Is it a done deal?

On Friday, rumours began circulating of a merger between Sprint and Nextel. The merger has few obvious advantages for either company, in addition to a whole host of apparent drawbacks. The wireless and wireline telecommunication industries fascinate me; for my own amusement, here are my thoughts on the potential merger.

First, who is Sprint, and who is Nextel? Respectively, they are the third and fifth largest domestic carriers. Sprint is popular among families, while Nextel has a strong business subscriber base. They both provide pre-paid services aimed at young adults: Sprint powers Virgin Mobile USA, while Nextel operates Boost Mobile.

The Mobile Phone Industry in the United States

So one has a consumer-heavy base, while the other has a strong business customer portfolio? Match made in Heaven, right? Not quite.

Every cell phone is different. Today, the two technology families predominantly in use in the United States are GSM and CDMA. Nextel’s network is based on a technology created by Motorola, called iDEN.

Combining Sprint’s CDMA network with Nextel’s Motorola iDEN platform would be a difficult challenge, to say the least. With only one exception, every phone offered by Nextel is built by Motorola. While CDMA has failed to see truly spectacular worldwide adoption (as GSM is the true international standard), it does have broad support from phone manufacturers such as Sony Ericsson, LG, Nokia, Samsung, Sanyo, and even Motorola.

So their customer bases might gel well together. And so combining their technologies will be a nightmare. Why would they chose to tackle this now?

Three reasons.

First, the acquisition of AT&T Wireless by Cingular was a massive change for the industry. Regulators approved the merger, which showed their willingness to allow for consolidation in the industry (a willingness that nobody was entirely sure of before). Today, there are two huge wireless carriers and three much smaller ones. Sprint and Nextel may well feel like they have to join forces to fight the humongous Cingular and Verizon monsters, or else.

Second, Nextel has some work to do. In a deal with the United States Federal Communications Commission, Nextel agreed to move all of its customers to a new, higher frequency, to eliminate interference with emergency radios and transmitters. Nextel is expected to spend billions accomplishing this task. And, Nextel needs to get a high-speed platform in place. Sprint’s technology and frequencies would provide solutions to both: no interference already, and a high-speed platform already in place. The downside here? Most, if not all Nextel subscribers will have to get a new phone, essentially a new Sprint phone.

Third, maybe this is really just Sprint fooling around with Nextel? Nextel, without a doubt, is serious about a potential merger (for its frequency change and high-speed data needs). But Sprint could well just be aiming to force Verizon to finally consider a merger. Sprint and Verizon operate using the same technologies. Verizon has been reluctant, though… Sprint is a messy company, and a merger between the two would be no less of a mess to sort through, if it’s every even approved at all. (Remember in 2000 when MCI WorldCom had hoped to buy Sprint, only to have the deal prohibited by regulators?) But a Sprint-Nextel carrier would be very, very close to catching up with the solo Verizon, whereas a Verizon-Sprint company would far surpass Cingular, catapulting Verizon back into first place, where it undoubtedly thinks it belongs. So maybe Sprint isn’t wholeheartedly into a marriage with Nextel? Quite possible.

No matter which of the three, or which combination of the three reasons are fuelling this coupling, it’s not going to be pretty. With the media coverage that the Cingular and AT&T deal garnered, don’t doubt for a second that you’ll be hearing more about Sprint and Nextel in the coming days, weeks, and months.