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Assignment Questions

Case Study on Cellular Phones

Read the Case Study below. You are to write a 2-page paper. You are to ‘Give an Overall Response’ to the Nextel Case Study. Do Not Use Outside Sources.

www.nextel.com
Let the Battle Begin, Nextel Communications. Inc., has recently been embroiled in controversy with Verizon over its walkie-talkie service. Walkie-talkie is a service that allows phones to send voice messages to each other instantaneously. Nextel and Verizon have been in court trying to settle a dispute over Verizon’s recent announcement of “Push to talk.” Nextel has used its direct connect walkie-talkie service as its major competitor advantage, and has accused Verizon out false advertising and stealing the slogan “Push to talk.” Nextel has known about competitors’ intentions to use the walkie-talkie service offerings for some time. If Verizon succeeds, it could potentially take some of the walkie-talkie service market share from Nextel. How effectively Nextel reacts to this penetration of its market will determine how long it can remain a market leader in this type of service. For 2003, Nextel’s revenues rose 24 percent to $10.82 billion and earnings fell 11 percent to $1.47 billion. As of February 2004, had 15, 200 employees.

History
Nextel became the large corporation it is today by a series of mergers and acquisitions that have lasted over a decade. Nextel was founded as Fleet Call in April of 1987. It issued an IPO in 1992 (NASDAQ:CALL). Fleet Call was originally founded as a two-way radio service, which eventually became the backbone of technology of Nextel’s present business. After a series of mergers and acquisitions, the company eventually became Nextel communications in March of 1993. In 2003, Nextel and Nextel partners’ service became available in 197 of the top 200 US metropolitan areas, which is where 242 million Americans they live or work. Nextel has been dealing with negative profit reports since its inception, until 2002 when the business turned its first profit. The telecommunications market is saturated with competitors, so Nextel is trying to differentiate itself with marketing strategies, technological advances, and infrastructure improvements. The business is aggressively increasing its distribution channels in network capability. Nextel has also done test marketing for Boost Mobile in California and Nevada, which is targeting the youth market.

Current Situation
Nextel has 8.2% market share among the top six national wireless carriers as year end 2002, it also garnered 14.1% of new wireless subscribers, which is helping to build market share growth. In 2002, the company posted significant growth in revenue and subscribers and had its first full year of net income. Nextel’s major competitive advantage is Nextel direct connect, which is a two-way walkie-talkie service. Customers can instantly have private or group conferences within their local calling area. In 2002, this system was upgraded to allow customers to interact with direct connect nationally on the Nextel network. Direct connect is continually updated and is now allowing customers to interact with other direct connect users traveling with them outside of the local market. This feature is key among competitors’ initiatives to copy and improve upon. Verizon is the first on the list of competitors to introduce walkie-talkie service. Features like this help Nextel to attract high-value customers. Nextel is the leader in average revenue per user at $70.00

Affiliations
Nextel owns 32 percent of Nextel partners, which provides digital wireless communications services under the Nextel brand name in small to midsize markets. Nextel partners possess the right to operate in 57 of the top 200 metropolitan areas of the US during ranked by population. Nextel partners allow Nextel Communications & Co. to focus on other aspects of the business, www.nextelpartners.com. Bells and whistles attract consumers in today’s culture. Handset technology is an important factor in the telecommunications market. All of the company’s handsets are manufactured by Motorola except for the Blackberry 6510, which is made by research in motion, Ltd. All handsets incorporate iDEN technology and offer digital wireless services, Nextel direct connect, wireless Internet, and two-way messaging capabilities. Often, consumers will choose wireless services based on the types of phones provided. Having Motorola make considerable technological advancements will help Nextel secure customers in the future; www.motorola.com As of December 31, 2002, Nextel owned 6% of the outstanding common stock of NII Holdings, previously known as Nextel international, which sells wireless communications services to Latin America. NII Holdings filed for Chapter 11 bankruptcy in 2001 but emerged from bankruptcy in November 2002. Prior to its reorganization, NII Holdings was Nextel’s wholly owned subsidiary, www.niiholdings.com
Mission/Vision
Mission and vision statements were not found on either the Nextel web site for a in the Nextel 2002 annual report. However, Nextel partners, a company partially owned a Nextel that markets its services, has a mission statement on its web site, but no vision statement.
Mission Statement in Guiding Principles-Nextel Partners
Our mission is to provide high-quality, integrated wireless service that maximizes customer and investor value.
Guiding principles:
*Strive for 100 percent partner satisfaction
*Strive for 100 percent customer satisfaction
*Achieve targeted revenue growth with a low cost structure
*Achieve win-win results through the power of teamwork
*Work smart while remaining humble
www.nextelpartners.com/Mission.htm

