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Pearlstein

Business: Sprint-Nextel

Steven Pearlstein
Washington Post Columnist
Wednesday, December 15, 2004; 11:00 AM

Washington Post business columnist Steven Pearlstein was online to discuss his latest column, which looks at the implications of the merger of Sprint and Nextel Communications.

A transcript follows.

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About Pearlstein

Steven Pearlstein writes about business and the economy for The Washington Post. His columns on the economy appear every Wednesday and Friday.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

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Kansas City: It would seem that having two headquarters doesn't make a lot of sense since Sprint owns their campus and Nextel leases space. What promoted this arrangement?

Steven Pearlstein: We take our first call from Kansas City, where our correspondent no doubt feels it would be cheaper and better to locate as much of Sprint-Nextel's operations as possible. Ownership of the building, he or she suggests, is one factor that cuts that way. I'd respond by saying Washington is a better place to locate the corporate functions because this remains an industry where the regulatory issues are quite important and because the airport connects better to the rest of the country and the world. In the long run, it is also easier to attract and find top executive talent in Washington than Kansas City, I hope you'll agree. In that context, the own or rent factor is pretty small potatoes. The new company, in fact, may decide to build its own headquarters here.

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Richmond, Va.: How will independent, regional cell phone service provides be affected?

Steven Pearlstein: In the short run, it probably won't. But I suspect it will gradually lose customers who want or need broadband services through their phones, which a small company may have trouble providing because of the big upfront investment and spectrum involved.

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Arlington, Va.: So which competitor will feel the most pressure from this combination - Cingular, Verizon, T-Mobile?

Steven Pearlstein: T-Mobile is the most vulnerable, it seems to me, but obviously in the long run the new combined company will be a tougher competitor to everyone than either Nextel or Sprint, acting independently. Of course all that depends on executing the merger well and gaining the cost and scale advantages that have been advertised, which isn't as easy or automatic and the executives want everyone to believe.

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Atlanta: How do you think that the merger will affect pricing for Nextel and Sprint? Do you think that both companies will maintain focus on the niche groups they have created?

Steven Pearlstein: Yes, I think they'll be smart enough to work out from their strong bases, Nextel with small businesses and Sprint with consumers. I doubt it is possible for pricing in this business to be more competitive. In fact, one reason for the consolidation that is now going on (Cingular/ATT, Sprint-Nextel), is that it will reduce the number of competitors, eliminate "excessive" price competition, and have the industry settle down to a more "mature" level of pricing competition in which companies are allowed to earn a reasonable return on their investments.

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Gaithersburg, Md.: I was unhappy with my cable company and signed up for satellite TV last year and some of my other neighbors have Starpower which provides TV, Internet and telephone. Now Comcast and Verizon keep sending me flyers to come back to them. The way I see it, I did have a choice to switch companies. Isn't how the market is supposed to work?

Steven Pearlstein: You are lucky to have so many choices. In most parts of the country, people only have one or two choices for that full range of services. In such duopoly markets, price competition tends to be non-existent (companies compete on other bases, but not price, since they know the only winner from a price war is the consumer). Having a third player makes a lot of difference in that regard. By the way, you have satellite TV, but I suspect you can't get your phone and broadband Internet by satellite yet as part of that package, although one hopes that is around the corner as well. That would give you choices among four different providers and technologies.

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Reston, Va., Nextel employee: Washington Post coverage indicates that Nextel's CFO, CIO and Strategic Planning VP would have the same roles in the new company. What other Nextel executives will remain in place? And why do you think Tim Donahue agreed to step aside from the CEO slot? Most all of my colleagues think he is an incredibly inspirational leader and a terrific businessman, while media reports on the Sprint CEO paint a much less positive picture of his management style and effectiveness.

washingtonpost.com: Sprint, Nextel Announce Merger Plans (Dec. 15, 2004)

Steven Pearlstein: I have never even spoken to either gentlemen so I am reluctant to comment. Donahue is obviously a real talent and the directors would be crazy to let him go, so I think they'll try to find a role for him that is mutually beneficial. Age and tenure probably had something to do with the decision, as well as the fact that Sprint is buying Nextel and is a bigger company with more current customers. I think it a measure of Donahue's commitment to Nextel, its employees and its shareholders that he didn't let his own ego and career goals stand in the way of the deal. You don't know how rare that is.

