Push-to-talk gets commoditized: Nextel's unique Direct Connect via mobile phone is gaining competitors. Is push-to-talk the key to business users?

NEXTEL HOLDS ONLY 7.5 PERCENT of the U.S. mobile phone service market, but its share is coveted by the other wireless carriers. Nextel has a strong following with business users, and these customers are extremely loyal. Nextel's churn, a measure of customers discontinuing service, is an industry-low 2.1 percent. Research firm In-Stat/MDR says that "nearly one in five wireless Internet subscribers is thinking about churning." And Nextel's customers more spend money, averaging at least US$8 more a month per user, than any other carrier's customers.

Competitors attribute Nextel's popularity to a unique feature: push-to-talk, Direct Connect as Nextel brands it, a long-range "walkie-talkie" feature. Instead of dialing, waiting for the circuit connection, then waiting for the other party to answer, and possibly ending up in voice mail, a Nextel phone user just pushes a button and is immediately talking with another Nextel user. (Nextel provides regular dial-the-number capabilities, too.) In addition to saving users' time, having a series of efficient Direct Connect chats tends to save money compared to making a series of phone calls.

Searching for the magic button

Zeroing in on push-to-talk as the key to the business market, Alltel, AT&T Wireless, Cingular, Sprint PCS, T-Mobile, and Verizon have all announced push-to-talk strategies. Although none have launched real services yet, there's no shortage of telecom technology companies offering to help. For example, Nokia, Siemens, and Ericsson are joining forces to define a GSM/GPRS push-to-talk standard and have enlisted the help of Sonim, Winphoria, and Airvana.

Until we see non-Nextel push-to-talk in action, we won't know what kind of latency subscribers will face. However, consensus is it will be high, from 2 to 4 seconds. With many years to focus on latency, Nextel's connection time averages between .5 and .75 seconds. A couple of seconds might not seem critical until you experience it. If you've seen TV interviews routed by satellite, you know how a 2-second delay makes for difficult conversation, with awkward gaps followed by participants stepping all over each other's sentences.

However, even if Nextel's competitors can't initially provide low-latency push-to-talk, they'll probably get it right eventually. With larger competitors working feverishly to duplicate Direct Connect's unique value, should Nextel be worried? Put another way, is Direct Connect the only reason for Nextel's success?

Ken Hyers senior analyst with In-Stat/MDR doesn't think so. "I've cautioned carriers to not view push to talk as a magic bullet. Nextel has other things going for it. It's more focused than the other carriers; its marketing strongly targets the business market, particularly team workers, for whom Direct Connect is key. And it has a sales force that has spent a lot of time in vertical business markets honing their arguments on why Nextel service--not just Direct Connect--is better."

Several mobile phone carriers are betting (or hoping) that combining push-to-talk with high-speed data service will be a compelling package for businesses, and they point out that Nextel's iDEN network isn't as advanced as some. However, Hyers cautions that the team workers who highly value push-to-talk aren't usually users of high-speed data. "If you're a field service technician, you might occasionally find it useful to be able to download specs, but you don't need high-speed data to communicate with other members of the team." He adds, "Most carriers are consumer focused. If they have a business strategy, it's typically targeted to large accounts focused on one-to-one communication. These business users aren't going to get as much out of push-to-talk as team workers such as fleet dispatchers, hotel event planners, construction workers, etc."

Nextel also serves business customers with software applications delivered via phone. Business solutions include wireless time sheets, mobile office e-mail, work order automation, and GPS tracking. In addition, third-parties offer a wide range of Java applications that run on Nextel phones.

Then, there's Nextel's reputation for customer satisfaction. A Yankee Group report says 55 percent of Nextel customers surveyed were very satisfied with service--the best score of all the carriers. Nextel also came out on top in outdoor coverage, voice quality, and service features. Research firm In-Stat/MDR agreed, saying "... yet again, Nextel came in as the favorite wireless Internet provider, and was nearly impossible to beat." In 2002 Q4, Nextel ranked highest in Instat/MDR's top four keys to customer satisfaction: Quality of Service, Reliability of Service, Ease of Use, and Technical Support.

Even though push-to-talk services from competitors might devalue this as a differentiator, Direct Connect is still valuable to Nextel for a different reason: It's extremely efficient. Direct Connect requires only a one-way channel, where a phone call requires a two-way channel. And it handles about half of Nextel's voice traffic. This has made it possible for Nextel to delay upgrading its iDEN network even while competitors are racing to build 3G networks. "Instead, Nextel has been able to focus on subscriber growth, debt reduction, and remaining cash-flow positive, says Hyers. "However, subscriber growth is going to put pressure on Nextel's ability to provide clear calls and avoid dropped calls. It is going to have to make a technology choice in the next year or so because it takes time to build out a network and transition customers to a new network."

Crazy like a fox

Commoditization of push-to-talk probably won't hurt Nextel much. Its real hurdle is the upgrade to a faster data network, but delaying gives Nextel time to evaluate new technology, and learn from the experiences of competitors. Meanwhile, Nextel continues to build on its strong reputation in the marketplace. How many other mobile phone companies can say that their best advertising comes via recommendations from satisfied customers?

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