You’re never too focused: Lessons from Nextel’s early days

Editor’s Note: Welcome to Reality Check, a feature for RCR Wireless News’ new weekly e-mail service, Mobile Content and Culture. We’ve gathered a group of visionaries and veterans in the mobile content industry to give their insights into the marketplace. In the coming weeks look for columns from Tom Huseby of SeaPoint Ventures, Mark Desautels of CTIA and more.
There’s been much talk of the disappointing merger of Sprint and Nextel. In the two years since the deal closed in mid-2005, the $35 billion value attributed to Nextel at the time of the merger has eroded rapidly as customers have churned and APRU has declined. And shareholders don’t take kindly to a decline in ARPU, no matter how much high-quality spectrum an acquisition may gain you. It is undeniable that Nextel’s fortunes have shifted under Sprint’s watch. What happened?
The seismic shift at Sprint reflects the dangers of merging a highly focused organization like Nextel with a mass-market focused company like Sprint. It also provides an excuse to look back at an interesting question: How did Nextel build such a valuable franchise in the first place? The answers behind Nextel’s industry-leading ARPUs, it turns out, are instructive to even the smallest startups in my venture portfolio.
Nextel seemed an unlikely if scrappy competitor at the get-go. Its 800 MHz SMR spectrum was used by mom-and-pop radio dispatch for taxis and delivery fleets. The spectrum was useless for analog cellular, but the advent of digital wireless made the idea of using this patchwork of spectrum for voice communication more feasible. The idea behind Nextel was to roll up 100+ SMR networks nationwide, apply digital technology, and become a national wireless carrier that could compete with cellular and PCS. But the Motorola iDEN technology failed very publicly in its initial 1994 rollout in Los Angeles. Leaders in the industry declared the company a disaster.
It looked like Nextel was never going to hit the mass market or the big time with its quirky iDEN patchwork quilt of a network. But one of Nextel’s regions noticed something interesting. It was true that voice quality on Nextel at the time was significantly worse than cellular and PCS competitors. But Nextel could offer something that competitors could not: a fully integrated phone/pager/dispatch service on one device. Mass-market consumers might not be willing to sacrifice voice quality for these features, but some segments of the mobile workforce would. Perhaps the trick would be to narrowly focus on those customers for whom PTT was an unmet business requirement rather than a technology feature.
It was at that point that one of my partners at Voyager Capital, Tom Kippola, whipped out his whiteboard marker and led a regional Nextel team through a detailed segmentation exercise. What they found was that Nextel’s integrated product offering could fully solve a set of painful problems for an industry segment that had no good alternatives: general contractors. The bet was that if Nextel could get general contractors participating in their network and using Direct Connect, they would bring their subcontractors in. And once the subcontractors were on the contractors’ Direct Connect PTT networks, it would be difficult for them to churn away without other subcontractors beating them to the punch for bids.
With this newfound focus, the regional team at Nextel knew exactly what their next steps should be. Their sales force sought every opportunity possible to get in front of groups of general contractors. And as predicted, the contractors and their networks of subcontractors signed up. Nextel proved perfectly tailored to their needs, and the tradeoffs in voice quality were insignificant relative to the value of the whole product offering. Within one year, the benefits of an industry-focused approach were so clear-this region was outpacing the rest of the company’s growth-that Nextel as a whole started examining its methods. Then came $1.1 billion from Craig McCaw. The rest is history, and is the story of one of the most profitable companies in the history of wireless.
Nextel did a lot of things right, from its go-to-market strategy to its use of GPS. But the key that unlocked value for them-in the form of the highest ARPU in the business-was resisting the temptation to broadly cover the mass market and instead focusing on creating unique value for specific markets.
What can startups learn from the SMR rollup that grew up to be worth $35 billion?
Focus in startups is like location in real estate.
It’s usually the most important thing, and sometimes it’s the only thing that matters. If you think you’re too focused-well, you’re probably not. Some might have worried that Nextel was too focused in its early days, but look what it led to. It is easy to get lost in the sea of opportunities as an entrepreneur. The truth is, more companies die of drowning in opportunities than of starving for prospects. Tight, disciplined focus is the liferaft.
Solve one problem, and solve it completely.
Even if you are selling a fundamentally horizontal product or service, the “whole product” that gets delivered to your customer inevitably varies by customer segment. Many young companies fail because they try to bring a platform to market and expect customers or integrators to figure out how to leverage the platform. It is far better to fully solve one limited set of problems than to partially solve a large set of problems.
Resist the siren call of the mass market.
What would Nextel have been if they had gone after the mass market? Possibly a third-tier provider of low-quality voice with an odd set of suboptimized technology features. The voice quality issues would resolve in time-assuming the company survived long enough. By resisting the siren call of the mass market and strapping themselves to the mast of tight customer focus, Nextel created lasting value. They are an outstanding example of how great entrepreneurs can build sustainable companies by being strategic rather than opportunitistic.
You may contact Jodi directly at jahic@voyagercapital.com. You may contact RCR Wireless News at rcrwebhelp@crain.com.