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Arlington, Va.: What is this I hear about Verizon and Sprint as well? Are these rumors or is this a three company merger?

Steven Pearlstein: No three company. Verizon might make a hostile bid for Sprint, which uses the same technology. There is what's called a breakup fee in the Sprint-Nextel agreement that presumably Verizon would have to pay -- $1 billion-- if its offer "breaks up" this deal. But the courts might not allow that to stand if a judge concludes it was done to prevent shareholders from exercising their rights to maximize the value of their shares. Verizon will also face very serious antitrust scrutiny for a deal that combines the No. 2 and 3 companies in the industry. Even the Bush Justice Department and FCC would have trouble justifying that one.

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Kansas City, Mo.: Mr. Pearlstein,

Why would it be a mistake to locate the company's operations in Overland Park?

Steven Pearlstein: You know, I have to blame my editors for changing that sentence. I wrote originally that it would be a mistake to locate the corporate headquarters in Kansas, and that's my feeling on that. Sprint probably has a huge investment in equipment there in Kansas, and that may well be the best place to locate the operational headquarters, as I think has been agreed to. But as I said before, Washington seems to me like a better corporate headquarters location -- and with corporate goes a number of obvious functions. This is also a more expensive place, so the company will probably prefer to locate those who don't have to be here somewhere else. Of course, the somewhere else could also be farther outside of Washington.

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Tysons Corner, Va.: Steve, what do you think will be the impact on Nextel and Sprint operations in northern Virginia if the "operations headquarters" is in Kansas?

Steven Pearlstein: No doubt there will be shifts. Some jobs will be eliminated because of the efficiency gains that come with any merger like this. And other jobs will have to be shifted to Kansas, which will give Reston employees the choice of moving or finding a job with another company. This won't be painless and it will be disruptive to hundreds if not thousands of families in the Washington area. But it is a strength of the U.S. economy that we accept that kind of disruption as a price of making companies and the economy more efficient through mergers. In Germany, for example, worker representatives on the governing boards routinely block mergers to protect jobs. The result has been that Germany has weaker companies increasingly less able to compete in the global economy.

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Bethesda, Md.: Will this merger increase or lower the number of Nextel - Sprint antenna sites presently installed and proposed across the USA?

Steven Pearlstein: Both. How's that possible. It will decrease the number of overlapping sites in the medium term, but in the longer term it will allow the combined company to locate more sites in new locations to improve service coverage. By the way, have any of you noticed that one of the worst areas in terms of service coverage is the Dulles corridor, where all the telecom firms like Nextel are located. Ironic, huh?

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Washington, D.C.: What do the recent mergers mean for chances that Congress will re-examine the Telecom Act any time soon?

Steven Pearlstein: The Baby Bells and cable companies are quietly pushing Congress to take up the subject again, on the theory that they can tilt the table even more in their direction than the FCC and the courts have already done. The single most impressive core competency of all of these companies is protecting their monopolies for as long as possible. If only their customer service were anywhere near as impressive....

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Rockville, Md.: Would you expect the companies to lay off many employees outside of obviously overlapping functions such as billing, marketing, sales etc?

Steven Pearlstein: No. This merger is designed to provide a platform for growth in sales and market share. That means more employees in the long run, not less.

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Reston, Va.: I thought Nextel's technology was incompatible with other carriers. Will the new company have to spend a lot to upgrade?

Steven Pearlstein: Time and money. Beyond that, I am ignorant on all technology questions. Maybe one of our other participants can help on that one.

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Kansas City: How do the two companies plan to bring the their two very different business cultures together?

Steven Pearlstein: That's always tricky and I can assure you that even after the best attempts by top management, people inside the company will continue to think of employees or even entire departments as Nextel legacies or Sprint legacies. It just takes time. My hunch is that the Nextel culture will probably wind up prevailing because it is more entrepreneurial and market driven.

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Alexandria, Va.: I just can't shake the concept that two companies are better for consumers than one. Fewer providers = fewer options, higher prices for consumers.

