The fates of the two companies have been intertwined since Sprint merged its WiMAX operations and spectrum with Clearwire in 2008, but their relationship goes back further and is built on much more than just a business arrangement. Clearwire and Sprint had starry-eyed visions of creating a new kind of mobile network and carrier.

2006: the year 4G became a thing

On August 8, 2006, then-Sprint CEO Gary Forsee announced that Sprint would adopt a little known technology called Mobile WiMAX for its fourth-generation mobile data network. 4G was a new — and many would argue a much misused — term at the time, but as Sprint’s plans began to unfold it became very apparent it was viewing WiMAX not just as a generational shift in technology but as new model for operators to sell mobile data services.

Led by then CTO Barry West, who would become WiMAX’s chief evangelist, Sprint proposed selling a pure mobile IP connection, following the model of an ISP, and letting any device makers or any application developer ride over that connection.

The choice of WiMAX as the delivery mechanism was also significant since it came out of the Institute of Electrical and Electronics Engineers (IEEE), rather than the wireless industry’s traditional standards bodies. WiMAX’s big backers came from tech — Intel and Google — not from telecom, and they wanted the future mobile Internet to be built on internet principles, not carrier ones.

Meanwhile, a wireless ISP owned by mobile industry pioneer Craig McCaw was getting similar notions. Clearwire was using fixed wireless technologies to deliver residential broadband service in smaller cities all over the country. In WiMAX, Clearwire saw a way to transform the an ISP into a mobile broadband carrier. It also happened to have built up a big collection of licenses in the same 2.5 GHz band over which Sprint was planning to deploy its network. It was only a matter of time before these two got together.

One big missed opportunity

Both operators danced around one another for two years, neither committing to a large-scale WiMAX deployment while they negotiated their eventual merger pact. Incoming CEO Dan Hesse inherited a financially strapped Sprint still reeling from its acquisition with Nextel. As he acknowledged in an in-depth interview with GigaOM this week, Hesse had two choices: either strike a deal with Clearwire or mothball WiMAX completely.

In May of 2008, the companies negotiated deal that combined both their WiMAX operations under the Clearwire umbrella and brought in a $3.2 billion investment from Intel, Google and several cable companies. The deal closed in December of 2008 at which point the combined Clearwire only had two WiMAX markets to its name: Baltimore and Portland, Ore.

Supposedly WiMAX had one other big advantage: it was well ahead of competing 4G technologies in development. Sprint and Clearwire felt they had years before their competitors could get LTE networks off the ground, and they were right. The first LTE network wouldn’t launch in the U.S. until 2010. Both companies essentially had a four-year head start, but they squandered their time-to-market advantage.

Clearwire rolled its network slowly in 2009, but in 2010 it made a big push, going live in some of the countries biggest cities. But after it brought San Francisco online on Dec. 28, 2010, its expansion ground to halt with only about one-third of the U.S. population covered. It just ran out of money.

Sprint’s first WiMAX phone, the HTC EVO 4G, went on sale in the summer of 2010. A few months later MetroPCS launched the first U.S. LTE network and phone. And that December, Verizon began its juggernaut rollout of LTE nationwide. Verizon’s first LTE phone, the HTC Thunderbolt went on sale in March of 2011. Sprint’s four-year head start had been whittled down to nine months.

The waiting game

Clearwire has basically been a holding pattern for the last two years. It’s announced all kinds of grand plans, such as its intent to build a new LTE networks alongside of WiMAX, but without funds it hasn’t been able to execute. Sprint has kept Clearwire afloat and has even fronted the initial funds needed to begin a limited LTE rollout. But until today’s big acquisition announcement, Sprint has been keeping Clearwire at arm’s length.

The global WiMAX ecosystem has pretty much collapsed, leaving Clearwire with one big asset: the single largest swath of 4G spectrum in the U.S. Sprint now has money thanks to its newfound benefactor Softbank, and given Clearwire’s hobbled state Sprint can buy the company at a bargain price. After four years, Sprint probably feels its time to take that spectrum back – or at least prevent anyone else from getting their hands on it – and resume its grand 4G project once again, this time with LTE.

 Featured photo courtesy of Shutterstock user Yuri Arcurs

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• CES 2012: a recap and analysis
• The future of mobile: a segment analysis by GigaOM Pro
• Mobile Operators’ Strategies for Connected Devices

With a majority stake in Clearwire, Sprint is now running the show – a role it’s never been willing to assume despite its plurality stake in the company. But with Softbank’s takeover of Sprint looming, Sprint now seems ready to consolidate its U.S. assets, in particular the more than 100 MHz of 2.5 GHz spectrum that Clearwire controls.

