Nextel and Sprint Announce Plans to Merge
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RAY SUAREZ: Sprint and Nextel made it official today. The two companies have agreed to merge, creating the nation’s third-largest wireless phone provider.
If approved by regulators, the new company will be known as Sprint Nextel, with more than 35 million customers. This isn’t the first merger for the industry.
Earlier this year, Cingular became the number-one provider when it acquired AT&T Wireless for $41 billion. Verizon is the second-largest wireless provider.
What is the significance of this merger and what does it say about the telecommunications industry? For that we get two perspectives.
Rudy Baca is a wireless and media analyst at Precursor, an investment research firm, and Gene Kimmelman is director of the Consumers Union here in Washington.
Rudy Baca, in the case of these two particular companies, Sprint and Nextel, what do they want from each other? Why this marriage?
RUDY BACA: This marriage is one that fills gaps each have in their product portfolio. What Sprint has is it’s got a wire line and wireless segment, so they have a long-distance network. They can provide a third generation that is a broadband service.
Nextel, on the other hand, has a push-to-talk feature that is very, very popular with a certain market segment, but it doesn’t really have any means to provide those broadband services.
By coming together, they each can take the best of their disparate networks, put them together and offer a more complete product bundle.
RAY SUAREZ: And looking at the industry in a wider context, why are the giants merging with each other rather than trying to grow their own industry?
RUDY BACA: Well, there are two reasons for that. One, with the penetration rates that we have, subscribership levels in the U.S., essentially growth is going to come from poaching the customers of their competitors because they’ve reached high levels now.
Eighty percent of the American consumers, the target age groups, already have a cell phone. So what they’re trying to do is attract customers with a better product bundle.
Number-one Cingular, number-two Verizon are providing these broadband services or beginning to provide them. Sprint needs to move quickly and Nextel needed to find a way to do so.
RAY SUAREZ: Well, we’ve heard the business rationale, Gene Kimmelman. If you are one of the tens of millions of people with a cell phone in your pocketbook or clipped to your belt, this is a good deal for you?
GENE KIMMELMAN: We are afraid it won’t be a good deal. We are afraid it diminishes the level of competition. We’ve had enormous price reductions with five, six firms competing aggressively, trying to poach, as Rudy says, in the cell phone business, bringing prices down, offering new packages.
But when the government allowed Cingular to buy AT&T Wireless, it effectively signaled that it was willing to accept just three players in the wireless market in every local community.
And that is why Sprint and Nextel are getting together. It is survival,l but the problem for the consumer is less competition, less aggressive rivalry between these firms.
And we are afraid we are not going to see those prices continue to come down. In firms with three players, in markets with three players, for example, you have cable and two satellites, look what has happened.
When was the last time consumers saw a cable rate reduction? Prices are going up three times inflation. We certainly hope cellular doesn’t become what cable and satellite have been for consumers.
RAY SUAREZ: But Rudy Baca just posited a world where they grow by competing for each other’s customers. Don’t they have to use price and technical innovation to do that?
GENE KIMMELMAN: When there are enough companies there, they certainly do, but as Rudy’s firm has said, when there are only two or three major players, they tend not to compete on price.
Yes, you may get some new features. Yes, you may get some new services, and I certainly hope Sprint and Nextel will move toward a broadband offer, but look at the two other players in wireless.
Verizon Wireless is owned by a wire-line company. They were supposed to be competing wireless versus wire line. They have broadband, local phone service, they have long-distance phone service. AT&T and MCI are virtually disappearing from long distance.
The other major company, Cingular, is owned by SBC and Bell South, major dominant local wire line companies, offers the full package of service, dominates in the South, Midwest and California.
I hope Nextel Sprint can come together and offer something, but they don’t have the full package of services. They won’t have it for a few years. I’m afraid this is a Hail Mary effort to make the companies survive but, again, not price reductions for consumers.
Consumers may have to change their telephones now, buy new phones because the technology of these two companies is different. The government has, I think, in effect created a mess here by taking what was a vibrant competitive market and making it less and less competitive.
