Sizing Up the Sprint/Nextel Deal
The $35 billion Sprint/Nextel Communications merger announced last week answers a lot of questions for those who wondered when further consolidation of the wireless service market would happen.The formation of the third-largest wireless provider (behind Cingular Wireless and Verizon Wireless) also raises a new set of questions, which we take a whack at here:
Why would Sprint want to merge with Nextel?
Nextel, despite the fact that it has a proprietary network based on Motorola’s iDEN technology, is highly valued for a few reasons: its annual revenue per subscriber (ARPU), its low churn rates and its high concentration of business customers.
What’s the big deal about ARPU?
This figure represents how much customers spend with their wireless service providers, and Nextel always has led the pack. In the third quarter, Nextel reported that its ARPU was $69. Sprint’s was $63,Verizon Wireless’ was $51.58, and Cingular’s was $49.78. Nextel has been able to nab a nearly $20 premium per user vs. Cingular primarily because of its high ratio of business to consumer customers (80% vs.20%).Business users tend to spend more for features, applications and reliability
What about churn rate?
Nextel also has the lowest churn, which represents the percentage of users who leave their carrier per quarter. Nextel’s rate in the third quarter was 1.5%. Verizon was a close second, with 1.7%, with Sprint and Cingular picking up the rear with churn rates of 2.7% and 2.8% respectively Churn is a key metric used to gauge customer satisfaction.
What does this mean to Sprint customers?
Sprint is merging with a company that has a lot of experience with business users and likely will take a page from Nextel’s book. Nextel has more than 10 years of experience in dealing with business users in specific vertical markets offering applications and services that meet their needs. Sprint and other wireless providers have been accused of simply taking consumer offerings and repackaging them for business users.
What do Nextel customers get?
Sprint is deploying high-speed 3G gear based on Evolution-Data Only (EV-DO) over its Code Division Multiple Access (CDMA) network. It says the upgrade will be complete by late 2006 or early 2007.Verizon Wireless is adopting EV-DO. Meanwhile, Motorola is working on a gateway and dualmode iDEN/CDMA phones that would support Nextel and Sprint customers on each service providers network.
So does IDEN go away?
Yes, eventually Nextel says it will continue to invest in its iDEN network through 2007, until its customers’ voice traffic can be supported over Sprints network. But Nextel says it might use the network after 2007 to support its push-to-talk service, which is far more mature than Sprint’s.
What about Sprint’s traditional landline business?
Sprint says it will spin off its local division post merger. Although there wasn’t much talk about its traditional interexchanage carrier (IXC) business last week, Sprint says it will continue to offer enterprise users voice, data and IP services.”It would be a big strategic mistake to deemphasize its IXC business,” says Lisa Pierce, a senior analyst at Forrester Research. Sprint needs to reassure customers that it will continue to make its landline business a priority she says.
Things sound pretty rosy. What is Sprint/Nextel lacking?
International coverage. Analysts agree Sprint/Nextel will not be the first choice of business users who frequently travel abroad. ATcStT Wireless, now owned by Cingular.has extensive roaming agreements overseas.T-Mobile owns T-Mobile Germany and offers far- reaching international coverage.
Are there overall industry benefits for all wireless users?
Bob Egan, president of consultancy Mobile Competency, says yes.”Business users can expect wireless data prices to collapse,” he says.Today users pay about $70 for IG byte of wireless data per month. Egan says he expects that monthly price to drop to about $35. He says business users can expect Verizon Wireless and Cingular to fight aggressively for their contracts before the Sprint-Nextel deal is final.
Copyright Network World Inc. Dec 20, 2004