December 15, 2004 12:43 PM PST
Mixed marriage for Sprint and Nextel technologies
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Nextel's cellular network is based on IDEN (integrated dispatch enhanced network), a standard developed by Motorola which has found relatively few takers outside of Nextel. Sprint's network is based on CDMA, a technology developed by Qualcomm that is supported by about a fifth of the world's cell phone operators. The two standards are incompatible.
On Wednesday, Sprint said the new combined entity will diminish the role of Nextel's IDEN network, possibly even phase it out, to lower capital expenses.
Nextel voice calls and its crown jewel walkie-talkie-style "push-to-talk" calling will use Sprint's CDMA network starting around 2008, according to a company spokesman and press and analyst merger briefing materials. Following the $35 billion deal, other services will be "migrating over time," but representatives did not disclose details.
By favoring CDMA, Sprint would deal a blow to Motorola's struggling IDEN standard. According to the research firm, investors are worried that a Sprint-Nextel merger poses a risk to the 9 percent of sales and 13 percent of operating income Motorola currently receives from Nextel. It is possible Qualcomm "could collect royalties on additional CDMA handset sales and sell most of the chipsets for handset sales," according to Wojyek Uzdelewicz, a Bear Stearns analyst.
CDMA wins out, according to analysts, mainly because without much interest in IDEN, network equipment and handset makers haven't developed newer, faster and better generations of their products. CDMA's 20 percent market share drives ample research and development on new gear.
"IDEN is esoteric and saddles you with one problem--you can't grow as fast as everybody else," said IDC analyst Shiv Bakhshi.
A Motorola spokeswoman said the company "remains committed to the ongoing development and deployment of next-generation IDEN technology and products." A Qualcomm representative did not immediately return calls seeking comment.
Negative effects could also be felt by wireless broadband equipment maker Flarion Technologies, whose equipment Nextel is now testing to keep pace with competitors' relentless push to higher-capacity networks capable of faster Internet services.
The new Sprint Nextel is likely to keep the two networks going separately for some time because there's no financial reason now to shut down one or the other. Nextel's customers generate the highest average revenue per user in the business, and Nextel's minutes of use continue to grow. But over time, as the expense of operating two networks mounts, the company will probably have to choose between the two technologies.
Should IDEN lose its place among major cell phone operators, the U.S. market would be down to two dominant cell phone standards: CDMA and GSM (global system for mobile communications). GSM, the world's most popular standard, is used by No. 1 U.S. cell phone operator Cingular Wireless and new No. 4 T-Mobile USA. That puts the U.S. carriers a few more acquisitions and bankruptcies away from rallying around a single cell phone standard.
Europeans know well the benefit of eliminating a patchwork of incompatible cell phone standards. They can travel anywhere on the continent and use the same GSM phone, while anyone trying to do that in the United States would come away disappointed.
The newly announced merger comes just a few months after Cingular Wireless closed its $41 billion purchase of AT&T Wireless, a union that could serve to foreshadow problems for Sprint Nextel.
Cingular Wireless and AT&T Wireless have been using a tactic borrowed from football coaches--scripting the first few plays of each game--for the relatively smooth sailing in the eight weeks since their megamerger.
But the scripted moves are now done, and here comes the hard part: keeping 46 million customers satisfied as Cingular Wireless maneuvers through a huge number of remaining merger projects--about 600--over the next two years as it tries to stitch together two giant cell phone networks.
One troublesome task involves meshing the mundane but incredibly complex machinations of accurately billing cell phone subscribers.
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