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Summary:

We said that building a wireless network isn’t for wimps. It doesn’t just take billions of dollars; it takes the guts to go out and fight to create a big business out of cheap spectrum and new network technology. Clearwire has guts, but it needs cash.

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We said that building a wireless network isn’t for wimps. It doesn’t just take billions of dollars; it takes guts to go out and fight like hell to create a big, profitable business out of cheap spectrum and new network technology. Fortunately Clearwire, with backing from its Chairman, Craig McCaw, has the pedigree of a wireless winner and is now taking the hard steps to make sure it translates its bets on unpopular spectrum and a non-standard mobile broadband technology into a win for its backers.

Yesterday, Clearwire said in order to conserve its cash, it would cut 15 percent of its workforce, delay the launch of some handsets, and stop prepping new markets outside of those needed to hit its original launch goals. It expects those steps to save it $100 million to $200 million this year and a similar amount during the first half of 2011. Many analysts have long been convinced that the operator, which has raised billions in equity and through a public offering, is still under-capitalized.

As I said earlier this year, Clearwire has some $2 billion in debt and payment obligations coming due next year, up from $586 million in 2010, so it’s almost time to pay the piper. We’ve been hearing about Clearwire’s attempts to raise more money either through more investment from Sprint and its cable partners, or from the sale of spectrum, but so far, there’s nothing to put in the bank.

That raises a bunch of questions about the wireless industry. First, can Sprint really allow Clearwire to fail? It owns 54 percent of the company and is banking on it for its 4G network. It appears to be engaging in negotiation with Clearwire over how much it’s willing to pay and what it wants Clearwire to do operationally, according to BTIG analyst Walter Piecyk in a research note issued today. In that note, he wondered if Sprint’s taking over Clearwire might trigger a default on Sprint’s bonds and wondered how long a takeover is even feasible, given Sprint’s falling share price. From the note:

Clearwire needs money to survive and Sprint wants them to do certain things like shut down retail and invest more capital in existing markets in order to get that money. Clearwire does not want to do some of those things because it would make them more beholden to Sprint and reduce the value to public shareholders. Sprint could end this debate by taking control of the company through the approval of all Clearwireʼs strategic partners which would probably involve the purchase of the public stock and Eagle Riverʼs stake. So basically we have a high stakes negotiation and we are waiting to see who blinks first. Meanwhile 600 employees got fired while the management teams of both companies flex their muscles.

Given that Clearwire has been trying to push its spectrum for months in the midst of huge publicity about the shortage of spectrum, what does its failure to entice a buyer say about Clearwire’s spectrum specifically and the spectrum shortage in general? If the industry was really freaked out that by 2013 the airwaves will be so clogged with data they won’t be able to meet demand, wouldn’t the giant swaths of spectrum (up to 100 MHz in some cities) held by Clearwire look pretty enticing, even if it isn’t paired and is in a higher band that would require more towers? After all, if you’re worried about a famine, you don’t turn up your nose at rice simply because you wanted bread.

So while Clearwire hunkers down and continues playing the wireless game, its hunt for cash is raising some interesting questions for the industry at large.

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  1. Great post, thank you. We’ve seen them scaling back their operations in Kansas City which was interesting since Sprint in headquartered in the area.

  2. Just a question. Can there be any cross over (if that’s the term) between Clearwire & Sprint accounts in the same market? I live in Nashville, TN, and been a subscriber of its Internet and telephone services for two years, or whenever Clearwire began marketing here. Last month they sent out new Motorola modems. Clearwire had replaced its Expedience network with the 4G WiMax. But isn’t this the same 4G that Sprint now has here? And since we also have Sprint accounts, could we take our wifi macs and ipod touches on the road accessing the WiMax thru Clearwire?

  3. Christopher Mitchell Friday, November 5, 2010

    Why would anyone want to sign up for Clearwire? When I check out their services, they seem to be slower than DSL and from reports I’ve read online, not particularly reliable.