Organizational Chart
the organizational chart was devised using the titles on executives in the 2002 annual report. Nextel has a functional structure since most of its VPs Functional readership titles. CEO Timothy Donahue has been at the helm since August 1999. He joined the company as COO in 1996. Mr. Donahue was previously Northeast Regional President at AT&T and it is a graduate of the John Carroll University with a B.A. in English literature.
Wireless Environment
The US wireless market has entered a transition phase on the path from start up to maturity. A number of large carriers have emerged as market leaders, offering nationwide service, bundled minutes, and one rate pricing plans. The improved service and greater affordability has boosted market penetration—more than half of the US population has now signed up a wireless service. Major carriers have invested heavily in upgrades to their networks to 2.5G technology, so that they can to support Internet and other data related offerings. The carriers to grow their revenues, firm must look for largely untapped markets. This is no easy task since analysts considered wireless communications a mature product. Upper and middle class consumers are already hooked; therefore those demographic facts are difficult to penetrate. Most of the carriers are currently targeting the youth market with prepaid wireless plans. Another trend appearing is to be all you can talk plans. Carriers are now competing offering more minutes at lower prices, which in turn has caused the ARPU(average revenue per user) to rise only 2% in 2002. Wireless is beginning to replace landline communications services. With an onslaught of plans offering more minutes at an affordable price, many consumers, primarily young adults, has switched to wireless only. For example, college students sometimes live at dorms and at home during the same year. Consolidation among major players in the communication industry seems likely with subscribers’ growth slowing, heavy capital requirements, and stiff competition. Some areas like Cingular have 15.9% US market share and need radiofrequency rights, while T-Mobile has high fixed costs and needs more customers. Sprint PCS and Verizon have common technology platforms; however, as with any merger, there are obstacles, such as Department of Justice approval and management. In the wireless business, customer churn is an important measurement business performance. Customer churn is a measurement of customer retention and is defined as the monthly percentage of the customer base that disconnect. Churn measures both voluntary and involuntary disconnects. Involuntary disconnection usually refers to nonpayment situation. Voluntary churn is when the customer decides to disconnect service. To calculate customer churn, divide the number of handsets disconnected from service by the average number handset in use during the period. It’s important to have a low churn rate because it is much more costly to acquire new customers and to retain the existing ones.
Legal Governmental Issues
Access to radio redundancies or transmission, or spectrum, is the basic regulatory barriers to entering the wireless industry. A portion of the spectrum that is usable is AM frequencies to infrared. As technology improves, wireless providers are moving up the spectrum to higher frequencies. The Federal Communications Commission (FCC) assigns a range of spectrum associated with different types of technologies. Cellular wireless is between 824- 849 MHz and 869- 894 MHz. PCS provides between 1850 and 1990 MHz. Spectrum is very valuable asset in the wireless communication industry. On September 23, 2003, Nextel announced its intentions to sue Verizon for false advertising of its walkie-talkie service “Push to Talk.” The feud between Nextel and Verizon has been going on for some time with Verizon suing Nextel in June 2003, for testing unreleased handsets in what Verizon describes as “corporate espionage.” With competition so intense but unique product offerings, legal battles could continue in wireless industry.
Economic Issues
