Mobile Radio Firms Take On Cellular Market : Technology: American Mobile Systems of Woodland Hills aligns with Nextel Communications in their bid for an all-digital phone network.

Southern Californians love their cellular phones, but the ubiquitous gadgets now have a new rival. Those static-filled, two-way mobile radios used by truckers and taxicab drivers have gone digital, and a RutherfordJ., mobile radio company called Nextel Communications Inc. is leading the charge and hoping to grab a big slice of the booming wireless communications market.

Nextel, formerly named Fleet Call Inc., is the nation’s second largest specialized mobile radio company, behind communications giant Motorola Inc. For decades these companies have provided radio dispatch services for fleet operations. It’s an old and rather dull market in which growth is hindered by the lack of available radio-frequency capacity in many areas.

So Nextel has set its sights on competing with the fertile cellular phone market, and has drawn attention for its aggressiveness in building its new all-digital network. With technology and financing from Motorola, Nextel launched in August its first network in Los Angeles, and promises to soon go nationwide--something even cellular phone companies don’t do yet.

The technology Nextel is using allows it to offer voice, paging and dispatch services--and also data such as faxes and stock quotes in the near future--all on one handset similar to a cellular phone. By comparison most cellular systems still use older analog technology, and aren’t yet able to handle most other services besides phone calls.

“Our objective is to build a nationwide system,” said Jack Markell, Nextel vice president, “but our special challenge is to differentiate ourselves in the eyes of the customer. We are not a cellular company. What we are doing is offering an entirely new type of communications company.”

Now the fortunes of a Woodland Hills company, American Mobile Systems Inc., will rise or fall with the gamble that Nextel will beat out cellular phone companies. American Mobile agreed in August to sell up to 61% of its common stock to Nextel at $7 a share, or a total of about $76 million in cash and property. In return, Nextel gets a chance to tap into American Mobile’s market in Florida.

So far Nextel has signed up 500 customers for final testing of its digital system in Los Angeles. Used in computers, digital technology is much more crisp and concise than old analog systems, which use electromagnetic waves to imitate the pattern of the image or sound they’re transmitting. But until recently, the technology to make digital communications cost-effective wasn’t available.

When Nextel begins full-scale marketing in Los Angeles in January, it will initially target business people in professional services, real estate, movie and TV production, catering, and others who now use separate cellular phones, pagers and dispatch equipment. It hopes to have a statewide network operational by the end of next year, and the nationwide system in place by the end of 1995.

Some analysts believe that Nextel is well-positioned to take part in the explosive growth of wireless communications.

There are now 12 million cellular phone subscribers nationwide, and the market is growing at a rate of 40% this year, said analyst Bill Schmitt at Moran & Associates, a Greenwich, Conn., investment banking firm. Schmitt expects that Nextel will capture 10% to 15% of the new cellular phone subscribers in the markets it enters.

For now, Nextel says, prices for its phone services will be comparable to cellular, but the handset itself will run a hefty $500 to $1,000. A package of services--voice and paging, for instance--would be somewhat cheaper than if they were each purchased from separate companies, Nextel says.

To build a nationwide system, Nextel has been on an acquisition spree that included last week’s announcement that it would spend about $780 million to acquire the radio dispatch units of Salt Lake City-based Questar Corp. and CenCall Communications Inc. of Denver, expanding its penetration in the Southwest.

That followed Nextel’s acquisition of rival Dispatch Communications in July. And with American Mobile, Nextel gained entry to the promising Florida market, where American Mobile has concentrated its services.

It’s significant that Nextel’s big rival, Motorola, has become an ally, providing digital technology and about $300 million of the $595 million Nextel expects to spend building the nationwide network.

Motorola is focusing its efforts on technology and equipment sales, a strategy underscored by its announcement Friday that it would sell nearly half its mobile radio licenses to CenCall and Dial Page Inc. of Greenville, S. C., in exchange for about $1.2 billion in stock. Motorola also now stands to benefit if Nextel and the other mobile radio companies succeed in their efforts to compete with cellular.

