Carrier Seeks Boostfrom Younger Users As Corporate Growth Slows

Nextel Chases Teen Market

Carrier Seeks BoostFrom Younger Users As Corporate Growth Slows

By JESSE DRUCKER

Staff Reporter of THE WALL STREET JOURNAL

April 13, 2004; Page B2

Nearly every U.S. cellular carrier these days wants to be more like Nextel Communications Inc. Ironically, Nextel seems to want to be something else.

Nextel scored a major hit with Direct Connect, a walkie-talkie feature for business customers that has proven especially popular with construction crews and other heavy users of group calling. The technology carved out a distinct identity for Nextel, and is a major reason it boasts the industry's lowest customer-turnover rate and the highest revenue-per-subscriber rate.

Now though, Verizon Wireless, Sprint PCSand Alltel Corp. are rolling out their own versions of walkie-talkie service. So Nextel is putting a full-court press on a new market, teens and young adults, with a brand called Boost Mobile.

Boost Mobile offers cellphones equipped with prepaid services and a walkie-talkie feature called Boost Walkie-Talkie. It is sold through retailers such as Best Buy Co., Target Corp. and Wal-Mart Stores Inc. Nextel already has accumulated 405,000 subscribers while selling prepaid services under the Boost brand since late 2002 in California and Nevada. Starting this month, it plans a marketing and advertising push to expand Boost service to several new markets, including New York, Chicago, Washington, Miami and Dallas. It also will launch marketing efforts for Boost with a series of youth-oriented events, from a snowboarding competition at Soldier Field in Chicago to a surfing event in Lower Trestles, Calif.

Nextel needs new markets because its growth appears to be slowing. Gross customer additions were down for the fourth quarter. Business and government customers accounted for only about a third of new customers in that period, though they constitute roughly 57% of Nextel's total customer base.

With growth from its corporate accounts slowing, Nextel says the time is ripe for a change. "It would be a limited view of the future" to market only to businesses, says Tom Kelly, Nextel's chief operating officer. "There's a tremendous opportunity in business and we're still looking there, but you also want to create a new set of entrants."

Still, moving into the notoriously fickle youth market is a risky strategy that could leave Nextel more exposed to perennial industry pitfalls: high customer turnover and lower revenue per customer. "Maybe I'm being cynical, but I'm not sure the economics of these customers is all that great," says Dave Bishop, a senior analyst at Detwiler, Mitchell, Fenton & Graves, Inc., a boutique equity-research firm in Boston.

Because Boost customers aren't committing to monthly service, Nextel subsidizes the cost of their phones at a lower rate than those it sells to regular cellular-service customers. That means the Boost phones end up costing considerably more.

For example, the Motorola i730, a new color-screen flip phone, costs regular Nextel customers $150, but Nextel charges Boost customers $225. Boost's regular cellular-service minutes, meanwhile, cost roughly twice as much as Nextel's regular cellular-service minutes.

Just two years ago, many analysts and investors were questioning whether Nextel could survive, pointing to its high debt load and thin radio-wave spectrum holdings. But the carrier has cut its debt roughly in half, and it has been lobbying the Federal Communications Commission to get better radio-wave spectrum. Although its share price has been off during the past two months, the result in part of its former interest in bidding for AT&T Wireless Services Inc., overall Nextel has been on a tear since July 2002, with its share price rising roughly ten-fold.

Nextel's overtures to the youth market are part of a broader marketing reinvention taking place at the Reston, Va., company. In June, the carrier began sponsoring the Winston Cup series of the National Association of Stock Car Auto Racing, shortly before it kicked off an extensive rebranding campaign, tweaking its logo, and changing its corporate color scheme to bright-yellow. Since 2002, the company has sold phones through Phat Farm, branded with the name of the clothing line that is part of Phat Fashions LLC, a company founded by hip-hop impresario Russell Simmons. The latest line of the phones -- a big change from the older, bulky models that once dominated Nextel's offerings -- sport an extra-shiny silver exterior shell and a screen saver featuring a picture of Run-DMC's late turntable deejay, Jam Master Jay.

"The best thing you can have is to have one kid tell another to buy this Nextel product because it's cool," Mr. Kelly said. "It's the most credible recommendation that can be made."

Making money selling such services is a challenge for Nextel and the entire wireless industry. A recent report by Morgan Stanley analyst Simon Flannery estimated that Boost subscribers are paying average monthly revenue in the $35-dollar-a-month range, which is roughly half of what an average Nextel subscriber pays, although better than several other prepay providers, Mr. Flannery noted.

Prepay customers tend to use less minutes and pay lower bills on average. Prepay offerings offer cellular carriers the opportunity to sign up customers who currently don't have service, but analysts and investors question whether targeting low-revenue customers could reshape the industry.

Mr. Kelly says Nextel is able to acquire Boost customers at a lower-than-normal cost. The company says its Direct Connect feature and group calling makes it particularly appealing, enabling it to poach teen customers from other carriers. "The group can all hear each other at once," said company spokeswoman Elizabeth Brooks. "It's made for teenagers."

Write to Jesse Drucker at

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit