Sprint Nextel faces challenges as it combines technology, customers and culture

by Brett Lieberman
for Virginia Business
November 2005

The first large-scale test for the $35 billion merger between Sprint Corp. and Reston-based Nextel Communications came one night in early September. As the last customers walked out of 1,600 Sprint and Nextel stores, employees scrambled to transform the public face of the newly combined company.

Overnight, they hung 10,000 banners showing Sprint’s new logo over Nextel’s black and yellow colors. Nearly half of the 80,000 employees took home new uniforms. Plus, the company distributed 16,000 new nametags and more than 100 million brochures, displays and other printed materials proclaiming its post-merger slogan: “Yes you can.”

Driving home this message is a massive rebranding campaign, which has been running full tilt since the merger was approved in early August. It includes television, Internet and print advertising plus sponsorships of NASCAR and the National Football League. For added punch, Sprint Nextel will sponsor the heavily watched Super Bowl half-time show next year.

To avoid the snafus of other large mergers (particularly last year’s combination of Cingular and AT&T Wireless which had consumers grumbling about an $18 activation fee), planners at Sprint Nextel tried to anticipate every detail. From Sprint’s Overland Park, Kan., headquarters, they spent months analyzing issues large and small, down to the number of new logos that would be needed.

While not flawless, the carefully choreographed transformation has gone smoothly so far, say analysts. But the true tests of whether the merger will work lie ahead. Despite upbeat talk about growth and opportunities, the merger — which created the country’s third-largest wireless carrier — faces tough challenges. While integrating its two cultures, Sprint Nextel must remain competitive against its larger rivals, Cingular and Verizon Wireless, in a saturated cell phone market while at the same time rolling out new handsets and technologies to retain its nearly 45 million subscribers.

An even more difficult and costly task will be dealing with the different technology the two telecoms used to build their existing networks. “There are certainly some great opportunities but some big issues as well. Nextel is on a very different technology than Sprint,” cautions Lisa Pierce, a vice president and telecom analyst with Forrester Research of Cambridge, Mass.

Pierce gives Sprint Nextel a one-year grace period to succeed. Ideally, the company will use this opportunity to gain on Cingular while that company works out the kinks of its merger. Sprint Nextel also needs to dislodge the perception that Verizon’s coverage is superior. Otherwise, it runs the risk of becoming the perennial third player among top carriers, says Pierce.

Another complication swelling the merger’s price tag is legal challenges from some of the 10 affiliates that sell Sprint and Nextel phone service. Some have filed lawsuits alleging violation of noncompete agreements, pointing out that the merged company rivals the smaller telecom affiliates in some markets. One affiliate, Gulf Coast Wireless in Baton Rouge, agreed to drop a lawsuit last month after Sprint Nextel agreed to acquire it for $287.5 million. Buying out all the affiliates and resolving contractual issues could cost $12 billion to $15 billion, according to some estimates.

For now, though, Sprint Nextel is enjoying a honeymoon of sorts. It recently raised its target of post-merger savings by 20 percent to $14.5 billion and expects to pick up 1.2 million new subscribers in the third quarter. “What the merger really offers to the customer is more choice,” says Christine Pantoya, a Sprint Nextel regional vice president for field sales whose territory includes the Eastern Seaboard north of West Virginia.

The new company plans to woo new and existing consumers with flexible pricing plans, which allow unused minutes to carry over to the next month. Sprint’s traditional base has been among consumers, while Nextel has been popular with small businesses, government agencies and businesses with service workers in the field. With the merger, the company aims to extend its reach with small businesses, who enjoy Nextel’s walkie-talkie handsets, and corporate users, who want a single vender to provide BlackBerrys to executives and push-to-talk handsets for field workers.

In other words, customers can have it all — with a single company. At least that’s the theme of a fall advertising blitz that has been plastered over television.

While millions are watching during the Super Bowl, the company plans to showcase some of its technology. In October it rolled out NFL Mobile, allowing fans to tap into sports programming via their wireless phones. For $5.99 a month, customers on the nationwide Sprint PCS network and the Nextel National Network can get an NFL television channel, exclusive video and audio highlights from NFL films, and team/player scores, stats and schedules.

The long-term prospects for the Sprint/Nextel marriage may depend on how well the combined company is able to smooth over differences. Nextel’s Integrated Digital Enhanced Network (iDEN) technology powers its “push-to-talk” phones. They’re wildly popular among service industries and government agencies because of their easy ability to connect a group of users. Sprint’s network runs on the more commonly deployed and faster CDMA (Code Division Multiple Access) technology. It offers some services that iDEN cannot, such as high-speed wireless data.

Sprint Nextel will be able to expand its combined network, which covers 80 percent of the country, by co-locating transmission equipment. Sprint, for example, can add CDMA transmitters to Nextel tower sites to expand its reach where coverage is weak, such as urban markets.

Yet, despite such opportunities for expansion, the blending of the company’s differing technologies creates the biggest and costliest challenge. “There is a reason that Nextel decided to merge with Sprint,” says Pierce.

Without the merger, Nextel — a small player on its own in the wireless market — would have been forced to spend billions of dollars upgrading its iDEN network from frequency bands in the 800 and 900 MHz spectrum to the 1900 MHz used by Sprint. As part of a deal with the Federal Communications Commission to give up its lower band frequencies for use by first responders, Nextel would have had no choice but to make the costly switch on its own.

Sprint plans to support the iDEN technology until at least 2010, but is expected to begin moving customers to Sprint’s CDMA network in the next couple years. That could prove tricky.

If Sprint Nextel mishandles the migration, it risks disenfranchising its Nextel base of small-business customers. They have been among the most loyal in the mobile phone market, and their monthly bills average $70, among the highest industry revenues per phone. “One of the more important things for Sprint to do is take Nextel’s knowledge about push-to-talk and make its CDMA technology work as much like it,” says Pierce.

“Yes, it can be done, but it’s never been done before.”
One downside of mergers is that they typically bring layoffs as companies shed overlapping units. Sprint Nextel officials say some reductions are likely, particularly in the executive ranks. Some thinning has already occurred as the top 1,500 executives have been named, and analysts predict more to come. “It’s what happened when long distance companies merged in the ‘80s,” says telecom analyst Jeff Kagan. “It leaves numbers of workers with a job cut.”

The combined company operates with a split headquarters. Reston is home to its executive headquarters, which keeps the company near government regulators and public-sector agencies. Meanwhile, operations stay in Kansas.

Cuts or shifts at the retail level are not likely to occur soon as store performance and other factors are weighed. Company officials, who like to cite the example of gas stations selling the same brand on both sides of a street, caution that stores won’t necessarily close because there is a Nextel and Sprint store in the same mall or across the street from one another. Yet a key difference is that Exxon stations located across the street from each other usually aren’t owned by the corporation.

Sprint and Nextel executives are trying to avoid the mistakes of past mergers as they combine systems. The company has no plans to force subscribers into new price plans before their contracts expire. Instead, consumers are already sampling some of the benefits of the larger network and both companies’ offerings. For instance, Sprint and Nextel users call each other free of charge in-network. Sprint users with plans starting at $49.99 a month will be able to receive free incoming calls, a feature enjoyed by Nextel subscribers. And, Nextel subscribers can take advantage of a Sprint plan that allows them to buy blocks of 100 extra minutes for $5 rather than incur nasty 40 cents a minute charges when they exceed their monthly quotas.

That’s a far better start than charging customers extra fees. If it works, Sprint Nextel might be paging industry leaders Cingular and Verizon with this message: “Can you hear me now?”