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.
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.
Entire contents, Copyright © 2000 Meta Group, Inc. All rights reserved.