Given the enfeebled nature of Sprint Nextel’s business and leadership, it is perhaps unsurprising that, of all the options being discussed for its WiMAX business Xohm, it has taken the most illogical, and the one best placed to increase uncertainty around its future. So on Friday it announced it was scrapping its deal with Clearwire to share build-out costs, networks and brand, an agreement that had represented the US’ best chance of gaining a true mobile broadband service and ‘ given the ties of the two partners to the major cable and satellite providers ‘ a quad play alternative to the two top telcos.
True to Sprint’s indecisive and somewhat panicky behaviour in the wake of the loss of its COO and now its CEO, there was hardly even an attempt to put a positive spin on the decision. There was no alternative partner or plan to sell Xohm, no firm roadmap for how Sprint would maintain its promised build-out schedule without Clearwire, not even any convincing reason why the split had happened, beyond vague statements on failing to reach agreement on the complex terms. All that was left was an even greater question mark over whether Xohm, which was due to light up its first commercial networks next month, will continue, or whether Sprint will sacrifice its greatest opportunity to make a major mark on US telecoms and media, in order to placate shareholders by cutting cost and risk (and any likelihood of being more than an also-ran in the market in future).
Sprint officially said it remained “fully committed to developing WiMAX services and deploying a WiMAX network” and would continue to work with Clearwire on opportunities such as network roaming agreements and airwaves exchanges. It said it was still on track to test WiMAX services in Chicago and Baltimore/Washington late this year, and for a commercial launch in 2008.
The decision is bad for Sprint from almost any angle. If it keeps Xohm, it almost certainly needs to find a new investor and/or scale back its ambitions (within FCC restrictions of course), and this will further dent confidence and certainly increases the risk attached to the venture. Although the operator may be reluctant to make a critical decision to dump its WiMAX activities without a CEO in place, the failure to work things out with Clearwire is a pretty strong signal that divesting Xohm is on the cards. Although, as we have argued, that will be a body blow to Sprint’s future hopes, it is not necessarily bad for the US market or the WiMAX suppliers, provided a good buyer is found and the FCC continues to insist that the spectrum is built out at a rapid rate.
Verizon or AT&T could snap up the vast 2.5GHz assets that Sprint holds ‘ the type of spectrum treasure chest most mobile broadband operators will never be able to dream of ‘ as a defensive move against internet players and to support their own pre-4G plans (if the FCC allowed this). The main problem would be that they would find themselves building out several different bands at once, potentially with different technologies ‘ or, to harmonize their pre-4G efforts around, for instance, LTE, would need to waste a lot of Sprint’s work. Of course, they could also use the 2.5GHz spectrum as a springboard to a unified WiMAX strategy for 4G.
In the end, the fact that AT&T had to divest its own 2.5GHz assets to Clearwire as a condition of its merger with BellSouth suggests that these telcos would be warned off buying Sprint’s spectrum. The most obvious candidates would then be Clearwire itself, and the cablecos’ collective, which has been disappointed with the nascent quad play it was attempting through the Sprint MVNO deal, Pivot, but is still on the look out for spectrum to add wireless to the mix offered by its four members.
Clearwire was widely assumed to be the huge loser from Sprint’s attack of cold feet, and its shares fell 25% in value on the news and a difficult set of results (see separate item). Certainly, the Sprint-Clearwire alliance was very logical and represented a way for both companies to share risk and cost, and speed up their efforts in order to gain a realistic chance of leapfrogging larger operators into mobile broadband. Without a gung-ho and committed Sprint, Clearwire is much the weaker ‘ but it has not had a committed Sprint since before CEO Gary Forsee fell on his sword last month. Clearwire would benefit more from having a partner with fewer short term financial difficulties and more resolve ‘ any company that bought the Sprint spectrum would almost certainly revisit the Clearwire partnership, such is the commercial sense behind the deal.
And Craig McCaw’s company remains in the position of kingmaker that McCaw likes so well, owning one of the most valuable tranches of spectrum in the US, at a time when not only the cellcos, but all kinds of service providers, are looking for more wireless capacity. It seems unlikely that McCaw will not be able to make an advantageous alliance with somebody. Clearwire executives said the company was looking at options including strategic partnerships with companies besides Sprint. They did not give details beyond pointing to the high degree of interest in wireless broadband, stimulated by the upcoming 700MHz auction, which suggested they are already receiving signals of interest in deals based on their 2.5GHz licenses.
One option would be an internet player ‘ in particular, one of the companies, such as Intel or Google, that has been most vocal about promoting new competition in the US, and in particular ensuring that spectrum gets put to the service of the open access internet model. Both these giants have worked closely with Sprint, but if that plan starts to founder, would see Clearwire as a strong second option (Intel already invests heavily in Clearwire).
Sprint has planned just such an open access, multimedia broadband service, with heavy encouragement from Intel, and this could have been a flagship of its kind in the western world. If it backs away from its plan, the worst case scenario for the Intel brigade will be that Sprint keeps Xohm but devotes the spectrum to a far more conventional, safe business model. It would be better that Sprint sold to another company with more freedom of movement and the mobile internet plans could be kept on track. With the internet players ‘ Microsoft, Cisco, even Google ‘ seeming to be backing away from owning spectrum themselves to support their preferred technologies and approaches, they could well prefer to fund an operator friendly to their cause (as Intel has done, on a smaller scale, on many occasions for WiMAX).
We believe that, if the Clearwire project looks to be in trouble because of the increased risk following the divorce from Sprint, it will attract new investment from Intel and possibly other internet players, and possibly its key supplier, Motorola (also an existing stakeholder). The logical next step would be for Clearwire, with the financial backing of these WiMAX supporters, to buy Sprint’s spectrum if that comes up for sale in the new year. For Intel and Motorola, the choice may be a stark one ‘ see Xohm and Clearwire falter badly, so putting at risk the investments they have already made as well as the credibility of the WiMAX businesses on which both have staked a considerable part of their growth strategies; or inject some of the estimated $8bn that the combined companies would have spent over the next 3-4 years to create and run a full mobile broadband WiMAX system. For the sake of perspective, it is worth noting that this is the same sum Nokia paid for Navteq, in order to achieve a similar objective ‘ not for simple financial return per se, but to make a market happen on which it believes it can build significant growth round the world.
Intel and Motorola have the most to lose from any setback to Sprint, Clearwire or WiMAX, although Sprint’s other suppliers, Nokia Siemens and Samsung, will also be feeling nervous about this flagship deal. But it is important not to take Sprint as a bellwether for the whole global industry. In one way, Intel is being hoist by its own petard. It helped to build up Sprint as the poster child representing WiMAX everywhere, whereas Sprint is, and always has been, a maverick operator, in no way representative of the provider community worldwide. So just as it was unrealistic to use Sprint to prove that the WiMAX market was real and booming everywhere, so now Intel has to cope with the problems at Sprint being interpreted to mean WiMAX is in trouble in general.