As I pointed out Wednesday, Sprint has kept Clearwire at arm’s length ever since it merged its WiMAX operations with the company in 2008. Sprint has stepped in at critical junctures to keep Clearwire afloat, but it’s also been content to leave Clearwire’s half-built 4G network in limbo. Sprint has even pursued its own LTE strategy, relegating Clearwire’s WiMAX service to its prepaid customers.

But with Softbank deal, that may all change. Softbank and Clearwire have a future technology path in common. They’re both building a variant of LTE called time-division or TD-LTE and are working together along with other international operators to build a device ecosystem around the technology. While many analysts predicted that Sprint and Softbank would buy out Clearwire entirely, purchasing a few million shares is a far easier and far cheaper way of ensure they have access to that spectrum in the future.

Still, if the new Softbank-Sprint wants to take advantage of the treasure trove of airwaves, they’ll have to shell out a lot more money. Clearwire is building an LTE network today, but its scope is pretty limited. It’s deploying LTE capacity “hot zones” in its current WiMAX footprint, not a uniform, nationwide network.

Sprint hasn’t yet made any public statements on the deal, but surprisingly AT&T has. On Wednesday AT&T vice president Brad Burns issued a statement that points out the Softbank-Sprint-Clearwire deal would give a foreign company control of the country’s single largest collection of wireless spectrum. Yet, at the same time, Burns wasn’t condemning the deal. Here’s the full text:

Photo courtesy of Flickr user [401(K) 2012].

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• CES 2012: a recap and analysis
• Updated: Forecast: global mobile subscribers, 2010-2015
• The mobile backhaul market, 2011-2012: more innovation, greater competition

Craig McCaw. Photo Courtesy of Wikipedia

This is the latest in the string of bad news for Clearwire; earlier it was talk about the company running out of cash, and thus, being unable to build out its network. It has cut jobs, slowed down the network build-out and has even started toying with the idea of selling spectrum. There have been reports of conflict with Sprint, the company that’s the single largest shareholder in Clearwire, not to mention looming competition from the likes of Verizon and T-Mobile, which have launched their own high-speed next generation wireless networks.

It’s tough to read what McCaw’s exit means. Some, like Michael Mahoney of Falcon Point Capital, wonder if this means the company is going under. That’s an over-reaction. From what I hear, McCaw hasn’t been that active with the company for a long time. Those in the know think it is a non-event, though it could also be something as simple as Clearwire’s largest shareholder, Sprint, finally asserting control over what is clearly its own future. Sprint currently owns 54 percent of Clearwire. One can only guess that McCaw’s exit is a precursor to some sort of company-defining event – perhaps more money from Sprint, and a management shake-up to follow. Neither Sprint and Clearwire have responded to my queries.

In response to McCaw’s exit, Clearwire spokesperson offered this statement:

Ben Wolff has been named to fill the Eagle River seat on the board in Craig’s place. You probably remember that he was the CEO of Clearwire until early 2009. In terms of business plan, his past role with the company and affiliation with Eagle River will maintain continuity in our leadership and bring to Clearwire a unique perspective on our business and skills that are sure to provide added value to the Company and to our shareholders.

Clearwire is owned by McCaw’s Eagle River Holdings, Sprint Nextel, Google, Intel Corp, Comcast, Time Warner Cable and a sundry group of investors. These companies have collectively invested about $5 billion into Clearwire, with Sprint ponying up the largest amount of cash. It also contributed a massive amount of spectrum to the company.

At present, Intel has abandoned WiMAX. Google’s strategy is extremely confusing, and its increasingly cozy relationship with Verizon doesn’t bode well for Clearwire. Comcast is too busy fending off the FCC and other regulators as it tries to put a bow on its NBC acquisition. The others are simply irrelevant entities, with neither market clout nor financial muscle. That leaves Sprint!

Sprint CEO Dan Hesse recently told me that Clearwire’s WiMAX network was its 4G strategy. In the high-speed wireless future, Sprint would be left naked without Clearwire and its network. If Clearwire fails, you can bet it is going to take Sprint down with it. In the past there has been talk of Sprint acquiring Clearwire outright – a pricey but necessary move for the company. In the words of UBS analyst John Hodulik this is one dysfunctional relationship.

Clearwire went to the public markets and sold $1.33 billion in debt to keep building out their network. Will that be enough? When I recently met with Mike Sievert, chief commercial officer at Clearwire, he argued that the negativity is unwarranted. For instance, he said the recent debt round was a sign of confidence from the market, and gives the company room to maneuver. “People question whether we will be able to raise capital to grow the network, and we have proved them otherwise,” he said.

