Clearwire et alMonday, May 12, 2008
In last week’s Commentary, I dissected Sprint piece by piece but the Clearwire/Sprint/Everyone Else deal was still being jelled when I published it. Now we have had a few days to digest the idea of this new marriage and I find a number of things about it that are strange.
First, 51% of the company, called Clearwire and trading under the Clearwire symbol (CLWR) will be owned by Sprint. Clearwire, the company before the new company, will own 27% and the remaining 22% will be spread out among Intel Capital, Comcast and Google. At the same time, an additional $3.2 billion in funding will be put into the company.
In an effort to track what this “system” has cost so far, I started backtracking through Clearwire’s funding. I am not clear how much it started with, but in July 2006 Intel put in $600 million (its second investment in Clearwire), others put in $300 million and Clearwire sold its equipment company to Motorola. The statement at the time was that with this amount of funding, Clearwire would not have to do an IPO it had been planning. By this time, the CEO of the company stated that it had raised more than $2 billion. Next, of course, it did do an IPO in March 2007 and raised $600 million. Sometime after that, it arranged for another $1 billion plus of debt financing.
Sprint said it was going to invest $3 billion in its own WiMAX network and it received at least $1.5 billion from Intel, Samsung Motorola and others for choosing WiMAX. The new company is valued at $14.5 billion? If that is what has been spent so far, what is there to show for it?
Clearwire’s first quarter earnings report, dated 5/12/08 (a few days after the merger announcement) reads like a typical earnings report with a very positive slant: New Subscribers Growth 72% over same Quarter last year—that is to a total of 443,000. Meanwhile, first quarter revenues increased 76% over the same quarter to $51.5 million. Later on, it talks about an ARPU for the quarter of $36.86, up from $35.80 a year ago and still it continues to lose money every quarter. As of the end of the first quarter, it had cash on hand of $806 million, down from $1.5 billion in 2006, and claims to cover 16.6 million POPs as opposed to 10.1 million a year ago (out of a total 300 million POPs).
I wonder what that works out for per POP covered. In any event, I’m sure I missed investments of $500 million here and there, or perhaps even more. But what is a few extra billion dollars here and there? It amazes me that Intel is pouring so much money into WiMAX both here and overseas. It just bought spectrum in Sweden, I think, and is giving money to a number of other companies to continue their promotion of WiMAX. Why would Intel do this? Because it wants to embed WiMAX chips into everything that moves and it wants to help deliver a rich Internet experience to all of us who walk, ride or drive anywhere.
Throwing all of this money at this system, now a joint system, is easy. It is surely a lot easier than it will be to realize the promises made for this network. The thing that keeps making me more and more upset is that not too long ago, WiMAX was accepted as a 3G technology, which it is, and yet today’s version is still being touted as a 4G technology and well ahead of LTE or UMB—in fact, two years ahead if you listen to the WiMAX folks.
The reality is quite different. Today’s WiMAX is on a par with CDMA2000 1xEV-DO REV A and UMTS/HSPA—nothing more. The difference is that this new network has more bandwidth to build out, so yes, the network can be faster in given areas, but not much faster, and it has the same issues as the other 3G technologies. It is shared bandwidth and, therefore, each customer in a given cell sector shares that bandwidth with all other customers in the same sector. Why do you suppose Clearwire is offering blinding speeds of 1.5 Mbps down to a fixed device and 256 Kbps up? Because this is not real WiMAX. However, the Portland system that Clearwire is bringing up is real WiMAX and the soft launch Sprint is doing in several cities is real WiMAX. Why aren’t we seeing any real-world speed data reports from these systems? If Sprint and Clearwire are so convinced that this version of WiMAX is 4G, then let’s get some independent testing of the systems that are up and running and see some published results.
It is really interesting to me that so much money and hype are being thrown around here. WiMAX, as a technology, is on a par with others and not light years ahead. By the time REAL 4G technologies are available, WiMAX may or may not have its 4G version ready to deploy. The other two standards (LTE and UMB) are much further along in their approval cycles and will be in service sooner. Another thing the U.S. version of WiMAX is missing is that as 4G (LTE and UMB) is built out, there is a fallback to EV-DO and UMTS/HSPA, and beyond that to CDMA 1x and GSM GPRS/EDGE. The WiMAX network won’t be turned on all at once or even cover many of the suburbs or residential areas at first. Unless customers have dual-mode WiMAX/CDMA devices, when they are out of WiMAX coverage, they are out of any coverage. There is no fallback to another technology.
If this was 1981 or even 1991, people would put up with losing coverage because there were coverage problems all the time on all of the networks. However, given that this is 2008 and AT&T, Verizon, Sprint and now T-Mobile are offering data services at 1 Mbps or more with fallback where necessary to lesser rates, I wonder how having no coverage on the WiMAX network will sit with those who bought into the hype and believed WiMAX would truly be a ubiquitous network covering all of the United States?
What I see ahead for this new company is a lot of tough times, a lot more money to be spent bringing devices to market in a timely fashion and establishing coverage in enough places to keep customers happy. Clearwire’s first systems were designed for point-to-multi-point, which means you put in a site, figured out the coverage and then started selling home systems for the network. Once these were installed and working, they usually stayed that way. But when you add mobility to this mix, it is a lot tougher to meet people’s expectations and a lot more expensive to build the network.
Just think, if Sprint had shown up at the auction with the many billions of dollars it has already invested, it could have gone home with enough 700-MHz spectrum to really enhance its CDMA network. And, if it had gone after and won the D block, I’m willing to bet it could have built that network for less than it will spend on the WiMAX network. Perhaps it could have even convinced first responders to move to WiMAX and to use the Nextel system for interoperable voice while the 700-MHz system was being built out. I want to make it clear here that I don’t believe for a minute that WiMAX should even be considered by the first responder community. The idea is to build on standards so first responders can use existing commercial networks for data while the 700-MHz system is being built out and where it does not have coverage—no system will ever have enough coverage!
So Clearwire’s stock continues to slide. Sprint doesn’t have to worry about WiMAX since Clearwire will be calling the shots and it only has to worry about protecting its own 51% of the investment. To me that means a long, hard struggle ahead for all of the partners in this new company called Clearwire. It may be a lot larger than before, but it has a long, hard road ahead if it is to truly compete in the mobility space.
Andrew M. Seybold