There are reports that Sprint is considering spinning off Nextel. Interestingly, one of the options being considered:

Sprint is said to be contemplating a couple of options for Nextel. The company has held preliminary talks with Nextel founder Morgan O’Brien, who now runs a company called Cyren Call Communications in McLean, Va., that is trying to create a nationwide wireless network for public-safety communications.

is very similar to a scenario I considered in a post a while back:

It would make a lot of sense at this point to cap investment in the Nextel network, build a robust replacement Direct Connect product on the CDMA side, and invest there instead. Then, in time, either shut the Nextel network down or sell the rump to a specialist public safety provider. What Sprint needs now more than anything is focus on the one hand and a single network, single brand and single device portfolio to drive some serious synergies and efficiencies on the other. Keeping the Nextel network alive indefinitely feels like an act of desperation at this point. [emphasis added]

Nextel is the bear on Sprint’s back right now, and unless it does something to get rid of it, it’s saddled with several big disadvantages in competing against Verizon, AT&T, T-Mobile and even some of the smaller players:

• having to maintain a combined portfolio that is either considerably larger than competitors’ - if it wants each brand’s portfolio to be competitive - or maintain a portfolio a similar size to competitor’s in total, but therefore be uncompetitive within each brand (it appears to be pursuing the latter strategy)
• maintaining a level of investment in networks considerably above that of others because it is maintaining two separate networks
• trying to compete while spending a smaller amount on advertising than competitors while attempting to boost (no pun intended) the visibility of two or more brands
• trying to maintain two rather different customer bases and differentiated messaging and branding for both sets of customers and potential customers.

All of this is on top of the problems the company is already dealing with, although most of those problems stem from the merger in one way or another. Although disentangling Nextel would be difficult and painful it may well be the right thing to do. As long as Sprint has these problems to deal with it’s hard to see how it can ever be truly competitive again.

At the same time, there are rumors about a possible renewed deal with Clearwire. Again, getting Nextel out of the way would allow Sprint to really focus its attentions on investing in the next generation of the core Sprint network, which is a big gamble in its own right.

Sprint held a call with industry analysts on Tuesday, during which it reiterated its commitment to its Nextel network, which is based on the iDEN technology and provides the Direct Connect push-to-talk service which Nextel is famous for. Sprint runs the Nextel network in parallel with the Sprint network, which uses CDMA, and has been losing subscribers for over a year.

As long as two years after the Sprint Nextel merger was announced, the company was saying that it planned to decommission the Nextel network, possibly as early as 2011 or 2012. For a couple of years after the merger completed, the company certainly acted as if it had made its last significant investment in the Nextel network, and the result was that churn rose steadily in its iDEN business. Network congestion drove blocked and dropped calls up, and customers quickly started to notice. The network effects associated with the relatively exclusive push-to-talk service magnified the results even further.

Around a year ago, Sprint’s management began to get to grips with the problem and invested heavily in the Nextel network again. They also began launching new handsets again after a hiatus of 18 months, as part of a bid to resurrect the Nextel network. But customer desertions have continued, and iDEN subscriber losses have dragged down the company’s performance as a whole even as CDMA subscribers appeared still to be growing.

One of the possible strategies which could have been adopted by new CEO Dan Hesse was to accelerate the demise of the Nextel network. This would be facilitated by the fact that Sprint is about to launch the CDMA version of its Direct Connect service, which is based on Qualcomm’s Q-Chat technology. The company claims that it has been able to replicate the Nextel push-to-talk experience on the Sprint EVDO Rev A network, and as such this should provide a good substitute for many customers.

However, Tuesday’s call made clear that Sprint is committed to the Nextel network for the long haul, and has no foreseeable plans to decommission it. Instead, it continues to invest in the network, and has just re-launched the Nextel application development team in support of that effort. It is hoping that it can reinvigorate performance on the Nextel side of the business in order to turn around overall performance.

There are good reasons for keeping the Nextel network alive. The company doesn’t want to instigate forced migrations from the Nextel network to the Sprint network, and public safety organisations rely on the iDEN network and latterly its interoperability with LMR services. But these reasons – though valid – mean that Sprint has to continue to invest in what by all appearances seems to be a rapidly declining user base of just over 17 million. And this at a time when growth on the CDMA side of its business appears to be flagging too. Morgan Stanley estimates that the company added just 3,000 net new customers to its CDMA network in the fourth quarter of 2007.

It would make a lot of sense at this point to cap investment in the Nextel network, build a robust replacement Direct Connect product on the CDMA side, and invest there instead. Then, in time, either shut the Nextel network down or sell the rump to a specialist public safety provider. What Sprint needs now more than anything is focus on the one hand and a single network, single brand and single device portfolio to drive some serious synergies and efficiencies on the other. Keeping the Nextel network alive indefinitely feels like an act of desperation at this point.