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Commentary: Cellular market faces shakeout

Nextel's complaints about "irrational" pricing by competitors indicate the cut-throat competition for wireless business customers and the overall irrational nature of the industry.

    Nextel's complaints about "irrational" pricing by its competitors indicate not only the cut-throat competition for wireless business customers but also the overall irrational nature of the telecommunications industry today.

    See news story:
    New wireless rivalries take market toll

    Large telecommunications providers such as AT&T are continuing to drive pricing and relationships around service bundling and packaging even as they unbundle their business units. This dichotomy will not be resolved until the new relationships between the future independent businesses become clear, which will take at least six to 12 months.

    In the interim, Nextel will be forced to continue responding to every drop in pricing.

    Nextel and other wireless firms are worried that a plunge in wireless voice pricing will be the "next shoe to drop" following the collapse of traditional long-distance voice pricing. If this mindset continues, it will undermine financing plans for upgrading to third-generation (3G) wireless infrastructures.

    Nextel defines "irrational" pricing as competitive pricing that it cannot or does not want to match. The so-far-unanswered question is whether this indicates that its infrastructure is more costly than its competitors' or whether those competitors are pricing so low to gain market share that they cannot continue to improve service.

    Nextel gained a foothold in the cellular market partly because it did not need to carry the regulatory baggage and unionized labor costs of the telecommunications companies. However, in the last few years, all the regulated carriers have created unregulated, non-union subsidiaries to compete in the cellular market, and now the FCC is increasingly allowing companies like Verizon to combine those unregulated services with their landline voice and data services in overall business contracts.

    The North American cellular market has been going through a period of consolidation. The major population areas all have numerous service providers, and the large players are now in a position of advantage that will allow them to buy or eliminate the upstarts. In this market, Nextel must continue to cut prices and costs to remain competitive and, as with all telecommunications providers, try to be as compelling an acquisition candidate as possible.

    Nextel also faces three underlying disadvantages. First, it has tried to sell itself as having superior technology in a market that is focused on coverage and price. Second, it has tried to sell itself as the one service whose phones can be used in Europe, but only a fraction of users care about that. Third, like all cellular companies, it has an expensive infrastructure that it must pay for from earnings. The more customers a company has using its infrastructure, the more people it can spread the cost over, which equates to lower cost per user. Nextel does not have the customer population of competitors like AT&T or Verizon.

    Meanwhile, cellular infrastructure in the United States remains poor in many areas. For instance, Palo Alto, in the middle of Silicon Valley, has major cellular dead spots. Other dead spots can be found near New York, Washington and other major U.S. cities. Certainly in the United States, better coverage will be cellular carriers' most important distinction in the business market for the next 12 months and beyond.

    Meta Group advises business users of cellular phone services to continue leveraging every negotiating trick in the book when dealing with wireless carriers. The key is maintaining contract flexibility. Gaining overall pricing concessions by consolidating traffic types to one provider is a great tactic, but maintaining the ability to unbundle in the future is key because of the uncertain business structures of telecommunications providers.

    META Group analysts Peter Burris, Dale Kutnick, Val Sribar, Jean-Louis Previdi, William Zachmann, and Jack Gold contributed to this article.

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