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Summary:

Clearwire is hinting it may default on loans to save cash, which could be the first step toward bankruptcy. If that happens, Sprint stands to lose the most. Not only is it Clearwire’s largest shareholder, but Sprint’s 4G strategy is tied up in Clearwire’s spectrum hoard.

No money

Clearwire is thinking about skipping out on a $237 million loan payment due in two weeks, which could make things very uncomfortable for its primary shareholder and WiMAX bandwidth customer Sprint. A Clearwire default or bankruptcy could do irreparable harm to Sprint’s future 4G strategy –- whether the operator admits it or not.

In an interview with the Wall Street Journal, Clearwire’s new CEO Erik Prusch said the mobile broadband wholesaler is weighing whether or not to conserve cash by putting off loan payments due Dec. 1. Clearwire has a 30-day grace period after the payment comes due so if Clearwire delayed sending a check, Pursch said the company could make good use of that time to seek more funding and to sign up new partners to resell its WiMAX service. Prusch declined to tell the Journal if Clearwire is considering the option of restructuring its debt load either in or out of bankruptcy, though he did say the company is consulting with multiple advisors on its “strategic options.”

Clearwire is walking a tightrope, and if it falls, its weight will land squarely on Sprint. Not only would Sprint lose much of investment during a Clearwire bankruptcy, but it also risks parting with perhaps its most valuable asset: spectrum. When Clearwire’s current incarnation was created in 2008, Sprint turned over 70 MHz of 2.5 GHz spectrum to the new venture, relying on Clearwire to be a good steward of Sprint’s future mobile broadband strategy. WiMAX turned out to be a flop, but as the network technology slowly dies, the spectrum it runs over remains just as valuable, if not more so.

Clearwire holds over 100 MHz in every major U.S. market. To put that in perspective, that’s more than five times what AT&T and Verizon are using to launch their current ultra-fast LTE networks. With that kind of capacity, Sprint conceivably could continue to offer unlimited smartphone data plans well into the future, while its competitors struggle to limit their customer’s usage.

Sprint wants to leave WiMAX in the dust eventually, which is why it has committed to its own LTE buildout using its own PCS spectrum. But you can bet Sprint is counting on keeping that 2.5 GHz in reserve, using the current WiMAX network to power its 4G smartphones and modems and Clearwire’s proposed future time-division LTE (TD-LTE) (subscription required) deployment to supplement future 4G capacity. Sprint, however, isn’t exactly advertising its dependency on that spectrum.

Sprint has taken several steps to create public distance between its 4G strategy and Clearwire. When Sprint revealed its future mobile broadband plans at an analyst conference in October, it began prioritizing its networks of choice. Clearwire ranked at the bottom of the list, behind Sprint’s own LTE network and network sharing deals such as the one it struck with 4G operator upstart LightSquared (which is still struggling to get FCC permission to launch). Even when Sprint and Clearwire publicly made up later that month with Sprint agreeing to work with Clearwire on its TD-LTE deployment, that network still came in dead last in Sprint’s priority list. Sprint has been playing a dangerous game of hard-to-get with its 4G supplier, making every effort to communicate that it doesn’t need Clearwire to move forward.

But reality tells a much different story than what’s written in Sprint’s PowerPoint presentations. Sprint has only a single clear 5 MHz-by-5 MHz block of spectrum over which to launch LTE. It’s primary competitors AT&T and Verizon Wireless have already launched LTE networks with twice as much capacity — and they have almost as much spectrum in reserve. To grow, Sprint will need to cannibalize its CDMA network or hasten the demise of its Nextel iDEN network, clearing those 800 MHz airwaves for 4G. If LightSquared can overcome the mounting political opposition to its launch, Sprint will get some relief, but even then it only can hope for the equivalent of another 5 MHz-by-5 MHz LTE carrier. Once that’s exhausted, that only leaves Clearwire.

If Sprint were to tap into a future Clearwire TD-LTE network, it would have capacity to burn. Clearwire can feasibly launch an LTE network with 40 MHz of bandwidth, double what AT&T and Verizon offer today — and Clearwire has plenty more room to grow.

But if Clearwire files for bankruptcy, Sprint could lose that treasure trove of spectrum. Sprint’s investment in Clearwire could be wiped out completely, or worse: the spectrum could be auctioned off to the highest bidder, placing it into the hands of a cash-rich competitor like Verizon or AT&T. From a spectrum position, Sprint today is the envy of the industry with access to the richest stores of frequencies of any operator. If it lets Clearwire default and descend into bankruptcy, Sprint would become the operator with the weakest spectrum position, except for T-Mobile. And we all know what T-Mobile’s 4G strategy is: get bought by AT&T.

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