Sievert pointed out Clearwire has a fundamental asset – spectrum – and that’s what that matters in the end. Sprint, we’ve heard from our sources, is not in the favor of Clearwire selling its spectrum. Nevertheless, in its most recent quarter, the company added 150,000 retail subscribers and about 1.1 million wholesale subscribers, thanks to the launch of the Evo and Epic handsets on the Sprint Network.

Sievert says an average Clearwire USB modem user was downloading about 7 GB of data every month, and the numbers are higher for folks using fixed wireless modems at home. If this is a norm, they and their competitors need more spectrum to support the growth. The company was planning to reach 120 million population points (pops) in over 68 markets by the end of 2010. This means Clearwire can now start attracting new customers in larger numbers.

Will that be enough for the company to stay independent?

Related GigaOM Pro Content (sub req’d):

• Everybody Hertz: The Looming Spectrum Crisis
• The Internet of Things: What It Is, Why It Matters
• 4G: State of the Union

• Comcast is pumping in $1.05 billion.
• Intel Corp. is putting in $1 billion.
• $550 million will come from Time Warner Cable.
• $500 million will come from Google.
• $100 million will come from Bright House Networks.
• The new company is also going to be called Clearwire.
• Current Clearwire CEO Ben Wolff will also be the CEO of the new company, Craig McCaw will be chairman.
• The service will offer voice service and broadband.
• Cable providers will sell it under their own brand, with a re-seller agreement with the new Clearwire.
• There is a good chance this service comes out before the wireless guys roll out their LTE networks.

Other details are sketchy, but here are my thoughts:

• Sprint Xohm is dead.
• Craig McCaw can chalk this up another win — he saved his near-disaster investment(s) in Clearwire with this deal.
• Intel will throw mad money to save some of its investments, however foolish they might be.
• McCaw & Wolff bluffed their way to a sweetheart deal. The cable companies, Google and Sprint are all playing from a position of fear. McCaw made AT&T buy his wireless operation, spend billions on it and then walked away, smelling very green. Same is true this time.
• Many might see this as a win for Dan Hesse; I think of it as the start of one giant hack job in Overland Park, Kan. He will sell Nextel and be left with a puny Sprint that will eventually be sold to T-Mobile or someone willing to pay up just to shut up Wall Street.
• You might want to recall the AT&T implosion and the end of Michael Armstrong, who had the right ideas at the wrong time. Of course, he listened to Wall Street too much.
• The big winners will be the equipment providers: Motorola, Nortel, etc.

The elephant in the room:

This is a spaghetti-like mess of conflicts and self-interests. I wonder how open this network is going to be? Clearwire has a history of blocking other services such as VoIP carriers. Comcast is a known P2P offender. Will Google be our only search option?

The final word:

I told you so comes to mind :-)

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• CES 2012: a recap and analysis
• Report: The Ongoing Battle for the Digital Home
• Connected consumer first-quarter 2013: Analysis and outlook

Backers of Frontline included former FCC chairman Reed Hundt; some of Silicon Valley’s most elite investors, such as John Doerr of Kleiner Perkins; and angel investor K. Ram Shriram. These are smart guys who presumably knew what they were getting into, but the reasoned approach to high-risk investing, as practiced by VCs, is nothing like the wildcatter mentality needed by spectrum investors.

The proceeds from this auction are expected to range between $10 billion and $30 billion, and the cost of building out a network using that spectrum might reach $10 billion. If Frontline couldn’t meet a $128 million payment, it’s best they got out early.

The 700MHz spectrum licensed at auction may go to the telecommunications carriers with large pockets and an established business, but just in case Google still has plans to make a play, it’s worth reviewing some recent spectrum speculation history to show the Googlers what might be in store for them.

Aloha Partners is one of the freshest success stories of spectrum speculation. AT&T offered $2.5 billion for its 700MHz spectrum in October. Aloha bid for its licenses in 2002 and paid $29 million for them.

Aloha got its spectrum on the cheap, but Craig McCaw, the head of Clearwire Communications, has raised more than $1.6 billion (including a $600 million public offering) to build out a wireless network on the WiMax standard using 2.5 GHz spectrum. Clearwire hasn’t talked about its total spectrum costs, and its stock is off 44 percent from its IPO, but when McCaw sells a company, he tends to make the big bucks.

There’s also the rather repetitive history of the satellite industry, which is littered with investment, bankruptcy and buyouts. When it comes to spectrum, you have to pay to play, and even that won’t guarantee success.

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• The future of mobile: a segment analysis by GigaOM Pro
• What Does the Future Hold For Browsers?
• Threats Loom Large for Microsoft’s Email and Collaboration Platforms