The two major US WiMAX operators, Sprint Nextel and Clearwire, are to pool their resources in a much predicted move that could create a genuine quad play offering in the US to temper the power of AT&T and Verizon, and which puts all the main cable and satellite TV operators on to the same broadband wireless network. The two will not only divide build-out and management of the WiMAX networks, but will also share a common service brand and distribution channels.
While we never thought that Sprint could just come out and deal with its cable partners bitter arch rivals, the satellite DTH companies DirecTV and EchoStar, it is likely that these have suddenly gained a huge urban broadband footprint way ahead of schedule, and they could well drive the take up of a US wide WiMAX network that is suddenly going to be built twice as fast.
Sprint and Clearwire, subject to regulatory approval ‘ which given the green light for the multiple mergers that have formed the new AT&T, seems assured ‘ will split build-out, with Sprint taking on 65% of the burden and Clearwire the rest. Sprint Nextel CEO Gary Forsee believes the deal will pass regulatory hurdles by the end of the year. It lasts for 20 years, with three 10-year renewal periods.
Company management for the merged new brand has not been discussed, but given that the Clearwire team have little else to manage apart from a WiMAX network, it is likely they will form the bulk of the new team.
The move is in line with Sprint’s recent hints that it would look for additional funding to accelerate its WiMAX deployment, and so retain its projected quad play headstart, probably through a joint venture. Total spin-off of its 2.5GHz business had been speculated, but splitting the build-out load is a less drastic move that keeps more of the value in the core company, where it will be needed to counter the inevitable decline of the former Nextel’s iDEN business, and if current problems with CDMA business performance persist.
There will also be spectrum sharing, though this has not yet been detailed, but will continue a series of spectrum swap deals that the two carriers have done in their 2.5GHz bands. Most of this has been geared to increasing Sprints’ concentration of licenses in urban areas, and Clearwire’s in rural or suburban, and so it is logical that this pattern will be reflected in the new partnership. Under the network build-out plan outlined by the partners, Sprint Nextel will focus on geographic areas covering 185 million potential customers, including 75% of the people in the 50 largest markets. Clearwire will concentrate on areas covering about 115 million pops. The two companies expect to cover about 100m people by the end of 2008’the same coverage area Sprint Nextel promised to cover prior to the tie-up’and enable seamless roaming between their respective deployed areas. Clearwire had aimed to cover 125 million in five years on its own. Clearwire will now be able to sell its service through Sprint retail outlets in its territories.
This could look like another example of a growing trend for wireless operators to pool network ownership, except that the two will also offer their WiMAX services under a common service brand (as yet undecided). This suggests that, if successful, the partnership may be further expanded in future with a spin-off of the operation or sale of Clearwire US to Sprint once the network is proven to be a success. Given the lukewarm reaction to US wireless IPOs recently, including Clearwire’s own, Sprint could expect a better return by spinning off the unnamed venture once it has proved itself and has real revenues. The poor performance of Sprint’s share price this year indicates how little the market appreciates the daring scope of its vision, preferring to be swayed entirely by short term problems, and so spin-off at this stage would almost certainly be disappointing.
Sprint will offer dual-mode CDMA/WiMAX services across both its own and Clearwire’s networks, and will handle distribution relationships and ‘other potential strategic partners, including wholesale or mobile virtual network operator arrangements’. This raises the major question of how Clearwire’s recent agreement with the US satellite broadcast operators, DirecTV and Echostar, will fit into the mix, since this would be directly competitive, in quad play terms, with Pivot, Sprint’s venture with the four major cablecos.
Clearwire’s agreement allows both satellite players to resell its broadband wireless services to their subscribers as a bundle or standalone. In return, Clearwire can sell DirecTV and Echostar TV offerings to its base from later this year. Once the Sprint alliance is finalized, this would presumably count as one of the ‘strategic partners’ to be managed by Sprint. As yet, Pivot is using only the operator’s CDMA EV-DO network to add wireless to the cablecos’ bundles, but the far-reaching venture is expected to use WiMAX too at an early stage. Assuming all the partnerships continue under the new arrangements, this points to Sprint extending the MVNO model that it helped effect its turnaround of mid-decade, and focusing far more intensely on being a wholesaler and infrastructure owner ‘ a model that would not preclude having competitive clients such as the cable and satellite television players.
The Sprint-Clearwire alliance makes sense from many perspectives, especially as the two have always chosen to skirt round one another rather than compete head-on, in order not to divide their response to the far greater challenge of the two major telcos. Now that unofficial approach has been formalized, lending better economies of scale to the US WiMAX experiment and helping to ensure that build-out proceeds at the rapid pace that will be needed to stay one step ahead of other carriers’ EV-DO, HSPA and converged plans.
With Sprint shareholders restive at recent poor quarters, and Clearwire engaged in multiple cash-draining activities around the world, reducing cost by deploying just one network will also be welcome. Sprint had expected to spend $3 billion on its roll-out, but placated investors last quarter by pulling back its estimates for calendar year 2007 from $1 billion to $800 million.
Clearwire has put less firm figures on its plan, but was expecting to need to raise additional funding early next year even after its $600 million IPO in March (it spent $74.4m last quarter alone in capex), almost doubling its losses year-on-year to $96m).
Despite its high levels of funding, Clearwire needs to raise more money plus keep costs low to support its current pace of acquiring spectrum worldwide. Chairman Craig McCaw’s mantra has always been that spectrum is the key asset but of course, despite his undoubted skills in doing deals to gain this asset cheaply or indirectly, it does involve huge upfront outlays that do not generate revenues for at least 1-2 years while build-out takes place and customers are acquired.
The companies would not speculate on how much cheaper a single, higher capacity network would be to build than two systems, but analysts were speculating on $4 billion as the total for the national first phase. Operating cost reduction will prove even more important in the medium term, and for Clearwire, there will be the huge advantage of being able to tap into a more established operator’s support infrastructure, including towers, backhaul and distribution networks. “We are reducing our capital and operating expenses as result of this agreement,” was all Forsee would say.