Sprint - Nextel 2005 Annual Report Download - page 53

We offer wireless mobile telephone and data transmission services and features in a variety of pricing plans,
including prepaid service plans. Excluding prepaid service plans, we offer these services on a contract basis,
typically for one or two year periods, with services billed on a monthly basis according to the applicable pricing
plan. We market our prepaid services under the Boost Mobile brand, as a means to directly target the youth and
prepaid wireless service markets. We also offer wholesale services to MVNOs, which purchase wireless services
from us at wholesale rates and resell the services to their customers under their own brand names. These
companies bear the costs of acquisition, billing and customer service. We also recently entered into a joint
venture with several cable companies to develop converged next generation products for consumers designed to
combine many of cable’s core products and interactive features with wireless technology to deliver a broad range
of services, including video, wireless voice and data services, high speed Internet and cable phone service.
Our Wireless segment generates revenues from the provision of wireless services, the sale of wireless equipment
and the provision of wholesale and other services. The ability of our Wireless segment to generate service
revenues is primarily a function of:
• the number of subscribers that we serve, which in turn is a function of our ability to acquire new and
retain existing subscribers; and
• the revenue generated by each subscriber, which in turn is a function of the types and amount of services
utilized by each subscriber.
The ability of our Wireless segment to generate equipment revenues is primarily a function of the number of new
and existing subscribers who purchase handsets and other accessories. The ability of our Wireless segment to
generate wholesale revenues is primarily a function of the number and type of MVNOs that resell our wireless
service and the number of subscribers to whom they provide service.
We increasingly must attract a greater proportion of our new customers from our competitors’ existing customer
bases rather than from first time purchasers of wireless services. The higher market penetration also means that
customers purchasing wireless services for the first time, on average, have a lower credit rating than existing
wireless users, which generally results in both a higher churn rate due to involuntary churn and in a higher bad
debt expense.
Although many of the costs relating to the operation of our wireless networks are fixed in the short-term, other
costs, such as interconnection fees, fluctuate based on the utilization of the networks. Sales and marketing
expenses are largely dependent on the number of subscriber additions and the nature and extent of our marketing
and promotional activities. General and administrative expenses consist of corporate overhead costs and other
costs to operate the Wireless segment.
In February 2005, Nextel accepted the terms and conditions of the Report and Order of the FCC, which
implemented a spectrum reconfiguration plan designed to eliminate interference with public safety operators in
the 800 MHz band. Under the terms of the Report and Order, prior to the August 12, 2005 merger date, Nextel
surrendered certain spectrum rights and received certain other spectrum rights, and undertook to pay the costs
incurred by Nextel and third parties in connection with the reconfiguration plan, which is required to be
completed within a 36-month period, subject to certain exceptions particularly with respect to markets that border
Mexico and Canada. If, as a result of events within our control, we fail to complete the reconfiguration plan
within the 36-month period, we could be subject to actions, which could be material.
Based on the FCC’s determination of the values of the spectrum rights received and surrendered by Nextel, the
minimum obligation to be incurred under the Report and Order is $2.8 billion. The Report and Order also
provides that qualifying costs we incur as part of the reconfiguration plan, including costs to reconfigure our own
infrastructure and spectrum positions, can be used to offset the minimum obligation of $2.8 billion; however, we
are obligated to pay the full amount of the costs relating to the reconfiguration plan, even if those costs exceed
that amount.
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