Editor’s Note: As part of its celebration of 20 years covering the wireless communications industry, RCR Wireless News each month will take a look back at crucial points in the history of mobile telecommunications. This month, RCR revisits the early days of Nextel and its impact on the wireless and SMR industries.
What began as a simple observation and a “modest” business plan in 1987 would turn the specialized mobile radio industry on its ear and create an unexpected competitor to the young cellular industry. Nextel Communications Inc. didn’t set out to be a major competitor in the cellular space, but 14 years later, the company has carved out an attractive and loyal customer base and is among the five largest wireless players.
“We’re a company that has grown beyond anybody’s wildest expectations,” said Tim Donahue, president and chief executive officer of the company.
But Nextel hasn’t gotten there without its share of detractors and doubters. With one foot in the SMR arena and the other in the cellular arena, Nextel has shaken up both markets in its short history and has been a major force for change with its aggressive and scrappy style.
A simple idea
Fleet Call Inc., Nextel’s predecessor, was founded in April 1987 by Morgan O’Brien, an SMR industry veteran who was involved with SMR during its infant stages as a Federal Communications Commission attorney in the 1970s. After leaving the commission, O’Brien continued to practice law in the SMR and cellular markets until 1987, when he spotted a trend in the SMR industry that would eventually lead him to begin his own company.
“In order to get the industry started quickly, (the FCC) had a very low threshold for what it took to get a chunk of channels,” said O’Brien, who now is Nextel’s vice chairman. “But because the rules were so easy, they wanted to discourage somebody from going in and trying to monopolize the spectrum, so they said you can only have one unloaded SMR at a time in a market.”
That rule meant consolidation was impossible early on, but by 1987, some SMR systems began reaching the point where they could be combined, said O’Brien.
“I decided that it was likely that the SMR industry would consolidate, and after some efforts to get the industry to come to that conclusion themselves, I decided that the smart way to do this would be to actually try to start up a company that would acquire SMRs,” he said.
Not only was the industry ready for consolidation, but O’Brien said the business model made sense, because consolidation created economies of scale and the channels were very similar to cellular but less expensive.
“It was what I would describe as a modest business plan based on an observation about what was taking place in other industries,” said O’Brien, who noted the company initially focused on only six markets.
But small SMR operators weren’t inclined to sell their systems, and Wall Street wasn’t eager to invest in SMR, a business it considered a sideshow to cellular.
“Raising money for SMR in a world that was intoxicated by cellular was tough,” said O’Brien. “It took some selling skills and some persistence,” he said.
In spite of its doubters, Fleet Call managed to attract some investments and acquired several SMR systems. Within 15 months of its founding, Fleet Call was the largest privately held SMR operator in the country.
Digital dreams
Already a major force in the SMR industry, Fleet Call shook up the industry in April 1990 when it announced plans to invest $500 million to construct marketwide digital SMR systems in Chicago, Dallas, Houston, Los Angeles, New York and San Francisco.
“I am a compulsive reader of trade press, and I would shove all this stuff in my briefcase and read it while I was on an airplane,” said O’Brien. “Everything I read was about how terrific digital was going to be for cellular.”
O’Brien said he realized cellular carriers, with increased capacity made possible by digital technology, would go after his company’s SMR subscriber base, and the company would have no defense against that without its own digital play.
“It occurred to me that digital for cellular represented the biggest threat to our long-term success,” said O’Brien.
The company, which by then served 150,000 subscribers, asked the FCC for rule waivers to allow it to operate an enhanced SMR system, which borrowed from cellular the ideas of frequency reuse and multiple sites. The plan was the first serious attempt to introduce digital technology into the analog-dominated private land mobile radio industry.
Despite the idea’s chilly reception by SMR operators as well as cellular carriers, O’Brien was convinced the FCC would approve the waivers because the idea envisioned greater spectrum efficiency and better benefits for customers. The ESMR plan eventually gained reluctant support in the SMR industry, and the company won FCC approval in February 1991.
Fleet Call began building out its digital network based on Motorola’s Integrated Radio System (MIRS) technology.
In 1993, the company changed its name to Nextel, and in September of that year, just one month behind schedule, it flipped the switch on its digital SMR system in Los Angeles.
Meanwhile, the company was continuing to consolidate the SMR industry. The feather in Nextel’s cap was its agreement to purchase all of Motorola’s SMR radio licenses in the United States, providing it with significant spectrum rights in each of the top 50 U.S. markets.
Turnaround team
But while a lot of things seemed to be going in Nextel’s favor, the company began to face serious problems.
The company was forced to back down from an aggressive initial public offering slated for late 1991 due to a weak IPO market and continued skepticism about the company’s long-term potential. Nextel filed a scaled-back prospectus in early 1992 and got its IPO off the ground at $15 per share. The company also lost important investments from MCI Communications Corp. and Comcast Corp. in 1994 after the pair pulled out of an alliance they had formed with Nextel to build a digital network.
“Two things happened,” said O’Brien. “One was a lot of imitators were created. The other was the digital technology that we launched in 1993 turned out, after a ton of attempts to get it stabilized, to be not quite ready, and that then caused us to have problems in the market because we were then a public company.”
