Getting ready for the next wireless boom

Nextel Communications has a multi-talented CEO: He has helped build a company with 8.3 million customers and raised US$1 billion in cash from a recent bond sale, and he can spin a cell phone on a tabletop.

Tim Donahue can get a Motorola i85 to complete two rotations before deftly scooping it back into his hands and setting it into motion again. It could be a nervous habit or a playful trick, depending on how you see Donahue's current situation in the industry. Next-generation wireless networks face delay after delay, while software glitches have forced the recall of thousands of cell phones this year.

At the helm of the company since 1996, Donahue, 52, has been part of the wireless boom that has placed Nextel among some of the largest wireless providers in the United States. Now the company--along with its competitors--is wrestling with the huge cost of introducing next-generation wireless networks while watching shares fall to new lows.

In May, the company announced it would cut 5 percent of its work force after missing first-quarter revenue projections. Despite such financial pressures, Nextel says it will add another 2 million customers this year.

Donahue recently talked about the future of the wireless industry and whether Nextel can make good on its plans in a down economy.

Q: It seems like every week another telephone service provider is delaying the introduction of its version of the next generation of cell phone service, known as 3G
A: I don't think there's any question about the fact that the world is going to move to 3G. I think these delays are sort of expected anytime you have new technology, so I wouldn't get overly concerned about it.

So when do you see your network reaching 3G?
It's difficult for us to say because we haven't gotten all the information back. We don't yet know the cost, we don't know delivery dates. Clearly you won't see it until probably the 2003 time frame. You'll see some of the carriers coming out in 2004. That's at least what they're saying, but as you have rightly noted, they've pushed it back and pushed it back.

In Europe, 3G licenses are so expensive that one telecom company wants its money back now that the market has soured. You're starting to see a lot of carriers planning to share one network, not build independently. Do you think that's going to happen in the United States?
Once all of us go through our due diligence, once all of us understand which way we're going, once all of us appreciate the capital requirements and the operating costs, I think that it'll be a possibility that carriers could sit down and say: "Let's jointly build a network." The carriers would continue to market under their current brands and compete in the marketplace as we do today.

Why hasn't that happened in the United States to begin with?
Here, you get deep-pocketed players for the most part. Verizon is probably not going to share a network with us. AT&T is probably not going to share a network with anybody. I don't know if it'll happen; it's clearly possible.

We have a down economy. Will handset sales continue to grow?
We've seen some belt-tightening. We haven't lost accounts, but we've lost units inside of accounts when there's restructuring going on. We felt it, but at this point in time we have said to the world that we expect to put on 2 million net new customers this year and generate US$1.9 billion in positive cash flow.

NTT DoCoMo has recalled at least two sets of phones in the past six months because of software glitches. Analysts are beginning to question whether there's too much software on the new models of phones. What do you think?
There has been nothing that we can see that has negatively affected the overall network in terms of its performance, uptime, downtime, speeds, interference or throughput.

Motorola has had its troubles. Nextel is aligned pretty tightly with the handset maker. Have you guys felt the pinch?
We're their largest customer worldwide. Second of all, obviously we have their attention. Third of all, with all of the reduction in force that they've done, all the cutbacks that they've done, the one area that they have not touched--it's a sacred cow--is iDEN (a network software used by Nextel). And we are very comfortable with the road map that we have with them, we're very comfortable with the handset division of Motorola.

But what happens if their business continues to suffer?
In the world of 3G, one of the benefits to Nextel is that we now are going to be in a multi-vendor environment. So you've got Lucent, you've got Samsung, you've got Ericsson, and you've got any number of other infrastructure and handset manufacturers that will come to the party. So as a result, it is our expectation that we'll even get better scale as a result of more intense competition.

Nextel's perspective is more from the corporate side where application is king. What about on the consumer side? Do you think consumers are ever going to adapt to a phone that offers more than just a solid voice connection?
Here's where I think there's real legs in a consumer market: the youth market. Let me tell you about that for a minute. Funky colors, bigger screens, direct connect capability. Think about direct connect, right? I mean, direct connect is the voice equivalent of instant messaging. And I can talk to you or I can talk to a group of people, depending on what I choose to do.