Heavy capex investment remains something of which mobile operators’ investors are nervous, especially when the provider’s core revenue streams are under pressure, so it is perhaps no surprise that Sprint Nextel is considering various options to increase funding for its $3 billion roll-out of a US-wide WiMAX network, which could include new partnerships or even spin-off. This would not indicate anything fundamentally wrong with Sprint’s model for its 2.5GHz business, except that the operator has probably been over ambitious about how much it can achieve in a short time, in order to fulfill its aim of being first to market with a genuine multimedia mobile broadband service ‘ meeting FCC coverage targets into the bargain. Given the undervaluation of Sprint because of recent poor performance in its core CDMA business, and a general failure by the US markets to appreciate the audacity of the telco’s vision and give it the long term backing it requires, it was almost inevitable that the company would have to scale back its timelines or seek new sources of financing.
Of course, it is already receiving significant though unconfirmed financial input from its key suppliers ‘ Motorola, Samsung, Nokia plus Intel ‘ all well used to the commitment required of vendors that want to take an early beach head in a new wireless market. But more is clearly required if Sprint is to hope to steal a march in pre-4G over its larger rivals, and establish itself as a credible quad play provider. The most likely route would be some form of joint venture ‘ a restructuring of the existing partnership with four major cablecos, or an alliance with Clearwire (though this option, while commercially logical, might now be blocked by conflicts of interest between the cable operators and Clearwire’s new satellite broadcasting friends (see separate item). But following reports in the Wall Street Journal that Sprint might be considering full spin-off, the telco refused to rule out that possibility either, merely saying it would provide an update later this week, in a report due later today.
Would spin-off make sense? Judging by reaction to the recent IPO of Clearwire (and, less indicatively, of the smaller WiMAX ISP Towerstream), Sprint could not hope for a runaway valuation. Hype about WiMAX notwithstanding, this market has suffered none of the bubble mentality of the last broadband wireless boom at the turn of the decade, which saw off the likes of NextLink. And part of the efficiency of its build-out plans will rely on keeping its two wireless operations close, in order to leverage synergies such as shared sites.
A joint venture with another wireless operator would not be inconceivable, especially given the global trend towards rival cellcos sharing the cost of building and maintaining new networks. This would have been the logic behind a Clearwire alliance ‘ the two largest US holders of 2.5GHz spectrum pooling their assets and combining their investment into one truly national system, in order to make common cause against the quad play giants rather than fighting with one another (even equipment choices would not be hard to synchronize, since Intel and Motorola invest in and supply both operators). We mooted a Sprint-Clearwire venture over a year ago, and while this may be politically sensitive to Sprint’s vital cable partners now, we would expect, at the least, that these two operators will continue to skirt around each other rather than competing head-on (they have already engaged in several spectrum swapping deals, designed to strengthen both in their key, and differentiated, target territories).
Pooling resources and investment on the network will be a huge feature of the 4G generation, as presaged by several recent international deals, most notably between Vodafone and Orange, which will co-own and co-manage 3G infrastructure in the UK and beyond and may well set up a separate business venture to run this. Sprint, consistently with its self-styled role as the bringer of 4G to the US, could fly the flag in this respect too, creating a partnership with T-Mobile or Alltel (or even, more problematically, AT&T, which is obliged to build out the 2.3GHz spectrum it acquired with BellSouth). Any such deal could see the partners maintaining their own brands and services, but using shared infrastructure and spectrum.
The other main venture option must be a further deepening of Sprint’s vital alliance with the four cable operators, Comcast, Cox, Time Warner Cable and Advance/Newhouse. So far, this focuses primarily on the cablecos adding a mobile element to their nascent quad play offerings through an MVNO deal with Sprint, an initiative that is branded Pivot. But from the signing of the agreements in 2006, it was clear that the collaboration is designed to go far further, to the extent that the cable user base could be the primary initial target for the ‘4G’ services promised on WiMAX. With the cablecos increasingly operating as one, and having access not just to CDMA but a next generation, mobile broadband network in 2.5GHz, there is a realistic chance of creating a national quad play to challenge AT&T and Verizon, plus the new Clearwire/DBS combination. It is possible that the agreement could be rebalanced to involve greater cash investment in the infrastructure from the cablecos, and therefore a greater ownership of the total venture going forward. The cable operators would presumably insist on the right to lease access to the 2.5GHz network to fill out their broadband network, but any greater compromise on Sprint’s control of its network might be a sticking point. However, like most operators that embark on a new round of major infrastructure building, the cellco will look to support wholesale as well as MVNO and direct revenues in order to maximize cashflow from the start, and the cablecos would be valuable captive customers.
CEO Gary Forsee is not a man to shirk a creative, even daring, approach to increasing value ‘ he was the initiator of the MVNO strategy that was responsible for Sprint’s last turnaround as well as an enthusiastic backer of the WiMAX-based 4G efforts. Speaking at a Bear Stearns conference last week, he sought to placate investors restive at the increasing WiMAX capex burden by hinting at possible spin-off, but did not go into much detail, though he did say that possible partners would include anyone with an interest in ubiquitous WiMAX, whether a current supplier or partner, a wholesale customer or other entities aiming to accelerate WiMAX availability (for which many analysts read Clearwire).
Forsee told the conference that there were ‘opportunities for us to do a number of things, strategically and potentially financially, that could ensure that the business plan is achieved, that the technology is ubiquitously deployed, and financially that our shareholders could perhaps see some benefit of that before waiting the four or five years before the business would return a profit.’
The CEO is certainly keen to keep investors positive about the 4G plans, which are Sprint’s best hope of differentiating itself from the giant AT&T and Verizon, and avoiding the fate of becoming a minor wireless player, chiefly dependent on its international backhaul network for market weight. In the core business, the company has been addressing some of its key issues ‘ integration of its Nextel acquisition, stemming the tide of defections from that operator’s once highly profitable iDEN system, redressing an excessive swing towards low ARPU customers, and taking on the threat from flat rate voice providers like MetroPCS with its own creative tariffs.
Sprint’s stock, which was trading down to the $17 range earlier this year, has recovered to about $22, but Forsee will be keen to boost it to the $26 level it was at when the Nextel merger closed. The recent rebound has been partly fuelled by rumors that Sprint Nextel itself could be the target for a leveraged buy-out.