The company got a huge boost in 1995 when Craig McCaw, who had opposed Nextel’s ESMR plan as a cellular carrier, invested in the company and brought in a talented team of executives, including Dan Akerson and Tim Donahue, to get the company back on track.
“The fact that Craig McCaw was investing heavily behind it told me that it probably had potential, because I’ve never known anyone who understands the future better than Craig McCaw,” said Donahue, who worked for McCaw at McCaw Cellular.
Donahue said they were faced with four objectives when he arrived-fix the technology, raise money, build the network quickly and market it to business customers. The company ordered $100 million of new integrated Digital Enhanced Network equipment from Motorola and re-launched its digital network in 1996. The combination of cellular-like service with the Direct Connect dispatch feature was a unique mix in the increasingly competitive wireless industry.
“They’ve built their business around a quirk of the ESMR technology,” said Andrew Cole, who heads the global wireless communications practice at Adventis, an international business and technology consulting firm. “Nextel is probably the only wireless company in the United States, and probably to a certain extent Europe as well, that actually enjoys customer-acknowledged technology differentiation, and that’s a big deal.”
Cole said Nextel’s ability to create a service that resonates with an important segment of the market-business users-has helped it achieve some of the industry’s lowest churn leve
ls and highest ARPU numbers.
Nextel’s closest competitor in the SMR business, Southern LINC, which provides service in the Southeast, credits Nextel with elevating awareness of dispatch radio and iDEN technology.
“What Nextel, and the iDEN technology overall, has done is really opened up the SMR industry to nontraditional two-way radio users,” said Julie Pigott, vice president of marketing at Southern LINC. “The benefit (of competing with Nextel) is there are two carriers out there touting the benefits of iDEN technology, so in the markets where we do compete with them, we’ve found that there’s a higher awareness level of what iDEN can do.”
But not everybody has been pleased with Nextel’s success. The company is constantly criticized by its traditional two-way radio counterparts who claim the company’s success has come at their expense. O’Brien said he empathizes with those critics but that Nextel is not to blame.
“The forces that we represent are not the forces that we control,” he said, pointing to digital technology and the need for scale as necessities in today’s wireless industry.
“The traditional model of SMR, which I helped create, was one or two transmit locations trying to cover one whole market,” said O’Brien. “That era, that model, has been swept away by change, not by Nextel.
“But if you’re very frustrated with the world, and angry at change, it’s easy to pin the blame and pick a villain, and I guess Nextel is as good as any,” he said.
Next for Nextel
“I can remember as clear as a bell when we hit 1 million subscribers,” said Donahue. “I thought to myself, `Holy God, I can’t believe we hit 1 million subscribers when no one even gave us a chance to survive.’ I thought, `Wouldn’t it be great if we could get to 2 million or 3 million.’ ”
Now with a customer base of 7 million customers, Nextel is one of the largest players in wireless.
O’Brien and Donahue said the company’s future plans include digging deeper into the two-way market and moving along with the rest of the industry to data services and third-generation technology.
“We’re always looking for new and innovative products we can sell to our business customers or high-end consumers that will continue to drive very high average revenue per unit and hopefully very low churn, and that formula, from my perspective, is a successful formula, because it delivers very good results financially,” said Donahue.
Cole said he believes Nextel will take a close look at the mobile virtual network operator opportunity in the United States as a way to enter the mass market consumer segment, using familiar brands to reach the consumer market in a low-risk way.
“We like the consumer segment,” said Donahue, noting the company is already marketing to high-end consumers via its new horizontal networking service. “You just have to be sure that you acquire them at the right price.”
Donahue said the company is working on low-cost distribution strategies, such as telesales, Web sales and retail stores, that could lead the company to be more aggressive in the low-end, mass market arena.
The company has also focused on making international inroads
“Our goal was to go out and repeat the underlying Nextel idea, which was to take this little-used dispatch spectrum, cobble it together, and then get a license to use it in the various countries for digital dispatch, or digital trunking” said Keith Grinstein, vice chairman of Nextel International Inc. “We had to go market by market, or country by country, and get each one to approve the use of this spectrum this way.
“It has all the great characteristics of cellular spectrum and in many cases it can be obtained for much less money,” Grinstein said. “The difficulty is it comes in small pieces, and you have to do a lot of transactions, and from a regulatory perspective, you have to get approval to build a digital dispatch system.”
The company now has systems operating in Mexico, Brazil, Argentina, Peru, the Philippines and Tokyo.
“The success we’ve had, which is really nothing other than a lot of people buying our product, is the result of a great regulatory idea consistently pursued,” said O’Brien. “Every day in the marketplace, people are trying to knock Nextel out of its preferred position with business customers, and that’s just fine. That’s the nature of competition.
“You only win if you have the best product at the best price, and that’s something we will fight to keep,” said O’Brien. “That is a terrific model, and if we lose that, and somebody else gets them, well, more power to them. It’s the nature of competition, and I love competition.”
