruned; we get stronger,” he said. “Nextel constantly provides me with challenges,” added Shark sardonically.
Despite having regulatory and technical capability to offer dispatch, there is little evidence to suggest commercial wireless providers other than SMRs will do so to any significant extent.
For sure, dispatch is not the profit center that pocket telephones provides. The mass market wireless products are pagers (40 million subscribers) and pocket telephones (40 million subscribers), which attract most investor money today. While all commercial carriers are governed by CMRS rules, the FCC recognizes differences among various wireless services and has flexibility in how it regulates them.
Thus, using CMRS as the relevant market in an antritrust analysis of the SMR market could prove more difficult than expected.
Nextel-even with the addition of Pittencrieff, Dial Page, Motorola and other SMRs-would be far below the 45 megahertz CMRS spectrum cap.
But even that is somewhat misleading, given there is only 19 megahertz (15 megahertz at 800 MHz and five megahertz at 900 MHz) for SMR spectrum in every market compared with 50 megahertz for cellular and 120 megahertz for PCS.
The spectrum cap was devised to prevent domination by any one cellular or PCS carrier in a given market.
“It’s really too early” to make a judgment on whether the proposed Nextel-Pittencrieff deal poses antitrust risks, said Michele Farquhar, chief of the Wireless Telecommunications Bureau at the FCC.
If the SMR market becomes less rather than more competitive, the FCC may have itself to blame.
SMR licensing has been frozen by the FCC for two years in part to prepare for 800 MHz and 900 MHz auction licensing. The SMR regulatory scheme has been driven in recent years by Nextel and other SMRs that opted to scrap the tradition single, high-power analog transmitter architecture for digital cellular-like, wide-area networks. That worked well for the FCC because geographic licensing is well-suited to auctions, which have raised $20 billions and made the FCC popular with the GOP-led Congress and the Democratic White House.
“The freeze and regulatory climate has hurt the industry,” said Shark.
Antitrust officials aren’t always swayed by size alone. In fact, there is one school of thought that says big is not necessarily bad if efficiencies can be gained by mergers that ultimately benefit consumers. In that vein, Nextel is further along than any other wireless carrier in bringing digital wireless services to Americans. That may play well with government officials.
