Blue-collar workers swear by the mobile-phone small fry. Now, with competition looming,
CEO Donahue needs to keep them happy while hooking big business.
FORTUNE, September 15, 2003
A little before 4 P.M. on Aug. 14, Nasdaq CIO Steve Randich climbed into his Jeep Wrangler in downtown Manhattan. He needed to visit the market's data center outside the city and wanted to beat rush-hour traffic. As Randich wound his way up the island, an employee's voice sounded from the speaker of one of Randich's three cell phones: Nasdaq's Connecticut data center had gone out. Looking up, the CIO saw the traffic lights in front of him go out too. The blackout of 2003 had begun.
Randich pulled over and grabbed the Nextel phone that had broadcast the news. He spent the next few hours using the phone's walkie-talkie function, issuing quick orders to far-flung workers to make sure Nasdaq kept functioning. Neither of his other phones worked: The stampede of users trying to make calls had clogged their networks. What would Randich have done without the two-way digital radio service? "I don't even want to think about it," he says. "It would have been pretty bad."
Major blackouts can be major headaches for people like Randich, but for Nextel Communications such problems mean opportunity. Long the mobile service of choice for construction workers and cabbies, who rely on Nextel's Direct Connect—a walkie-talkie service that allows immediate contact among multiple users at the push of a button—Nextel is now pushing hard into the white-collar world. Over the past two years it has found customers in companies and public agencies worried about terrorism, disasters, floods, hackers, or any other event that can disrupt business. And it has redoubled efforts to soup up its phones and service even further (more on that later).
Nextel must move fast because giant rivals are closing in on its niche. In the wireless world, where competitors differentiate themselves by having the cheapest package of minutes or the coolest camera phone, Nextel up to now has been able to use its technology to stand apart. The company ranks fifth among the six national mobile-phone services, with 11.7 million users, compared with 34.6 million for the market leader, Verizon Wireless. But by financial measures, Nextel excels. Its business users—they make up 90% of its customers—spend on average $69 a month, compared with the industry's $54 a month. They're more loyal too. The company's churn rate—a measure of how many customers defect to other cell phone companies—stands at 1.6% a month, compared with Sprint PCS's 2.9%. Most carriers worry that churn is going to get worse this fall when federal rules will allow consumers to keep their cell phone numbers when switching carriers. Nextel should be shielded: The company sells to big businesses that buy in bulk, and more important, Nextel users can Direct Connect only with each other, locking them into the service.
Die-hard fans and hard-to-switch offerings have paid off handsomely. Over the past three years, as many other wireless companies have struggled to grow, Nextel's revenues have more than doubled, to an estimated $9.6 billion this year. The company lost $2.9 billion in 2001; this year it should earn $1.2 million. Nextel has also managed to retire or restructure $4.3 billion in debt in the past two years. Wall Street has rewarded Nextel's niche approach. While S&P's index of wireless services companies has grown 95%, Nextel's stock has increased 175% to a recent $20.
But now Nextel's peers are invading its turf. For the past few years most wireless providers have looked on in envy at Nextel's push-to-talk. The technology, while intriguing, was difficult to replicate. Nextel's service is built around Motorola's iDen network, a digital voice and data technology that uses advanced compression algorithms to allow walkie-talkie service. Nextel also incorporates radio dispatch technology, which can easily handle short-burst communications across thousands of miles. Many wireless executives complained that trying to duplicate push-to-talk on cellular networks was too difficult. It had too much latency—the time between speaking on one end and hearing on the other. Businesses would not settle for having to wait a few seconds between sentences for a herky-jerky conversation.
Nextel's increasing success overcame their reluctance. In mid-August, Verizon Wireless introduced a push-to-talk feature it calls, fittingly, Push to Talk. Sprint PCS says it will introduce a walkie-talkie function before the end of the year, and AT&T Wireless and Cingular both say they'll have one by the beginning of 2004. All those companies claim they can beat Nextel at its own game—because they run on larger networks, because they offer more choices in handsets, and because they're able to choose among multiple vendors for equipment while Nextel is married to Motorola. "For white-collar and maybe even consumer markets, the other carriers can offer a more compelling solution than what Nextel can provide," says Phil Marshall, a wireless analyst at research firm Yankee Group.
But then again, Nextel is used to being the undderdog. The company started as a two-way-paging outfit whose service was used mostly by truckers. In 1995 cell phone pioneer Craig McCaw invested $1 billion in the ailing company and turned it into a wireless and walkie-talkie hybrid. Direct Connect worked only regionally at first (since July it's been offered nationwide), but that was enough for Nextel to build a following among companies with dispatch-service needs.
As Nextel expanded, however, it piled on debt. By the end of 2001 the balance sheet showed $16 billion in debt. Few paid it any attention during the boom. But when the stock market plummeted in spring 2000, Nextel crashed as well, dropping from a high of $80 to a mere $3 in July 2002.
CEO Tim Donahue, who rose to the position in 1999 after serving as president and COO, knew he had to make big changes. As the sixth child of the 12 in his Irish Catholic family, Donahue was used to competing for attention—and he needed it now from Wall Street. To start, he sold off the company's majority stake in its international business, NII Holdings, which carried $2.7 billion in debt (it promptly fell into Chapter 11 bankruptcy).
