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Nextel's Next Connection

With Its Methodical Strategies, Reston Company Keeps the Heat on Larger Competitors

By Yuki Noguchi
Washington Post Staff Writer
Monday, August 30, 2004; Page E01

Nextel Communications Inc. is the scrawny kid who grew up to become a scrappy fighter.

"A couple of years ago, I think people said, 'These guys don't have a chance. They have a funky technology, a balance sheet that's a mess and competitors that are big,' " said Timothy M. Donahue, Nextel's president and chief executive.

Andrew Harhut, a police officer in Pennsylvania, uses his Nextel walkie-talkie feature when he hits dead zones in his police radio coverage. (Chris Gardner -- AP)

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The Reston mobile-phone company certainly had a rough start. Its founders cobbled together a network in the 1980s and 1990s out of walkie-talkie licenses bought from taxi-cab dispatch operators. Heavy debt brought the company months from bankruptcy in 1996. It relied on a technology made by a single supplier, and its chunky phones lacked the dazzle of competitors' increasingly smaller, sleeker phones.

Nextel is still the smallest of the six national wireless carriers, but it is the most profitable. Its customer loyalty ranks second only to that of giant Verizon Wireless. Nextel's 13.9 million customers pay more on average on their monthly bills, mostly because they are hooked on the company's unique "push-to-talk" walkie-talkie service. In addition, its focus on business customers makes Nextel a big threat to Verizon Wireless.

"I've never felt better about our position," Donahue said.

Over the past year, Nextel has dramatically ramped up its lobbying operation, outmaneuvering Verizon Wireless to win the rights from the Federal Communications Commission to valuable new cellular airwaves worth billions. Company representatives have been hobnobbing with politicians at both the Democratic and Republican national conventions, where Nextel supplied phones to convention staff and hosted promotional events and private receptions. The company also bought the rights to put its name on NASCAR's premium race series.

Its stock, which traded below $3 a share two years ago, rallied and has been trading in the $23-a-share range. It closed Friday at $23.29.

"It seems to me like they always have a chess board in mind, and they're always thinking a few steps ahead," said Rebecca Arbogast, an analyst with Legg Mason Wood Walker Inc., a major institutional shareholder in the company. "They've come from behind in an unorthodox way."

Albert Lin, an analyst with American Technology Research Inc., a San Francisco market research firm, agreed that the company has made a number of smart strategic moves but said it also may have problems continuing to grow at such a pace. He said the company's income tax rate is expected to go from less than 5 percent to as much as 39 percent starting in the third quarter of this year because the company is profitable and has reduced its cache of write-offs.

The company also is mulling what analysts estimate could be a $1 billion to $2 billion overhaul of its network using a novel technology that could make Nextel a big player among the pack of companies offering wireless, high-speed Internet. It is an expensive risk. "The transition to broadband is particularly tricky for Nextel because of having to transition to new spectrum" at the same time the company is changing technologies, said Scott Cleland, chief executive of Precursor, a Washington research group. "There are many more points of potential failure than their competitors."

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