RAY SUAREZ: Rudy Baca, Gene Kimmelman raises an interesting point. This is the first big merger between two companies that use different technologies to run their systems. Is this going to cost big money as much as they achieve a certain economy by marrying?
RUDY BACA: It would if they actually tried to blend both of those disparate technologies into one system. I think they’re much smarter than that.
Basically what they are going to do is they’re going to take Sprint’s transmission technology, and they’re going to build a next generation broadband network on that technology using one spectrum slot.
Nextel is going to continue to provide its distinct proprietary push-to-talk service on a separate spectrum slot. Basically what they run is what’s called a dual band network.
You can integrate them on the handset so that it is actually transparent to the consumer, but the network is actually two networks run simultaneously, and Sprint has shown they can do that.
RAY SUAREZ: What about Gene’s wider point: that having three companies control 75 percent of the cell phone business is just by its nature not good for consumers?
RUDY BACA: I think what they do is they run through the Department of Justice and they look at the competitive effect. They have indices they are required to run through. I think you are forgetting that cable is moving into a voice application. It is very, very cheap.
RAY SUAREZ: What does that mean?
RUDY BACA: It means that your cable company can provide you not only video but voice service. It can be your phone company. It is very cheap for them to do it. So it is going to be part of what they offer as their product.
There are also other technologies: Wi-fi, Wi-max, there’s this whole alphabet soup. Basically it means that some municipalities are actually providing free wireless Internet access free into certain areas.
You are going to get broadband from a number of different providers, and the FCC recently approved providing Internet access over power lines. Every home that has an electrical outlet potentially has an Internet connection. So if you focus on only three, you are missing the larger and more competitive aspect.
GENE KIMMELMAN: What Rudy is missing is that to get the cheap cable phone service, you have to pay $40 or $50 for cable modem service, and then your cable package and video programming another $40. It is all very expensive.
It might be something for the top end of the market but not the average consumer. Every major company is trying to fight these localities trying to build out Wi-fi networks. So the government is effectively abandoning a strict antitrust policy and is hoping somebody else will come.
But how can someone come and play against companies that have local, long distance, mobile, broadband service and brand-name recognition with 90 percent of the market where they were a local monopoly.
RAY SUAREZ: Well, what about Rudy’s point that phones won’t be competing against phone services in isolation, that because of other kinds of products and other kinds of technology, phones will have to stay competitive by staying cheap?
GENE KIMMELMAN: That’s fine if you don’t mind a digital divide. We only have 20 percent of the country that gets broadband service today. They may be able to get a combination package with cheap offerings from the new providers. Everybody else is stuck paying a lot more and now we are losing competitors. It’s not a good deal for consumers.
RAY SUAREZ: Does this continue, though, when you look at the range of companies that are still standing now? And I guess number four after this new Sprint Nextel is T- Mobile, which is part owned by a German concern…
GENE KIMMELMAN: I think this just continues. That’s why we are virtually giving up on the government solving this problem.
Tomorrow we are launching a new Web site called hearusnow.org, which gives consumers tips on how to navigate the markets, get the best deal and push back against companies. The government is doing something to prevent the companies from combining and potentially raising prices.
It is going to be up to the consumers to use their own marketplace prowess here and push back and demand that every telephone works with every company and demand that they offer new services when they claim they’re going to do so and push back on the government to deliver the promises that these companies always claim are going to come.
RAY SUAREZ: Rudy Baca, before we go, do you think a consumer who is willing to shop around, compare rates, compare companies, can still and will still be able to get a good deal when it comes to cellular?
RUDY BACA: I absolutely do. I think there are a number of options out there, and I think actually that it is not necessarily Sprint and Nextel that will come together.
I think Verizon could make a play for Sprint, which would leave Nextel and T-Mobile as very aggressive competitors. They want your business and they’re going to cut their prices and offer services to get it.
GENE KIMMELMAN: That would be worse for consumers if Verizon controls even more spectrum and is a local telephone monopoly.
RAY SUAREZ: Gene Kimmelman, Rudy Baca, thanks.