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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.

Clearwire et al

Monday, 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 yearthat 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/HSPAnothing 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

COMMENTS: This is an archived post. Commenting is no longer available.

Martyn Roetter - 05/12/2008 21:08:25

The only sure beneficiary whatever the outcome for Xohm or this consortium is Google.Google is putting up a small investment (much smaller at $500 million than the $4 billion plus it had bid in the recent U.S. 700 MHz spectrum auction) and helping to build a national vehicle for the preferred deployment of its Android platform and other elements of its mobile strategy which will add to building its experience in the mobile arena and increase competitive pressure on other operators to act more cooperatively with Web companies. Google has much less “skin in the game” with Xohm than does Intel, i.e. if Xohm fails it will have minimal effect upon its business and will have provided valuable experience that is widely applicable elsewhere, while if it succeeds, however unlikely for all the reasons cited, the upside for Google will be significant.

Andrew Seybold - 05/12/2008 21:15:07

Martyn--what you have said is that Google is smarter than the other players, for the cost of a lottery ticket they get to play, observe,and tweak their system for the Mobile Internet, smart folks at Google--they have nothing to lose and everything to gain--even, if I a right that most of us don't want the desktop Internet wirelessly, they will learn that too and perhaps lead the charge to provide us with a smater, wireless Internet--it is always better to let someone else take the arrows when you can come behind and pick up what is left--the folks at Google are smart--they just don't understand bandwidth limitations, but that too, they will learn, and in a hurry I will bet.
Thanks for the comments!

Joe Nordgaard - 05/12/2008 21:55:04

Spot on Andy. The whole affair, from start to this latest permutation has been a breathtaking spectator's sport.

I heard that the fixed uplinks are high powered to improve the link budget but how does that fit with mobility to have BTS spaced for fixed - with higher power fixed radiators dotting the landscape?

I wish them luck but I still maintain as I presented at a forum at Columbia U. three years back - without access to lower frequency spectrum for more affordable/cost competitive offerings, the long term viability of the technology at risk beyond the realm of a niche applications. (Certainly not to the level that would justify putting the technology into every laptop akin to 802.11 as Intel lusts for.)

Clearly, a beachhead at 700 MHz which would have provided that important "RF high ground" for WiMax was not been achieved. That failing could have been the real turning point for this technology. Needless to say, Craig has his work cut out for him and now Dan can turn more of his focus on his core network vehicle which let's face it, could have also been aided by some more coverage-affordable spectrum real estate - as you noted.

Never a dull moment in the wireless batch.

Andrew Seybold - 05/12/2008 22:02:39

Joe, I can always count on you for support but then you have been through the wars, promoting CDMA at 450 in Eastern Europe and taking the flack for it--but does it not still amaze you that people don't understnad the difference between 450, 700 and 2.5 GHz? Intel has said that WiMAX is 10 times faster at 1/4th the cost--so prove it Intel--

Ravi Kumra - 05/12/2008 23:01:36

Excellent observation, Andy.

I still don't understand why Google did not buy the CONUS C block and contributed it to SPRINT for a large equity. Build out the 700 and use the additional licensed and then the shared spectrum to deal with high demand in the metros.

Andrew Seybold - 05/12/2008 23:05:48

Ravi--thanks for your comment--and I think you are right--they missed a great opportunity--my tongue in cheek answer is that they did not have the right consultant, I think the reality is that they thought they could do better with WiMAX--which I don't believe--nor do you, so it is what it is, and sometimes lessons are expensive. But then Their CEO discounts my concerns about shared bandwidth as being old fashioned.

Michael Vakulenko - 05/13/2008 02:41:38

After years of consulting in this business, I learned that It doesn't quite matter what we, technologists, have to say. It's about people - not technology. WiMAX PR machine has created too many executive jobs, egos, and promises for people to think reasonably. It's been already noted a while ago that "It is difficult to get a man to understand something when his job depends on not understanding it." (Upton Sinclair).

Makes me wonder where these high-ranking decision makers go after such multi-billion losses. I guess having "Managed strategy and build-out of a multi-billion 4G wireless network (OPM**)" on their resume will help in getting higher salaries and more options in their next job.

** OPM - Other People Money, usually money of unsuspecting investors of large public companies.

I hope it's not too much philosophy for this respected technical forum...

Joe Nordgaard - 05/13/2008 07:03:58

I think one things missed in all of this. If Sprint tried to unload the assets - a couple of things would have probably been true. I doubt Craig could not have swallowed it at a valuation Sprint wanted but Craig also did not want the assets devalued by buying them on the cheap since it would reflect back on his holdings. So Craig engineered not only the means to get the assets with a new infusion of capital but also potentially inflating the value of the combined entity in the process (as Andy notes) - which one might be able to argue...some day....some day...

Andrew Seybold - 05/13/2008 09:54:07

Michael--I welcome your philosophy and I believe that you are correct in your assement about people and their jobs, if you add to that the reputation that Mr. McCaw has for being unvinceable when it comes to his investments in wireless (which if you check the facts is far from close to reality) then you have what we have-- a perpetrual motion machine feeding on itself--you have said in a much better way what I have said in a much cruder way for a while--it seems the more hype there is surrounding a technology the fewer people invovled undestand how to open, and complete, a spreadsheet--even Wall Street does not seem capable of truly understanding, thank you for your comments.

Joe--as always, I am sure that your comments pin-point the "rest of the story" or at least more of it--it is going to be interesting to watch all of this play out--and I am just waiting for the first excuses for why the data speeds are not what they should be.