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Technology > Tech Investor
Watch out for Nextel
"Push to talk" has boosted growth. But other firms are getting ready to sell walkie-talkies soon.
June 24, 2003: 2:17 PM EDT
By Paul R. La Monica, CNN/Money Senior Writer

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NEW YORK (CNN/Money) - Nextel's walkie-talkie phones are hot.

You've seen the commercials with Dennis Franz. You've heard people with them in elevators carrying on loud conversations. (Beep-beep!)

Nextel's unique Direct Connect feature has helped the company add subscribers at a time when competitors have struggled. What's more, the average monthly revenue per user (ARPU) for Nextel customers in the first quarter was $65, well above average.

As a result, shares of Nextel (NXTL: Research, Estimates) have surged 53 percent since March 11 and recently hit a 2-year high. But that run-up doesn't factor in the risks Nextel faces.

Nextel will soon have competition

Nextel has been unique in the wireless world, but that won't be the case for much longer. The phones feature a two-way radio service that allows users to simply push a button on the side of the phone which enables them to instantly talk to other Nextel users that have the Direct Connect service. It's basically a fancy walkie-talkie.

Verizon Wireless is set to launch its own two-way radio service soon. AT&T Wireless and Sprint PCS have similar plans.

Recognizing the threat, Nextel announced on Friday that it had received trademark approval for the term Push To Talk and its abbreviation PTT.

But Drake Johnstone, who follows Nextel for Davenport & Co and has a "sell" rating on the company, said that the trademark won't help much, and that competitors simply will come up with another name.

Of course, Nextel has the strength of having been alone in this niche for years, and Verizon and others likely will target consumers rather than go after Nextel's business base, said David Chamberlain, an analyst with telecom research firm Probe Group.

But there are other problems. Though debt is down from a year ago, it's still high at $12 billion.

In addition, Johnstone said that Nextel has yet to upgrade its network to enable faster transmission of data. He worries that if Nextel doesn't upgrade, it risks losing corporate customers to the likes of AT&T Wireless, Cingular and T-Mobile, which have faster networks.

And if it does commit to an upgrade, that would require more debt. "They'll have $17 billion to $18 billion in debt and instead of positive cash flows they'll have negative cash flows," Johnstone said. "Investors have blinders on."

Big investors trimming their stakes

Some of Nextel's strategic investors have been reducing their stakes. Motorola, which manufactures the walkie-talkie phones for Nextel, sold 25 million shares of Nextel in March. Motorola still owns 83 million shares, about a 9 percent stake.

Also in March, Nextel announced that billionaire Craig McCaw, who invested more than $1 billion in Nextel in 1995, was reducing his stake to less than 5 percent. He had controlled more than 10 percent as recently as two years ago.

David Hoover, an analyst with Precursor Group, an independent research firm that focuses on the telecom industry, said that investors should not overlook those moves.

After all, Nextel is relying on satellites owned by McCaw to launch a global version of Direct Connect and Motorola is Nextel's key supplier. "Nextel is understating the negative effects of these sales," Hoover said.

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Hoover added that even though Nextel is doing well now, it would probably need to sell out to a larger competitor in order to be able to survive for the long-term because it will be tough for it to come up with the money to keep upgrading its network.

If you're looking for one more reason why Nextel could be heading for some trouble, consider this. The company recently announced that it was ponying up an undisclosed amount of cash to become the new lead sponsor for Nascar, replacing RJR Nabisco's Winston brand of cigarettes.

And as my colleague Chris Isidore has pointed out in his SportsBiz column, public companies have often fallen on rough times after they've decided to slap their corporate name on something sports related.


Analysts quoted in this story do not own shares of Nextel and their firms have no investment banking relationships with the company.

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