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Sextel Take Three

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I have taken a scorched earth philosophy to the big Sprint-Nextel merger and am trying to be as comprehensive as possible about this. I had some interesting email reactions to the merger, and there were others who sent me their thoughts. I have included some here, including a take that the merger could actually boost competition.

“Conventional wisdom on the Sprint-Nextel merger is that this will make the market less competitive,” says Nick Wray, Vice President of Strategic Sourcing for Control Point Solutions. “I believe this merger will actually make the enterprise market more competitive. This consolidation, particularly of the technologies, will create a true competitor for giants of the wireless industry like Verizon and Cingular. The resulting company would combine Sprint’s large corporate customer base and network and Nextel’s extremely loyal customer base.”

Merrill Lynch, on the other hand believes that big winner here is Qualcomm since CDMA is the technology of choice for the combined company. Finally, the operators are planning to launch PTT (push-to-talk) capability on their CDMA EV-DO network in 2008. “We think this essentially means that the 14mn strong subscriber base of iDEN will join the CDMA community,” Merrill analysts write. On the flip side, the iDEN gravy train is coming to an end for Motorola.

“The near-term implications of the merger on Motorola’s handset business will be quite limited. Sprint and Nextel announced they would ask Motorola to develop dual mode handsets and, in addition, the operators are planning to keep the iDEN network fully operational at least until 2007, rendering Motorola’s iDEN handset business viable for at least another 3 years. In the long term Motorola’s handset division could lose 7-8c of its profits due to Nextel’s migration to a new technology, the impact on near term performance is quite limited. On the positive side, we note that while Sprint currently does not buy handsets from Motorola, the merger with Nextel and the development of dual mode handsets could open this market and create new opportunities.” iDEN sales account for approximately 20% of division revenues but 25% of profits, reflecting higher margins given Motorola’s sole-vendor status at Nextel.

Other links.
* The New York Times
* The Daily Deal
* Gary Forsee, profile in The Kansas City Star
* Timothy M. Donahue profile in The Kansas City Star
* The San Jose Mercury News on tough integration challenges.
* Nextel Cup — but for how long? The New York Post

2 Responses to “Sextel Take Three”

  1. Jesse Kopelman

    CS, right as usual but your news is not really shocking. All mergers are anti-competitive and in a general sense anti-consumer (although it is nice when your crappy service provider is replaced by one with its act together — this happened to me once when Comcast bought out my incompetant local cable co). Anyway, the good news is that bigger=slower meaning oportunities will come along for new players to offer something better. The only really bad news in my book would be if Sextel decided to abandon Sprint’s MVNO (the consumer’s real friend) support.

  2. Charlie Sierra

    Nick Wray is way off-base here.

    The relevant context of evaluating the merger is not to focus on the enterprise but the CONSUMER.

    VZW and Cingular are hardly innovators in the business, and lets face it they are more interested in protecting there backsides. And this merger helps them more than it could ever hurt them.

    One metric that is very important, and often overlooked is Yield, ie. $$$/MOU. And when we chart the carriers by Yield we get an interesting story, plus a TRUE glimpse into the future.

    VZW, Cingular, Nextel all have Yields in 9.5 – 11 cts/MOU.

    Sprint and TM have Yields in 6 -7 cts/MOU.

    What is obvious with just a simple calculator is that while VZW has nearly twice the subs of Sprint, its total network MOUs is only ~20% greater. Hmmmm.

    The affect of Sextel is to co0opt one consumer friendly provider (sprint) and to further marginalize the other TM.

    How does the Yield chart predict the future? I’m so glad you asked.

    Its very simple, once who have “scale”, ie lots of subscribers, aggressively lowering prices is too great a risk because of cannibalizing your installed base.

    One stupid pricing decision (ie. Sprint’s failed ClearPay) can nearly terminate a company.

    Will Sprint-Nextel be an agressive player? Most likily not, because the while the first rule of business is to not underperform, the second rule is to not grossly overperform.

    Thus the Sextel creates strong indications that this merger is anti-competitive, because Sprint will now have a large customer base, and the cover of defensive RBOC competitors to hide beneath.

    Large subscriber bases are not the basis of a competitive marketplace for consumers, they are antithetical. Just plot gross adds vs. installed base. Its obvious.

    This merger is great for shareholders, but not consumers.