Clearwire, Sprint, Jammers, and MoreFriday, August 14, 2009
Clearwire's quarterly results were released this week, sugar coated by the CEO and with a look forward to a healthy fourth quarter. Not being one to read much more than the facts and figures, here is what I learned:
Last quarter, Clearwire lost $73.4 million, down from the same quarter the previous year, which was a loss of $74.6 million. It added only 12,000 net subscribers for a total subscriber base of 511,000. Average Revenue Per User (ARPU) was up an average of $0.19 per customer to $39.57, but the number of subscribers lost on a monthly basis (churn) was at 2.8% compared to 2.6% in the prior quarter. The cost of adding a customer was $524, up from $499 the prior year.
These are the hard numbers, as they were reported. There was some good news in that Clearwire turned on both Atlanta and Las Vegas and expects to turn on service in 25 markets by year end and 80 markets by the end of 2010 for a total population coverage of 120 million by the end of 2010-slightly more than one-third of the U.S. population. But Sprint, which owns 51% of Clearwire and operates as an MVNO on the Clearwire network, is also rolling out WiMAX cities. In addition to Baltimore, Sprint says it will roll out Boston, Houston, New York, San Francisco, and Washington DC during 2010.
There are those who believe Clearwire and Sprint will be successful in the long term in deploying WiMAX in the United States. I am not one of those people. I think WiMAX in undeveloped areas and countries makes a lot of sense, but as the sixth, seventh, or eighth supplier in a given market, I just can't see the business model. Yes, the federal government is pushing for more competition, but market forces will determine how many networks will survive and we have new 700-MHz players coming into these markets. In addition to the big guys AT&T and Verizon, some cable companies and others purchased some of the 700-MHz spectrum. It will be a tough few years with the state of the economy and then additional competitors. Clearwire isn't the only company I don't believe will make it long-term, some of the other wireless companies coming into the markets from the ground up won't make it either.
Back to Clearwire specifically, if its cost of adding a customer is $524 and its ARPU is roughly $40 per month, each new customer will have to stay on the network for more than a year for Clearwire to break even (13.1 months to be precise). Meanwhile, Clearwire has stated that it is basically not worrying about losing customers in its smaller pre-WiMAX cities, which it admits it is, rather, it is concentrating on the larger, true WiMAX mobile markets. This is probably the right approach for the moment, but with a churn rate of 2.8% a month or 33.6% per year, that means Clearwire is losing one-third of its customers every year.
I realize that the other networks have similar per-customer acquisition costs, but if we compare Clearwire with AT&T, which has an ARPU of $52, and assume the same cost to add a customer (although I believe it's about $100 lower), the subscriber must be an AT&T customer for 10 months, a full 4 months less, which can make a big difference.
Some will point out that the existing network operators struggled along for a number of years before they made any money and they would be correct. However, they were building a market on voice, and later data, and not promising more than they could deliver. Clearwire, Sprint, and Intel (the man behind the curtain) have been touting WiMAX mobile as a fourth-generation technology, which leads me to the question, "If WiMAX is a 4G technology, why are its customers experiencing 3G data speeds?" If there is an answer to this question, I have yet to discover what it is. I find it interesting (amazing) that the promised 20-40 Mbps and 30-mile distance between cell sites has quietly become 2-4 Mbps down and 1-1.2 Mbps up with a cell radius of 1-3 miles depending on the urban area and population density. Both are a very long way from the promises made by the WiMAX community such a short time ago.
It's probably a good thing I am not a Wall Street analyst because my best guess is that Clearwire can only survive about three more years before it runs out of money, and I don't think it will have the customer base to support the continued operational expenses. Remember the deal? The merger and infusion of cash were based on a stock price of about $20 per share. Okay, the entire market is down, but Clearwire is sitting at only about $7 per share, having dropped another 16.84% shortly after its earnings release.
Cell Phone Jamming
I have written several articles about this recently and have sent letters to both of my U.S. Senators and my Representative. They are all busy doing their thing with healthcare reform, so this little matter appears to have been lost in the cracks, but it is important. The prison system thinks that the way to stop the illegal use of cell phones in a prison is to jam all of the calls-which (duh) means jamming their own calls and in some cases their own two-way radio channels, creating a very dangerous situation. Meanwhile, the CITA and the network operators have proven there are ways to accomplish the same thing WITHOUT using jammers.
Jammers are illegal in the United States. There are many good reasons for them to remain illegal, yet prisons, schools, churches, and restaurants are considering using them. I can tell you one thing. If I ever walk into a place where there is a jammer in use, I will leave and I will report the location to the FCC enforcement folks. If you feel the same way I do, please take a minute to send a note to your Senators, probably after their recess, so they understand the issue. Thank you.
I was recently contacted by the CEO of a small tier 3 wireless provider. It has one side of the 800-MHz spectrum in a rural area, is offering voice and 100-Kbps data services, and is about to roll out 3G broadband services. It has a roaming agreement in place with a large network operator, and it is making money.
But someone on the board of directors, or perhaps an investor, is raising the alarm-700 MHz is coming, we are doomed! Sell now, get out now, take our money and run!! I spent a long time on the phone with the CEO and talked through the spectrum valuation, the circumstances, the company's competitors, its roaming partner, and the 700-MHz build-out. It appears as though the valuation for its spectrum is reasonable-considering it is the 800-MHz Block and when compared to what the 700-MHz spectrum was sold for in that area.
My recommendation was to hold onto the spectrum, work with their existing roaming partner (who also bought some of the 700-MHz spectrum in the area), and see what develops. They have three if not four years before LTE comes to their rural community (unless some stimulus money becomes available), and I feel that their spectrum will increase in value, not decrease, because it is almost as good as the 700-MHz spectrum and the timing for voice over LTE is still questionable. Since they will have 3G data services and a nice roaming agreement, I thought they should sit tight and watch what develops.
I mentioned this in this COMMENTARY because a number of smaller network operators are facing the same type of situation and I am sure they have the same types of questions. I am perhaps more bullish on these issues than others because of the federal push for rural services, and because now that 700 MHz has been auctioned, the currency with the most value in the wireless industry is spectrum, not money.
Spectrum Bridge is selling and leasing spectrum and is providing valuations based on scarcity as well as on the fact that it has had a lot of success obtaining waivers from the FCC regarding what the spectrum was supposed to be used for and what its clients want to use it for. This means there are some very interesting things happening with channelized spectrum in the United States.
Spectrum. There is no more of it and everyone wants a piece of it, many for free, many because they feel as though those who have it are ripping off the public who want and need mobile access for voice and data services. What this new FCC believes, recommendations in the reports that are due out this year or next, and what it does concerning spectrum allocations could set the tone for the next few years. I hope some of the decision makers understand spectrum, radio propagation, interference, and other technology factors and can convey this understanding to the attorneys and elected and appointed officials who don't understand wireless and spectrum. The attorneys and elected and appointed officials don't want to nor should they have to understand. They need to rely on their staff and advisors whose job it should be is to listen to voices of people who are actually making things work. Too many people are talking about making things work in the future and making promises based on hyperbole.
Andrew M. Seybold