    I just don’t understand the fascination with slow wireless options when we should be building much faster, more reliable, and affordable wired networks (as many communities have done without help from any big incumbents).

  4. For Sprint this is a similar situation as the Sprint PCS affiliates. That situation ended with the forced and expensive buyout of the affiliates after the Nextel merger.

    Trying to partner up and have another entity build out a network for you looks good to the accountants, but it means you lose control of your destiny and sooner or later you either buy out your partners or cut the operation free.

    Sprint needs Clearwire more than Clearwire needs Sprint. Clearwire would survive by selling out to ATT/Verizon for a discount (if allowed by the DOJ). IMHO, this ends with Sprint bringing Clearwire back in house since Sprint just doesn’t have an alternative. Of course another strategic partnership could start the whole cycle again.

  5. Eric Anderson Friday, November 5, 2010

    I remember when Clearwire first launched and everyone was asking telecom infrastructure giant Ericsson, who was developing HSPA (3G) and LTE (4G), if it would also develop infrastructure for WiMAX. Their answer was telling, “We don’t see a business case for WiMAX.” I believe this was at CTIA Wireless in 2008. While this response was met with skepticism, it’s since proven prophetic.

    This post by Om Malik last year sums up nicely why WiMAX has had and will continue to have such an uphill battle:

    WiMAX Not Really 4G: Ericsson CTO
    http://gigaom.com/2009/08/12/wimax-not-really-4g-ericsson-cto/

  6. I disagree with “Sprint needs Clearwire more than Clearwire needs Sprint.” Sprint has an existing 3G network that they can fall back on while they built a 4G overlay (which they did in the beginning before partnering with Clearwire). It wouldnt be a good business approach for Sprint to do that now given how much they have invested in Clearwire already. If Clwr does go belly up, wouldn’t it be a good time for S to buy them out for dirt cheap prices?

    1. I think Sprint has to do a 4G overlay network no matter what. The Clearwire WiMAX network was just delaying Sprint’s decision/need to build that overlay network. If Clearwire fails(or stops deploying), a Sprint overlay network would be that much more urgent.

      The amount of spectrum that Clearwire has is a strategic advantage. If they do build out the network nationwide, Clearwire will be the only network, IMHO, ready for the flood of Gigabyte phones coming in the coming years.

      http://gigaom.com/2010/11/02/the-gigabyte-phone/

      Sprint can’t afford to start over on a 4G network, but seems to be committed (and/or stuck) finishing what Clearwire has started.

  7. Wondering what they are thinking? T-Mobile already has a bigger coverage area with their HSPA+ network, and it offers faster speeds than Clearwire. Verizon is going to launch their LTE network, which will be without many coverage gaps like Clearwire currently has. Most of Clearwire’s network is full of holes, and its footprint in major cities is not good. I can hear the bad reviews coming real fast. T-Mobile is just as cheap, and Verizon may cost more but it will be solid. I would not expect subscriber numbers to rise quickly, and I will bet that churn will be very high in most of the new cities they are launching.

  8. the big boys may actually prefer less spectrum as an excuse for higher pricing.

  9. 4G may not make the difference people think. the city i live in has not yet launched. yet both the evo and the epic 4G are very popular with the owners raving about how incredibly fast they are. they do not have the slightest clue that they are actually using 3G EVDO.

  10. What all of you forget is that without suficient spectrum holdings there will be limits to capacity. This is were Clearwire/Sprint shine among their competitors.

    On anther note Wimax will soon be upgraded to Wimax 2 (IEEE 802.16m), which is mainly a software upgrade costing very little in time and money. This will ensconce Clearwire and Sprint from the competition. Wimax 2 is expected to get a stamp of approval from the ITU for meeting all the 4G requirements, an all IP network using OFDM with minimum download speeds in excess of 100 mbps. It will also be commercially available for deployment in 2011.

    In conclusion, Sprint and Clearwire are poised to do well as more and more consumers demand more content at higher speeds. This is where capacity becomes vital and those with sufficient spectrum trump those with spectral deficiencies.

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