MCI Hitches Its Wireless Wagon to San Diego Start-Up NextWave
Positioning itself for the coming wireless wars with a markedly different approach than its competitors, MCI Communications Corp. said Monday that it has signed a major contract with NextWave Telecom Inc., a small but well-financed San Diego start-up.
MCI was the only major telecommunications firm not to bid in government-run auctions earlier this year for a chunk of the radio spectrum set aside for PCS, or personal communications services. The company’s wireless strategy had been in limbo since it backed out of an agreement with Nextel Communications in 1994.
NextWave--a spinoff of San Diego-based wireless pioneer Qualcomm Inc., which is backed by several South Korean electronics firms--shocked the industry earlier this year when it agreed to pay nearly $5 billion to win the bulk of a special “entrepreneurs block” of PCS licenses.
The firm plans to build PCS networks in 63 markets throughout 40% of the United States and has filed plans to sell $300 million in stock and $400 million in debt to finance the project.
Analysts said MCI and NextWave make a logical match that would add a potent competitor to the fiercely contested wireless market, which is expected to grow at a rate of 30% annually in the next several years.
MCI shares rose $1.25 to $26.75 on Nasdaq on Monday. The deal, which commits MCI to purchasing at least 10 billion minutes of air time in the next 10 years, will provide a major boost to NextWave’s planned initial public offering.
“Our competitors spent billions of dollars to get into the wireless business,” said Whitey Bluestein, vice president of MCI’s wireless strategy and development. “We don’t think you have to spend that kind of money to offer your customers valuable and competitive wireless services.”
But it also means that MCI’s performance is closely tied to that of NextWave, which plans to deploy a highly promising but untested wireless technology from Qualcomm known as code-division multiple access, or CDMA. NextWave’s strategy is to serve as a “carriers’ carrier,” selling air time in bulk to companies such as MCI, which would then use their marketing organizations to recruit customers.
MCI “can’t control costs as easily as they would like and they have to rely on others to provide the network and the quality of the network,” said John Ledahl, director of the wireless telecommunications program at Dataquest, a San Jose-based consulting firm. “This particular solution is pretty novel, but I do believe it will work for them.”
Neither company would discuss the rates NextWave would charge MCI. Under the agreement, MCI would connect its long-distance network with NextWave’s and provide wireless service under the MCI brand. The two companies have also agreed to work together to develop additional residential and business services.
NextWave’s licenses cover markets with a total population of 110 million, including Los Angeles, New York, Washington, Baltimore, Boston, Houston, Minneapolis, Denver, Seattle, San Diego and Portland, Ore.
Bluestein said Los Angeles, home to the nation’s most voracious wireless customers, will be one of the first areas in which MCI will offer service, probably beginning in the middle of next year. A particularly lucrative area the company hopes to exploit is wireless service in the home, which will give customers cheaper access to the MCI long-distance network.
MCI will face as many as eight wireless competitors in each of its major markets as PCS--a digital version of traditional cellular service that allows more calls to be carried more cheaply over the same bandwidth--debuts throughout the country.
Telecommunications giants such as AT&T;, AirTouch Communications, Pacific Bell and Sprint are erecting antennas and “bay stations” throughout the vast regional patchworks of licenses they purchased at auction. And the Federal Communications Commission on Monday began auctioning off three narrower bands of spectrum in each market.
With MCI’s intentions finally clear, analysts said the stage has been largely set for a decade of migration in the communications world from wired to wireless. In three years, wireless subscriptions are expected to balloon to nearly 100 million from 35 million today.
“PCS will take it over the top, because when you get four and more competitors there’s going to be a price war,” said Sharon Armbrust, an analyst at Paul Kagan & Associates in Carmel. “It’s going mass.”
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