In effect, Motorola is selling to both markets: it’s already a major seller of cellular phone equipment, and now hopes to dominate the mobile radio phone business as well.

Other financial backers of Nextel are Canadian telecommunications giant Northern Telecom, the huge Japanese industrial concern Matsushita and Comcast Corp., a cable TV and cellular phone company.

American Mobile’s chairman and chief executive, Richard G. Somers, who calls the alliance with Nextel “a perfect marriage,” said it hasn’t yet been decided when a digital network in Florida will be activated. “We’re going to learn a lot from what they do in L. A.”

Analyst Schmitt said the Los Angeles project will be closely watched by all mobile radio companies. “If it’s successful, they’ll be more aggressive” in building networks to rival cellular. “If it’s not, they’ll have to rethink their strategy.”

Analysts note possible obstacles to Nextel’s ambitions. First, there is the competition with entrenched cellular phone companies. Although most cellular systems are still analog, they are expected to convert to digital quickly and soon will probably offer the same services as Nextel.

For both mobile-radio and cellular companies, “it’s going to be a matter of how effective they are at marketing their services,” said analyst Susan Passoni at Boston investment firm Cowen & Co. “Ultimately, that’s going to determine how successful they are.”

The competition also could lead to price wars. And Nextel will soon face a new generation of rivals. The Federal Communications Commission last month said it would auction off up to $10 billion in new personal communications services licenses, and everyone from regional Bell companies to upstart firms could be bidders.

Markell conceded that’s a long-term concern, but noted: “The advantage we have is we’re out there today.”

Nextel could also gain an important edge, Markell said, if its ambitious network-building leads to its technology becoming the standard format for digital mobile communications. One complaint of cellular phone users now is that some systems are incompatible, so that the owner of a cellular phone in one city might not be able to talk to another in a different city.

Nonetheless, it could be years before Nextel sees any profit. Consider McCaw Cellular Communications Inc., the big telecommunications concern that has never shown an annual profit. (McCaw has agreed to be acquired by AT&T; for $12.6 billion.) For Nextel, the huge costs of building systems has kept Nextel piling up losses since it was formed in 1987. In its fiscal year that ended March 31, Nextel lost $9.6 million on $53 million in revenue.

Nextel’s new partner, American Mobile, has also had its problems and racked up nearly $33 million in losses in the five years that ended June 30.

American Mobile’s troubles include what it says were unauthorized transfers of $4.1 million in company funds to accounts held by its former chief executive, William J. Young, who resigned after the company discovered the transfers early last year. The company says it is cooperating with a formal Securities and Exchange Commission investigation into that case. American Mobile is also a defendant in a class action shareholder lawsuit over the matter.

Another problem is that in August, 1992, half of American Mobile’s market in Florida was virtually wiped out by Hurricane Andrew. A year ago, American Mobile’s financial condition was so precarious that its former accountant, Deloitte & Touche, wrote the SEC that the company’s “ability to continue as a going concern” deserved more scrutiny.

But American Mobile trimmed its losses to $2.6 million in the fiscal year that ended June 30 from a $13.9-million loss a year before, while its revenue grew 45%, to $8 million from $5.5 million. The narrower losses were partly due to a $2-million gain in fiscal 1993 on the sale of assets, but also resulted from increased sales and lower expenses. Somers contends that even without Nextel, American Mobile is on the right course.

Analysts caution that Nextel and American Mobile are still a long way from turning profitable. “You’ve got to build a skyscraper before you can rent it,” said Charles A. DiSanza at investment banking firm Gerard Klauer Mattison & Co. in New York. “The issue is how quickly can they build it, will it work and will people come.”

Some investors apparently think so. After reaching a low of $2.25 a share in fiscal 1993, American Mobile’s stock closed Monday at $23.13, up 38 cents.