Then he began streamlining. Instead of finding a way to manage Nextel's 14 billing systems, he outsourced the project to Chesterfield, Mo., IT-services firm Amdocs. Instead of building cell sites, he found contractors that could do it more cheaply—saving Nextel an estimated $90 million over the next two years. And he reduced the cost of acquiring customers by cutting out middlemen. In the past 2 1/2 years Donahue has opened 600 Nextel stores around the country and expanded Internet sales. Two years ago only 9% of the company's business came from those low-cost channels; now it's 29%.
To build revenues Donahue urged his salespeople to make themselves indispensable to customers. First, he told them to push deeper into companies; 80% of FORTUNE 500 companies use Nextel, but far from all employees inside those firms have the phones. He also reorganized Nextel into groups to target specific segments, like government, transportation, and utilities. Employees were to work on developing useful tools or partnering with other companies to create technologies for those specific industries.
Many of those new applications are just now coming to light. Roto-Rooter in Cincinnati has been a Nextel customer for nearly a decade. For most of that time the nation's largest plumbing company used Nextel devices for their walkie-talkie function, dispatching plumbers to mend busted pipes or unclog drains. Nextel brainstormed on what other devices plumbers could use and found an answer. It partnered with GM, GPS software maker Gearworks, and BlackBerry maker Research In Motion (RIM) to develop a PDA with voice, data, walkie-talkie, and satellite-positioning capabilities, along with the ability to track Roto-Rooter's trucks. More than half of the plumbing company's 3,600 employees now use the phones as digital assistants. Roto-Rooter CEO Stephen Poppe says that by the end of this year his workers will be able to bill and process credit card payments on the spot with Nextel devices.
The plumber's tool is snaking its way into the white-collar world too. For the past nine months some 2,500 employees at IBM Research's facilities in Yorktown, N.Y., have been testing a Nextel system that allows handsets to use both cellular and Wi-Fi networks, indoors and out. That enables employees to keep talking even while hopping in elevators or running between buildings, and saves IBM money by keeping on-campus calls riding on its corporate Wi-Fi system. To create the service, Nextel teamed with a startup in Seattle called RadioFrame, which had developed essential antenna technology. (It's no accident that the companies ended up together: Craig McCaw is a major investor in both; RadioFrame's CEO Jeff Brown and founder Rob Mechaley are, like Donahue, veterans of McCaw Cellular.) Using the system, IBM has been able to replace the pagers and walkie-talkies its employees strapped to their belts. And it's using the technology to give visitors easy access to the web, says IBM Research's director of IT, Albert Schneider, who has been a personal user of Nextel for more than three years.
The Nextel/RadioFrame creation isn't just for IBM employees. The researchers at the labs are trying to figure out how IBM might use the service for its customers. The company is now working to make an even more powerful handset by combining Big Blue's own products and software—think, say, instant messaging and calendar programs—with Nextel's network.
For Tim Donahue, the burgeoning businesses offer not just a chance for new revenue in the face of competition, but a new way to position his firm: "No one's given us any credit," he says. "Everyone thinks of us as a niche company for cab drivers and construction workers."
Not that Donahue is giving up on his old customers. He wants to keep them happy as well. The other area of major growth for Nextel is the government sector. Some 10% of Nextel's users are already government workers, and Donahue expects that part of the business to grow by at least 20% this year. Today, that business is largely centered around emergency-service providers. Employees in the New York City police department, the Denver police department, and the Charlottesville, Va., fire department are typical of those who swear by Nextel. The company frequently donates phones and network equipment during emergencies, as it did on Sept. 11, 2001, and after the blackout. It doesn't usually take long before many users in such crises become paying customers. "Once people get hooked, they're hard-pressed to give [the phones] back," says Donahue.
Now Nextel is expanding to the feds. First the FBI joined Nextel, then the DEA and the CIA, and most recently the staff at the U.S. Senate. "It became almost viral in nature," says Donahue, whose voice rises excitedly whenever he talks about public safety. "This country desperately needs a nationwide network that will serve as a communications system in case of national emergencies." It's not surprising that he has commercial motivations too. "It isn't necessary to study it for 24 years. It is here, it is operating, it is available today, and it's called Nextel."
There's a reason for impatience. To contend with his giant rivals, Donahue needs to keep finding ways to stay different. Nextel also has to fend off startups like Fastmobile, which offers a competing service it calls voice instant messaging. Although Fastmobile's target market is consumers, not businesses, it's still a threat. "The push-to-talk gets more hype than it probably deserves," says Fastmobile co-founder and vice president Harry Eschel. "It's useful in terms of how folks stay in touch, but it's not everything."
Perhaps not. But then again, Nextel isn't really trying to be everything. "I think that five of the carriers are competing on price and one on product and services," says Donahue. "I still like to view us as a small, aggressive, entrepreneurial company battling deep-pocket phone companies." They can come on his turf, but he doesn't plan to enter theirs. Don't look for Nextel to start hawking colorful phone plates or funky ring tones for the 'tween down the street. But when she starts a citywide lemonade-delivery service, well, Donahue might just come calling.