Steven Pearlstein: Its counter-intuitive, I know. But before long, the only competitors that will count will be those that can afford to invest in spectrum and technology to be able to deliver high speed broadband to wireless customers. And that requires scale and scope--otherwise a company wouldn't be able to recoup the investment. That's why I think this merger is competition enhancing. In industries where there are big up-front costs to build a system or design a new piece of software, with low marginal costs to add a new customer once that work is done, the Rule of Three probably applies--that is, three players controlling 75 percent of the market is probably the structure the market will provide.

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Washington, D.C.: What are your thoughts about long-term viability of CLECs in general? The last few years have been devastating. Will the few remaining survivors be here in 5 years?

Steven Pearlstein: These will be niche businesses, thanks to the FCC and a handful of judges on the U.S. Court of Appeals here in Washington. That's too bad. But its too late to revive that source of competition. The technology and the financing have moved on to other competitive models.

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Washington, D.C.: What will be the effects of the merger for sprint customers as far as phone usage? Will the new company start making phones that will allow sprint and nextel customers to direct-connect each other?

Steven Pearlstein: Good question but that's one of those technology things I wouldn't dare to touch. Maybe someone else who is on this chat could help out.

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Dallas/Ft Worth, Tex.: What about Verizon? Will they back off, even though they weren't officially making a move anyway?

Steven Pearlstein: They could have just been threatening to make a move on Sprint just to screw up the negotiations in some way. Or they may well be serious, if for no other reason to tie this thing up for year. The longer the status quo remains, the longer they have to leverage their monopoly advantages.

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McLean, Va.: As a Nextel employee, does it seem like this merger will create any downsizing in staff?

Steven Pearlstein: Yes, in the short run. No doubt about it.That's one reason they are doing it. You don't save $2.5 billion a year in operations without letting some employees go.

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Olney, Md.: Nextel has a dedicated customer base that pays a lot of money for its special service. Will that base be happy with the Sprint deal, particularly if the technology is changed?

Steven Pearlstein: That customer base is what Nextel brings to this combination, so nobody is interested in jeopardizing that. They'll do whatever they need to do in terms of marketing, pricing and technology to keep that base. You can bank on that.

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Washington, D.C.: Sir,

Have you ever been to Sprint's headquarters in Overland Park?

It is a brand-new sprawling corporate campus setting. To abandon this in place of a new HQ in pricey Northern Va. would make no sense financially.

And the cost of living is considerably less in the Midwest than here. Shouldn't that come into play when you're talking about maximizing shareholder value?

Steven Pearlstein: All true. But, at the risk of offending our good friends in Kansas, Kansas may not be the kind of business environment that attracts the kind of people, and is conducive to the kind of thinking, that is required to succeed in competitive and fast-changing global industries. That may help explain why Sprint lost its footing a few years back. Its so comfortable and cozy and friendly out there in the heartland that it tends to make people happy with the status quo. Yet the best corporate executives are those that are disruptive and always questioning the status quo.

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Washington, D.C.: How do you well do you think Nextel's Push to Talk function will be adapted by Sprint over their spectrum. That particular function seems the major draw especially to business customers.

Steven Pearlstein: Don't know, but I can tell you they will find a way.

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Omaha, Neb.: You mention a more mature level of pricing competition, do you envision further consolidation in the industry and how many wireless carriers will survive in this environment?

Steven Pearlstein: Three major players that are U.S. based, and maybe one from each of Europe and Asia in the longer run. Plus niche players (niche technology, service, or region).

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Cumberland, Md.: What happens, if anything, to Nextel's marketing programs in sports such as the lucrative NASCAR sponsorship?

Steven Pearlstein: One reason you do this kind of merger is that the cost of NASCAR sponsorship, whatever it is, can now be spread over a base of business that is suddenly twice as big. So I'd say the NASCAR relationship will be stronger, not weaker.

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Washington, D.C.: Sprint has this terrible customer service, frequent call drops, bad service, low range and not so popular. Nextel on the other hand is doing great service wise, call wise and their customer service is much better. How would the new company manage these differences.