The US economy is rebounding. The wireless industry and Nextel’s market share grew significantly even during the economic recession. Apparently, economic uncertainty, high unemployment rates, and war have not affected the demand for wireless communications services. Even though consumers are demanding wireless service, they are also demanding lower prices, which have and will likely continue to shrink ARPU. Inherently, this will force lower margins in considerable cost reduction is not implemented.
Cultural, Social, Demographic Issues
Our society is on the move and people are busy. Wireless communications allows people on the move to communicate freely without slowing down. Even lower income people are warming up to the wireless services. This market has been predominantly untapped. The lower income market may not increase ARPU but it will definitely generate more revenue. There is a positive trend in the use of wireless communications, from 1998 to 2002, wireless communications used increased by over 500 billion minutes in the United States.
Internal Forces
Marketing
Effect of marketing strategies are important for success in the wireless industry. Establishing a strong, loyal customer base is key to being successful. A company’s advertising program is a key component of the marketing plan, particularly in the mass market. The effectiveness of marketing in this industry can be gauged in terms of penetration growth and net subscriber additions relative to expenditures. Education is also in achieving growth. Companies of must convince potential customers to pay for innovation. As the wireless market reaches saturation, companies are focusing on retaining customers more than attracting new ones. In 2003, Nextel won the naming rights to NASCAR’s premier racing series. Previously known as Winston Cup, it will now be known as Nextel cup. This will cost Nextel $700 million over the next 10 years. Many of the top American companies were bidding on the package once it was reported that RJR-Nabisco could no longer pick up the naming rights. NASCAR is an attractive marketing tool and has experienced phenomenal growth throughout the entire country. Nextel is hoping to benefit by offering unique, was related products and creating greater brand awareness. With NASCAR’s market development, Nextel tried to follow suit more market growth. Retaining customers in the wireless business is of the utmost importance and arguably more important than attracting new ones. The average monthly churn rate was 2.1% in 2002, down from 2.3% in 2001. Strategies have been implemented to reduce its connections that include customer focused programs and efforts to migrate customers to more preferable pricing plans. Also represented by the churn rate is the effort of Nextel to acquire high-quality subscribers that are less likely to switch around.
Information Systems
Nextel has been awarded the best B2Bweb site award among telecommunication carriers in B to B’s 2003 net marketing top 100 list. It was recognized for its account management systems, online demonstrations, customer support, and interactive features. Nextel has shown a strong focus on meeting its customer’s needs through Web technology; the information systems initiatives are part of the strategy to lower churn rate. Quality information systems will help Nextel to be more responsive to its current customers-base needs. Quickly identifying key market drivers will help it stay ahead of the competition.
Finance
Nextel’s annual income statement and balance sheets, note that Nextel has recently reduced debt on its balance sheet by reducing its interest payments and increasing equity. Fitch has upgraded Nextel’s rating on senior unsecured notes from “B+” to “BB-“ however, significant long-term debt still exist which could cause problems in the future if Nextel experienced low margin and/or high customer churn. Revenue per customer, it’s down over the past few years. Nextel has traditionally been the leader in attracting the higher revenue generating customers what is unique offer. If the ARPU continues to fall there could you significant impact on profitability and there could be difficulties in covering overhead costs. However, if Nextel can gain new customers while keeping ARPU high, it could be tremendously profitable in the future. If the customer base remains the same size and ARPU, rises then profit margin will increase simultaneously.

