Nextel

Nextel: Looking to the Future

Introductory Text

EXTERNAL ANALYSIS: The external analysis will utilize the Porter's Five Forces Model (Figure 1) and will also include a discussion of the opportunities and threats facing Nextel.

Porters Five Forces: The Porter's Five Forces Model provides an excellent framework for evaluating the external conditions under which Nextel and other telecommunication network providers are competing. The first force to be examined is Threat of New Entrants. Wireless providers require infrastructure including a network of cellular towers. The massive capital outlay required to put the required infrastructure in place poses a significant barrier to entry to potential new entrants. Acquiring the telecom license required to operate is also difficult. To obtain this license, operators must apply to and be approved by the FCC, and this process can be time consuming and costly. Another significant barrier to entry is the fact that there is a finite amount of suitable radio spectrum available, and this spectrum is highly regulated and is the subject of fierce competition among current industry players. Consequently, Threat of New Entrants is LOW. The second force is Bargaining Power of Suppliers. Primary suppliers to the network operators are telecom equipment suppliers and the government agencies that effectively provide the bandwidth via regulation. The job of transmitting voice and data from place to place requires telecom equipment suppliers to provide network infrastructure (fiber optic cable networks, broadband switching equipment, etc.) and consumer electronic devices (mobile phones, PDAs, etc.). Typically, the technology provided by suppliers must be configured to match that used by the network operators. Although there are several suppliers to choose from, the need for customization forces network operators to deal with a limited number of suppliers and thus drives up switching costs. The radio spectrum used by the telecommunication industry is subject to extensive regulatory control, primarily administered by the FCC. The FCC is responsible for allocating bandwidth and for managing competition among wireless operators. As such, operators are beholden to the whims of the government regulation. Failure to understand, comply with, or anticipate changes in government regulation could restrict bandwidth which would be a catastrophic blow to a network operator. For these reasons, Bargaining Power of Suppliers is HIGH. A third force is Bargaining Power of Buyers. In this case, buyers represent the end users of telecommunication services. For major network operators, customers are numbered in the millions. Consequently, aside from the fact that switching costs are relatively low, an individual customer has very little bargaining power. However, business customers represent a significant portion of the demand for telecommunication services. Large business clients who purchase many cellular services at once have the power to wield some influence over operators. It should be noted however that while the switching costs are low for individuals; these costs can become significant for larger businesses. Thus, Bargaining Power of Buyers is MEDIUM. The fourth force is the Threat of Substitute Products/Services. Services typically provided by cellular service providers are now becoming available through nontraditional outlets.

Cable and satellite operators are beginning to offer broadband internet services at increasing levels. Consequently, the ability to communicate with text, voice, and images over the internet is becoming increasingly popular. Peer-to-peer communication over the internet via ones ISP is a bargain for consumers and represents a threat to telecom companies. While not as mobile as cellular technology, the availability of internet in the home, business, hotel, and even restaurants is on the rise. The Threat of Substitute Products/Services is MEDIUM. The fifth force is Rivalry Among Existing Firms. The telecommunications industry is relatively mature and cannot realistically support the current number of competitors. The battle over the finite market share, many of whom view cellular services as a commodity, drives prices and profits down. These pressures are exacerbated by the fact that exit barriers are high due to the specialized nature of the infrastructure. Thus, Rivalry Among Existing Firms is HIGH. These forces are summarized in Figure 1. Assigning a point value to the five forces results provides a general measure of industry attractiveness (i.e., profit potential). As shown in Table 1, the telecommunications industry rates a 24 out of 50 possible, indicating that some moderate profit potential still exists despite the market maturity.

SWOT - Opportunities: Although the telecommunications industry is maturing, the US market for cellular and wireless communication services is not saturated and is considered as undeveloped relative to European and Asian markets. According to industry statistics, there were 109 million wireless subscribers in the US in 2000 and this number is projected to grow to 200 million by 2005. Rapid advances in technology are resulting in new, previously unavailable wireless services (e.g., internet access, phone cameras) which appeal to a widening customer base. Finally, the FCC is signaling regulation changes that will increase the spectrum levels available to providers.

SWOT - Threats: As the industry migrates toward 3G (and even 4G), the cost of technology conversion presents a clear threat. In 2002, it was estimated that the infrastructure upgrades required to implement 3G would cost a major network operator at least $3 billion. Low cost communication alternatives via the internet pose additional threats. Intense rivalry and moderate growth forecasts continue to drive down prices for services, thereby limiting profit potential.

INTERNAL ANALYSIS: The internal analysis will present a financial ratio analysis and will summarize Nextel's strengths and weaknesses.

Financial Ratio Analysis: Select financial ratios for Nextel are presented in Table X. Competitor average values are also provided in Table X for comparison purposes.

SWOT - Strengths: Nextel is the only provider to operate on its proprietary iDEN platform. Unlike the other platforms, iDEN supports Direct Connect, a proprietary "push to talk" (PTT) function allowing cell phones to function like walkie-talkies.