Steven Pearlstein: They will be very disciplined in measuring which company is better at each thing and then turning to the division that has the higher score to take over the function and set the standards. AGain, that's why you do these mergers, to get the best of both companies and combine them into a company that is strong across a wider range of functions. That's the theory, in any case. But let me repeat: there are lots of hurdled to get over, technological and human, to realize that potential. Its not easy. In fact, its very hard, which is why most mergers wind up actually decreasing shareholder value.

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Alexandria, Va.: Any ideas on how long it make take before obvious changes would be visible?

Also - there has been mention that Nextel subscribers might need new phones. I bet Sprint/Nextel makes the customers pay for the new phones, which will make those of us who already bought phones upset.

Steven Pearlstein: People buy new phones every two? three? four years, on average -- whatever it is. So what they'll try to do is to run side by side systems for a while so they can gradually migrate people as they naturally replace and upgrade their phones. Look for the offer of enhanced services as the inducement to people to exchange phones sooner than they otherwise would.

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Vienna, Va.: For what it's worth, if a local Nextel employee is asked to move to Kansas, they'll probably be able to move into a mansion.

The average home values in the KC area are less than half of here.

Steven Pearlstein: You got that right. And more wholesome living besides! But they don't have a baseball team (whoops, maybe we don't either).

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Washington, D.C.: Michael Powell said this morning that the merger will get a thorough review. Any chance the FCC will hold it up?

Steven Pearlstein: No. They may require some divestitures in areas where the two companies are particularly strong and would have dominant market share. And they will probably do that just to try to convince everyone how tough they are. But if Cingular/ATT went through with little change, this one is much easier from an antitrust point of view.

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Basking Ridge, N.J.: Vodafone has been very eager to extend their worldwide reach into the US. they made a play for AT&T, I believe, and it was generally thought that they would try again. Their technology is GSM, so their choices are limited. Do you think they are through trying for a position here?

Steven Pearlstein: They are partnered with Verizon right now. At some point, they'll have to decide whether they want to go out on their own, but the divorce will be expensive.....Oops, I've just been reminded by my editor that Kansas City DOES have a baseball team, so maybe Kansas will be better in that way, too.

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Fairfax, Va.: You say sprint is buying nextel. The companies say it's a merger of equals. Why do they have to spin it that way?

Steven Pearlstein: Lots of combinations are billed mergers of equals, and few actually wind up being, although it is not always clear at the start which company will become the dominant culture. Apparently the reason Sprint is buying Nextel has to do with avoiding taxes after spinning off the local phone service.

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Reston, Va., Sprint Employee: I just wanted to remind everyone that it's going to take another 6 months before this all shakes out. We have been given very few details because there are few to give. All we can do is wait at the moment...

Steven Pearlstein: Good point.

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Kansas City, Mo. : No baseball team?

Have you ever heard of the Kansas City Royals?

Sure they finished in last place, but they are still marginally major league.

Steven Pearlstein: We stand corrected. Go Royals.

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Overland Park, Kan.: I'm confused -- Sprint has a push-to-talk service as does Nextel. However, if Sprint has the knowledge, expertise and network with CDMA and EVDO -- clearly the strategic, long term differentiators in wireless -- and Nextel has none of these -- how can this be viewed as a merger of equals? How feasible is it to have Nextel executives -- who know nothing of these technologies -- be placed in positions of strategic decisions?

Steven Pearlstein: Ah, the view from Kansas! I suspect its not that complicated and that, at least at the higher executive levels, the key skills don't involve an intimate knowledge of the technology, so much as a working knowledge of it, along with strong skills in marketing, finance, etc.

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Cumberland, Md.: I can recall at least a few Post stories mentioning Nextel's culture. Will Nextel's "philosophy" survive this merger?

washingtonpost.com: Merger Puts Nextel at Crossroads (Dec. 15, 2004)

Nextel's Next Connection (Aug. 30, 2004)

Steven Pearlstein: One reason there haven't been many Post stories on Nextel's culture is that it is such a pain-in-the-neck company to deal with for reporters. I can speak to that first hand. I hope the Sprint media relations people are the ones who wind up on top of that department. Nextel folks are very thin skinned and controlling, which is typical of young start-up companies.

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Steven Pearlstein: Our time is up folks. Very good chat. See you next week.

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