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Lessons From Nextel

Nextel Communications Inc. (Nasdaq: NXTL), once the poster child for high average revenue per user (ARPU) in the United States, is now a large part of the reason that Sprint Corp. (NYSE: S)’s financials are in a mess. Earlier this month, when Sprint Nextel reported its earnings, the company recorded a non-cash goodwill impairment charge of $29.7 billion. This accounted for a massive write-down of the value of the Nextel unit Sprint bought.

You may ask: Why bring up Nextel now? Nextel’s iDEN technology is an orphan technology – one that goes nowhere. Its customer base is defecting in droves to other operators. Is it because of technology? Yes and no. When Sprint bought Nextel it was seduced by the high ARPUs that Nextel users brought. Sprint believed these customers didn’t care about technology.

iDEN by itself, the technology of choice for Nextel, wasn’t the reason ARPU was high. Rather it was the fact Nextel set the “gold standard” for its push-to-talk (PTT) technology. It was PTT that was the backdrop for Nextel communities of users. Nextel users actually used their phones in a variety of manners that increased ARPU. And Nextel rates weren’t the lowest in the market – however, users were willing to pay for the value of the technology and their “peer or work groups”. Builders, plumbers, electricians used Nextel as a way to bid on jobs, communicate with workers, and discuss common issues through the push-to-talk technology. These users could rely on PTT to work on a network it could trust.

But Sprint took its eyes off the Nextel customer and the iDEN network. It wanted to push Nextel users onto its CDMA network as fast as it could to increase efficiencies and decrease capital expenditures for iDEN. But that strategy failed miserably. As of Sprint Nextel's fourth-quarter earnings for 2007, it had 17.3 million iDEN users. In the fourth quarter alone it lost 683,000 iDEN customers. The quarter before, the iDEN base declined by 337,000. Additionally, Boost (the Sprint Nextel sub-brand focused on the youth market, which uses PTT as the cornerstone for its offering) is also losing customers. Obviously, these numbers are going in the wrong direction.

Sprint made a fatal mistake. It did not realize that Nextel users loved their technology for what it allowed them to do with people with whom they wanted to communicate. Sprint thought the technology didn’t matter and believed it could push Nextel users onto its CDMA network with an inferior push-to-talk technology. But that wasn’t right. And in droves, Nextel users are moving to other operators. And they aren’t moving in “ones.” Communities churn in groups. Once a member no longer has “their club,” they move groups elsewhere. And once you lose a loyal community of users it is very difficult, if not impossible, to get them back.

In 2005, Tomi Ahonen and Alan Moore wrote a book entitled Communities Dominate Brands. The authors analyze the transition from “armchair” networks to communities that are mobile and active. The communities, they wrote, "can suddenly swarm and appear by literally the thousands on a moment’s notice.”

The authors discuss that communities are the counterbalance to brand dominance in the 21st century. They purport that, “by examining what word of mouth, when enhanced by the powerful digital echoes of mobile phone communities and other networked communications such as IM, email and blogging can do,” the authors have seen that “communities have been an undefined or underestimated barrier to recent marketing success...

"By harnessing community power and working with them, a modern marketer can succeed in delivering remarkably positive marketing effects to the intended target audience,” they state.

In going back to our Sprint Nextel example, Sprint could have enhanced and embraced the Nextel brand for what it was intended to be. Rather, Sprint Nextel rid itself of engineers who understood iDEN; it didn’t support upgrades to networks or devices; and it angered a loyal base of customers – and it's now paying the price.

As operators try to hold on to valued customers, these lessons are important. Communities of users are equally important as specific content or individual subscribers, if not more so. But operators cannot “own communities.” This is the reason why Facebook , YouTube Inc. , and others are so successful. Users find comfort in communicating with their peers and do not feel controlled. Mobile operators need to ensure that they enable communities of users with best-in-class networks, devices, and pricing of services. Take heed from the Sprint disaster of writing down more than $29 billion dollars for not recognizing what it was they were buying.

— Jane Zweig is CEO of the Shosteck Group , an international telecommunications consultancy focused on mobile, fixed, Internet, and cable providers

gobears 12/5/2012 | 3:45:40 PM
re: Lessons From Nextel I am not sure how accurate this characterization of Sprint's decision-making process this is, but it certainly seems like a valid description of what they effectively decided to do (the CDMA transition, etc.) and how Nextel customers have responded. Outside of Nextel itself and Motorola, the mobile PTT space (whether PoC-based or IP-based) completely ignored the crucial "chirp latency" advantage of iDEN. In addition, the iDEN 800MHz transition plan degraded both PTT and voice calls beyond any semblance of reasonable call quality and reliability.

It's hard to understand how they thought migrating users who were using a non-commodity platform onto a commodity platform was NOT going to result in customer loss as people realized they might as well do business with any of the other carriers using commodity platforms...
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