Competition
Verizon
Can you hear me now? Yeah, we have heard that a million times. Verizon is the leader in the wireless communications for year end 2002;it is number one nationally in the market share with 32.5 million customers, and revenues of $135.8 million. It operates in 29 states and has 10.1 million long-distance subscribers ranking it third in that particular market; it is also a direct tree publisher and has a global presence in 32 countries. Verizon is divided up into four segments: domestic telecom, domestic wireless, international services, and information services. Other services provided include wireless voice, data services, and equipment sales in the US and internationally. In 2003, Verizon marketed its “push to talk” feature versus Nextel’s direct connect.

Cingular
Cingular tries to emphasize freedom of expression in its marketing strategy. Cingular
Is a joint venture of BellSouth and SBC. It is currently the second-largest provider of wireless communications services and the US. Its name was chosen to symbolize unity and individuality. SBC owns 60% of Cingular and 40% of BellSouth. Its customer base is around 22 million. Eleven old brand names were replaced by the Cingular brand. Cingular has been in touch with T-Mobile USA about a potential merger. Recently, the company has cut 2,500 jobs (seven percent of its workforce).

AT&T Wireless
AT&T wireless services operates as a wireless communications service provider in the United States. AT&T sometimes markets itself with regional brand names, such as SunCom in the southeastern US. The company provides wireless voice and data services over two separate, overlapping networks. One network users time division multiple access (TDMA) as its signal transmission technology. As of December 31, 2002, the company’s TDMA network covered an aggregate population (POPS)of approximately 203 million, or 70 percent, of the US population. It also provides voice and enhanced data services over a separate network that uses a signal transmission technology known as global system for mobile (GSM) communications and general packet radio service (GPRS). As of December 31, 2002, this never covered approximately 63 percent of the US population, or 181 million POPS. As of December 31, 2002, AT&T wirelesses’ two network covered an aggregate of approximately 213 POPS, or 74 percent of the US population, and operated in 83 US metropolitan areas.

Sprint PCS
Sprint PCS (personal communications systems) group, together with his third party affiliates, all for services in over 300 metropolitan markets. Sprint PCS has licenses to operate and all of the US. Sprint PCS group’s has affiliation with other companies that use the same network system. These companies offer wireless service with the Sprint brand-name and bear the expense of the network. In August 2003, Horizon PCS, an affiliate of the PCS group, filed for Chapter 11 bankruptcy protection along with two of its subsidiaries.

Deutsche Telecom/T-Mobile
T-Mobile was formerly known by the name Voicestream and is a subsidiary of Deutsche Telecom. It is one of Europe’s top wireless communication companies. T-Mobile has major operations in Germany, United Kingdom, and Austria. In 2001, it acquired Voicestream Wireless and Powertel in the US.T-Mobile currently owns 60 percent of the UK Company T-Motion, and focuses on prepaid wireless services, which causes them to have a small ARPU. It is also the fastest growing wireless provider in the US.

Global Perspective
Only 20% of the world has access to wireless communications services, according to Jorma Ollila, CEO of Nokia. A global wireless market expects to reach all the 1.75 billion customers by 2007. Fish traditional wireless communication markets are saturated, companies will likely look at new markets to grow their business. There are more cellularphones in China and there are in the US. According to the Chinese Ministry of information, there are 250 million of them in use. China is a highly populated nation with inferior Landline infrastructure. Some companies are looking to develop nations such as China to increase revenues. There are many risks involved with entering markets such as the Middle East. Physical risk such as terrorism and political instability are legitimate threats to doing business. However, wireless communication companies have to look at these areas to grow revenue. Europe predicted to have substantial wireless communication market growth, which is expected to reach $131 billion in service revenues by 2007. However, most of his market growth for the in areas other than voice. Europe’s global market share will decrease from 30% to 20% because of high growth rates in Asia and the Americas. Nextel is being marketed to Latin America NII Holdings (Nextel international Inc.), which used to be wholly owned by Nextel Communications & Co.. This market has considerably less competition and is more politically stable than the Middle East and Asia. This could be a potential growth area for Nextel in the future as the US market becomes more and more saturated with competition.

Future Outlook
Nextel will continue to push his walkie-talkie service transition chief competitive advantage; it will have to increase its coverage area and make pricing competitive. It also expects to leverage its relationship with NASCAR auto racing to boost its market share and brand awareness. Or Nextel to become the dominant player in the wireless communication industry, and it will have to focus on retaining customers while encouraging people to switch over. Of mergers is very real and some could occur in the next few years. Competition all the unique services such as walkie-talkie will continue to increase. Nextel is also looking to expand to rural areas of the US where there is less competition. It is repurchasing debt to reduce interest expense and risk, and distribution channels also been expanded so more people can easily sign on to Nextel service. Customer centered operations will continue to be a focus so that high value customers can be retained and customer churn rate will be lowered.

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