Nextel Sprint merger Raises Regulatory Issues

The conventional wisdom early on was that a Nextel- Sprint merger would be close to a regulatory slam dunk, especially since the company would be smaller than the new Cingular, with fewer customers and less spectrum on a national basis. “I'm not expecting to see many regulatory issues since I think this is pretty straight-forward,” said a regulatory attorney. “Of all the combinations, on the surface of it this seems to be the most straight- forward.”

One of the more significant issues will be addressing govt. concerns that once the wireless industry moves to 3G services Cingular and Verizon Wireless will face at least one national competitor, sources said Tues. They said making certain this competitor has enough spectrum available to offer 3G was a major discussion subject within the FCC and DoJ in the Cingular-AT&T Wireless merger review and was why regulators focused on spectrum more than customers in the merger orders.

“The concern was not just the size but that there be spectrum available so that another competitor could deploy,” one source said. Nextel and Sprint “may not need that much spectrum to be a viable competitor, but they'll need more than they have today.”

A 2nd issue that could loom large is Sprint’s and Nextel’s dominant interest in MMDS spectrum. That issue started to emerge as regulators examined the WorldCom- Sprint merger, which ultimately fell apart. The companies haven’t said exactly how they'll use this 2.5 GHz spectrum they have been buying up around the U.S., but they could use it to offer wireless phones with fast Internet connections.

Legg Mason said the combination of the MMDS interests could emerge as a major issue. “Although opponents might argue that the merging company should divest MMDS spectrum, the merger would primarily increase the size of the footprint, and thus does not reduce competition in any given market and Sprint-Nextel could argue that the only practical way to turn that spectrum into a third, wireless pipe to the home would be to merge the companies,” the firm said.

The combined Sprint-Nextel holdings would be slightly above the old 45 MHz spectrum cap, lifted by the FCC at the beginning of 2003. Sprint has about 25 MHz of spectrum nationwide. Nextel’s holdings are more complicated. If the carrier accepts the terms of the 800 MHz rebanding order, Nextel would have about 28 MHz nationwide, including spectrum at 1.9 GHz, 900 MHz and 800 MHz.

Integration problems also loom large. Consolidating the Sprint and Nextel network would be one of the biggest challenges the companies would face if there is a merger, according to analysts. The integration of Sprint’s CDMA network and Nextel’s iDEN system would certainly be more complicated than merging Cingular’s and AT&T’s networks, which were both GSM-based, they said. “Those [Sprint’s and Nextel’s] networks are not compatible with each other,” said Communications Technology Research Analyst Steve Levy: “To physically merge them, there would be a challenge. They have different features and were built for different purposes.” Levy predicted the 2 companies would try to avoid merging their networks: “They could just build out a new 3G network that would overlay across their existing networks.”

“If [Sprint and Nextel] merge, they would run a dual network,” said Precursor Group Analyst Rudy Baca. That way, he said the combined company could get “the best of each network” -- 3G features from CDMA and push-to-talk from iDEN. “The combined network would make it easier to attract business customers, but the dual [one] would allow to keep push-to-talk customers,” he said: “Push-to-talk is [the industry leader] and if you can provide that and 3G feature, that would be an attractive bundle.

Sprint and Nextel have been trying to move their networks to 3G for some time. Sprint announced last June it planned to provide next-generation EV-DO (evolution, data optimized) wireless service at data rates up to 2.4 Mbps to major metro areas during 2005. It recently awarded $3 billion in contracts to Lucent, Nortel and Motorola to upgrade its wireless services infrastructure and accelerate mobile device data speeds up to 10 times. The contracts involve new switching and radio hardware and software for cell sites, capacity augmentation and Sprint’s EV-DO wireless high-speed data network deployment. They also include future 1xEV technology update options. Sprint has yet to announce markets in the service launch.

A merger with Sprint would likely determine what technology Nextel would use to provide high-speed data services, analysts said. Nextel is considering ways to move to 3G and is expected to pick its broadband technology early next year. “The merger [would give] Nextel a transition path to 3G,” Baca said. Nextel, which operates an iDEN-based network couldn’t make such a transition because iDEN doesn’t have a 3G standard. The company has been looking at Flarion’s Flash-OFDM technology as a way to move to 3G, but Baca said “that wasn’t realistic because Nextel [doesn’t] have a network for that. It’s a proprietary technology that doesn’t have standards. Nextel wouldn’t move to it.” Nextel hasn’t made an announcement and has been looking at CDMA among other technologies. “Absent a merger, we believe Nextel will spend about $2 billion-$3 billion on its 3G network,” UBS said: “Should an agreement be struck, there would be significant upfront savings as Nextel could piggyback off of Sprint’s 3G CDMA network.”

“Sprint and Nextel would have a need for tower space and that would be a much better deal for the tower companies than in case of Sprint and Verizon,” Baca said: “That would also be a better deal for Sprint affiliates, which control the towers and the base stations. There wouldn’t be any redundant towers.” But he said “in the Verizon and Sprint case, they wouldn’t need towers controlled by Sprint affiliates. They would just run the combined spectrum over existing Verizon infrastructure.”

Nextel’s move to CDMA-based network would benefit companies like Lucent and Nortel -- the dominant CDMA vendors -- while hurting Motorola, some analysts said. Motorola, which specializes in the iDEN standard, has been the sole equipment supplier to Nextel, its largest customer. But in a merger, Nextel would move away from iDEN, leaving Motorola at a loss, some analysts said. “Lucent and Nortel would be in a better position [if there is a merger] because they were just chosen by Sprint [for wireless services infrastructure build-out]… It is logical that they would be the primary vendors for Nextel as well,” Levy said. But Baca disagreed: “Motorola would actually benefit because the combined company would extend the use of iDEN technology. It wouldn’t be abandoned. You can continue to run your network at no incremental costs and retain your customers.” Motorola also provides some of Sprint’s infrastructure, he said.

Verizon Wireless would be a better company for Sprint to merge with in terms of network compatibility, since both companies use CDMA2000 technology developed by Qualcomm. “[It] would be much easier for Verizon and Sprint to combine their networks,” Baca said. Legg Mason projected that a combined Verizon/Sprint would need to divest spectrum in N.Y.C. (25 MHz), L.A. (5 MHz), Chicago (5 MHz), Philadelphia (5 MHz), D.C. (15 MHz), Baltimore (25 MHz), Austin (15 MHz), Mobile (15 MHz) and likely some smaller markets. “In addition, similarly to the Cingular/AWE merger some divestitures of operations in specific markets with high concentration of Verizon/Sprint would require divesting,” it said.

A regulatory attorney said the Cingular-AT&T Wireless order provides several clues on the issues FCC will look at if the merger moves forward. Much of the FCC’s focus in the Cingular case was on competition in local markets. While the FCC didn’t say so specifically, the source said, it seemed to order remediation in markets with only 2 or 3 competitors. Markets with 4 competitors were more acceptable.