Sure, Nextel ( NXTL) packs a mean wallop. But some observers are starting to wonder if the fast-growing wireless company can go 10 rounds.

The company's one-two punch has taken on legendary proportions. First, you hook users on walkie-talkie service. Then, you charge as much as you can for as long as you can. Thursday's blowout earnings report showed that Nextel continues to hammer its point home with a growing group of users.

Still, skeptics note that behind the industry's great success story of the last two years is a debt-laden company facing huge spectrum- and network-upgrade bills. Also potentially worrisome: Nextel's strides in cornering its market haven't gone unnoticed by antitrust regulators .

Perhaps the biggest question is how long the company, in the face of rising competition, will be able to keep charging a steep premium. Nextel defends its prices, saying its services make business users more productive. But with the wireless industry growing like gangbusters and deep-pocketed rivals pushing to take bigger slices of the walkie-talkie pie, the pressure is clearly building at Nextel.

The company's shares advanced 70 cents Thursday to $25.50.

Captive Audience

For now, investors have no complaints. They openly marvel at the tech edge that helped transform the teetering Reston, Va., niche player into the most profitable wireless telco in the nation.

Specifically, Nextel's push-to-talk feature has helped it run away with a prize portion of the market. Business sales groups, field technicians, medical teams, taxi fleets and security squads have found Nextel's instant radio connections an important communications tool. The phones have become so embedded into government agencies and corporate work groups that price has hardly been a consideration.

"They have the ideal captive audience and that lets them charge about 30% more than the rest of their competitors," says Friedman Billings Ramsey analyst Susan Kalla, who rates Nextel a buy.

In an interview Thursday, Nextel Finance Chief Paul Saleh turned a question about how much the company was charging into one about how much the company was delivering. "We offer our customers a lot of value and that helps them become more productive," said Saleh.


Phoenix-Like
Nextel's revival


And so far, Nextel isn't exactly hearing the hoofbeats of rivals hot on its trail. So far, imitative efforts by Verizon Wireless -- a joint venture of Verizon ( VZ) and Vodafone ( VOD) -- and Sprint ( FON) have fallen short of stunning. Meanwhile, Cingular, AT&T Wireless ( AWE) and T-Mobile have yet to deliver on their two-way radio plans.

"Sprint has come the farthest down the track of all the challengers," says Yankee Group's John Jackson. "But it's far too early to say if any of them have found a way to do it well."

Gravity, Anyone?

Even so, Nextel fans and naysayers alike agree that signs of strain are starting to show. For instance, some analysts wonder how long the company will be able to sustain its industry-leading $69 average monthly revenue per user, or ARPU, level.

Of course, Nextel's brilliant performance helps hide the cracks. In the past few quarters, the company has repeatedly blown by Wall Street's financial expectations. In the most recent quarter, Nextel nearly tripled its profits from year-ago levels.

Still, there were imperfections in the quarter's tally. Nextel added 474,000 subscribers, flat with the year-ago quarter and lighter than the 500,000 new users Wall Street was expecting. While that's hardly a blip when No. 3 player AT&T Wireless lost a record 367,000 customers during the same period, it raises questions about growth.

Nextel helped soothe those anxieties a bit Thursday by raising its new 2004 subscriber-addition target by 100,000, to 1.9 million. But the message was dampened by a slight increase in customer defections in the quarter. While Nextel has the most loyal subscribers in the game, monthly churn increased to 1.7% from 1.6% in the fourth quarter, another one of those annoying imperfections.

And despite heavy debt repayments in the recent quarter, Nextel still has more than $10 billion in obligations and must pay annual interest of $600 million. Add to that a potential $2.35 billion tab if the Federal Communications Commission votes to sell Nextel's new radio spectrum to clear up airwaves for emergency services.

Nextel also faces a steep bill if it hopes to compete with outfits such as Verizon Wireless on fast mobile Internet access. The company uses a proprietary iDEN network technology from Motorola ( MOT) to run its calling traffic. Moving to so-called 3G or broadband is likely to require a completely new infrastructure, a staggering expense by most estimates.

"They have a lot of debt, a network that's like a ship's anchor and some big spectrum and upgrade costs ahead," says Friedman Billings Ramsey's Kalla. "You have to wonder what happens if the revenue stops growing."

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