With the cost of spectrum for wireless networks skyrocketing,

Nextel Communications

(NXTL)

is shifting gears and looking to partner with another telecom carrier or a content provider to bid more aggressively in upcoming U.S. spectrum auctions, Nextel CFO Steven Shindler said Tuesday. Though Nextel wasn't naming names,

AOL

(AOL)

is seen as a possible Nextel partner in the bidding.

Nextel, under the gun to acquire additional spectrum, decided against going it alone after witnessing what companies shelled out for spectrum licenses in the U.K. last month, Shindler says. The U.K. auction raised $35 billion. Bids for licenses in a U.S. auction could top $50 billion and possibly reach $100 billion.

Nextel, which will strive to win a nationwide license, has about $8.5 billion in free cash flow. "We plan to come out with our guns blazing," Shindler said. "We expect to be a winner."

Nextel is in discussions with AOL, according to one source familiar with the company. But a Nextel spokeman said, "Everyone's talking to everyone. Everything's speculation until the check clears."

"It doesn't surprise me," said wireless analyst Art Poole of

Raymond James

. "AOL is at risk of seeing its customer base erode" as mobile-phone carriers launch their own Internet portals.

VoiceStream

recently launched its Internet portal,

MyVoiceStream.com

, while

Verizon

and

Powertel

(PTEL)

have announced their intention to do the same, Poole said. If AOL were to partner with Nextel, "it would become the Internet entry point for Nextel's customers and would, therefore, share customer ownership," he said.

Nextel has until Aug. 1 to file its registration with a partner for the 700 megahertz auction in September. It also plans to participate in a July auction if it and other established carriers are eligible to do so, the spokesman said. The company should learn in the next few weeks if the July auction will be open to established carriers.

Nextel has enough spectrum for now. But while it can meet its voice and narrow-band data needs, it must have additional spectrum if it wants to be a player in what is widely considered the future of mobile communications -- wireless broadband data transmission (i.e., the ability to rapidly transmit voice, video and text and provide Internet access through mobile devices).

"Future opportunities for incremental penetration, additional services, more revenue and

more cash flow streams are obviously valuable," Shindler said, noting that 2 million of Nextel's 5.1 million subscribers already own mobile phones that can handle data transmission.

Nextel wants a partnership with a company that recognizes the need for financing on three levels: buying the spectrum, building the network and marketing the service, the Nextel spokesman said. But Shindler notes that a partnership could develop in a number of ways, including splitting a bid for spectrum, or splitting the costs associated with buying the spectrum and building the network. Nextel hasn't discounted an overseas partnership, although Shindler says the most serious conversations now are being held with domestic concerns.

Nextel will face hefty competition in these auctions, with other likely participants including

SBC Communications

(SBC)

and

Bell South

(which have combined their cellular operations); Verizon (which includes

Vodafone AirTouch

(VOD) - Get Report

and

Bell Atlantic's

(BEL)

cellular operation); and

AT&T Wireless

(AWE)

. International participants could include

Telefonica

(TEF) - Get Report

,

Deutsche Telekom

(DT) - Get Report

,

France Telecom

(FTE)

,

KPN

(KPN)

, and

NTT DoCoMo

.

Without a partner, Nextel likely would be among the smallest bidders. Other relatively small bidders could include

Qwest

(Q)

and

Global Crossing

(GBLX)

.

Motorola

(MOT)

would make a sensible partner for Nextel; it is its second-largest shareholder (after telecom entrepreneur and financier Craig McCaw) and its only equipment vendor. But Shindler says a financial backer would be a "less likely" partner than another telecom carrier or content provider.

Money is not the only hurdle that Nextel and its competitors face. The spectrum to be auctioned off in September -- for the 700 MHz band -- is, in a word, occupied. It's as if a real estate broker were putting a series of mansions up for sale, but each grand space were already temporarily leased.

The telecom carriers want the

Federal Communications Commission

to provide more information about when the band will be clear (when the tenants are moving) before placing their bids. The auction has already been rescheduled twice and Poole, of Raymond James, says he wouldn't be surprised if it's postponed again. He believes the issues surrounding the 700 MHz spectrum, currently used by more than 130 television stations, will keep auction prices from getting out of hand.

If Nextel and other major carriers are allowed to participate in the July auction, which involves spectrum that was originally sanctioned for start-up carriers, it will help alleviate some of the pressure to capture the 700 MHz licenses, Poole says.

Another issue for the 700 MHz licenses is that they operate in a different frequency and would require Nextel and other operators to issue new mobile phones. "It's not unmanageable," Poole said about needing new phones. "But it's just one more thing in an already complicated situation."