Sprint's Dumb Pipe Dream

28 Comments

When Sprint (s S) signed away its WiMAX spectrum to Clearwire (s clwr) in exchange for 51 percent of the company, and the promise of a nationwide 4G network, it also signed away control of its future. It no longer controls its next generation network — instead it has handed over its spectrum to potential cable and wireless competitors in exchange for a 51 percent stake in the spoils. Sprint argues that this is the model for telecom’s future where the network is merely a pipe and the service provider must become the purveyor of customized service packages and applications for a wider variety of users than ever before.

According to Todd Rowley, VP of Sprint’s 4G business unit, the immediate vision is to build out services now based on the combined Sprint 3G and Clear WiMAX network. It already has a data card product out, and plans for a dual-mode CDMA and WiMAX handset to be released in early 2010.

In addition to the typical cellular data model, Sprint also sees consumer electronics makers embedding WiMax chips into special purpose devices such as the Kindle and general use gadgets such as netbooks and laptops. One plus is that a carrier doesn’t have to subsidize such gadgets. Rowley anticipates sub $10-WiMAX chips coming the next few years, making it less costly for manufacturers to embed 4G connectivity in devices.

“We see home broadband replacement opportunities, video surveillance systems and other products, that as we move forward, we will develop devices and services that target a particular space,” Rowley says.

The catch is multiple parties are able to resell the Clear WiMAX service once (and if) it gets built out, making network access almost a commodity. Clearwire as well as cable partners Comcast (s CMSCA), Time Warner Cable (s TWC) and Bright House Networks can compete against Sprint to provide access. This doesn’t even begin to address the competition of other wireless players such as Verizon (s VZ), AT&T (s T) and T-Mobile, which are also trying to boost data revenue by providing cellular access for devices other than phones and computers.

So why would a consumer choose to activate on Sprint? For now the 3G coverage is a plus, although Clearwire can also buy access to Sprint’s 3G network. Beyond that it’s not yet clear what Sprint will be able to offer. Cable providers can integrate their WiMAX enabled devices to a consumer’s current broadband and video services, providing the ability to program a DVR on the go, or extend digital home phone service on a computer.

Rowley says Sprint will likely offer more mobile services designed for a mobile experience such as phones, ultraportable computing devices and things like e-Readers or music players. He admits that novel home services such as security or medical monitoring is where Sprint and its cable frenemies will most likely compete.

Without its own 4G network, Sprint has bet its future on getting 51 percent of WiMAX’s success in the U.S. (not a certain thing), and its ability to develop special packages and offerings for the ultimate in dumb pipes. It’s a risky bet.

28 Comments

HostingDude

@Aaron Glenn

Now you’re talking about accounting differences — between an initial fixed cost for setup, and ongoing costs (theoretically variable, but limited by contract) for the DS3. Thus, there is a point where the greater cost of installation is eclipsed by the savings.

In your example of 24 T1 lines (almost a T3) vs. 1 DS3 line, the monthly cost of DS3 is one-quarter that of the T1 copper, with a $9,000.00 monthly savings. You can string a LOT of fiber, even (perhaps especially) in a dense metropolitan area, knowing your ongoing costs will be $108,000.00 LESS per fiber line, per annum.

Said another way, you can get a quicker payoff of fixed costs. In more suburban settings or less densely populated areas, sure you’re going to need T1. But you’ll also find a lot less concrete and steel obstacles to reduce signal.

On the topic in general, Sprint has made a gamble here, and we have yet to see if it will pay off.

As far as selling the pipe, Sprint was right to do so. Look at the previous market model of telephone long-distance as the market reached maturity. “Pipe” revenues were reduced down almost to the billable cost of 1.x cents per minute.

In cellular, the same will come true as the market matures. The revenues will NOT be in the pipe. They will be in the service provider and content. Sprint has had to make up for some blunders with cutbacks that affect customer service, but that can be rectified.

Just the allure of being the only 4g network got me doing my research on how to get a phone supporting it, which led me to this page. And I’m a T-Mobile (Blackberry) business customer who depends heavily on UMA to lower our costs. So Sprint has a hook with 4g, and with its packaged program at $99. If they can ramp up the customer service quality to keep customers they snag with these lures, they’ll be fine.

Mobile customers don’t switch carriers month-by-month. There are such a thing as service contracts, and such a thing as constant introduction of new and updated phones which carriers provide free or at discount to entice current customers to renew. Thus if Sprint can gain a bigger footprint by concentrating on marketing and customer service, they have a fairly decent fighting chance of making this work.

I do not count Sprint out.

kevin

Doesn’t Clearwire state that it uses all microwave backhaul? I read about Dragonwave radios with 80Mbps or so links. What was used on Portland?

Aaron Glenn

@Jesse Kopelman

It’s much easier (read: cheaper) to carry 24 T1s over copper back to the CO than run a 750ft DS3 to a fiber drop and OCn MUX. I much prefer your ideal world of ‘why not get a DS3 instead!’ though, believe me.

techboy2000

When will this nationwide Wimax network be completed? Who is going to create intriguing devices for a non-existent network? Who is going to create intriguing devices for Wimax even if a network is created? Vendors will create the best wireless devices for networks with the biggest subscriber base (AT&T and Verizon). AT&T and Verizon are going LTE. All non-third world countries are going LTE. Game over.
Sprint needs to drop Wimax ASAP.
I like Anonymous’ line “Does anyone do simple math anymore?”.

Adrian Hall

Stacey Higginbotham brings up an interesting point. If wireless carriers’ networks are barely able to handle the stress of increased data consumption from mobile phones, how can they be expected to support anything beyond that? Data traffic over tier-one networks is growing at 10-15% per month, with 1% or 2% of users generating up to 50% of the total volume. The rapid adoption of high-end smartphones like the iPhone and the avid consumption of video and other data-intensive applications will further accelerate this growth. It has become critical for operators to strengthen their existing network infrastructure in order to stay competitive and profitable. By increasing network efficiency and capacity, and intelligently controlling service selection, operators can cost-effectively manage the effects of continued traffic growth within the footprint of their existing installation and scale their networks ahead of the data curve.

Jesse Kopelman

@Anonymous

You are completely wrong.

As Jay C correctly points out 3X the spectrum makes for 3X less efficient spectrum. Really Sprint has it even better as you make your money in high density areas where you need lots of cells and having more spectrum is far more important than having better propagating spectrum.

Your ARPU numbers are too low. Even if they are only supposed to be 51% of the actual, they should still be $20-30, not $10-15.

Your transport costs are too high. Why would anyone buy 10 T1 at $500 each when you could buy a DS3 for $3000? More importantly, why buy 6 T1 for a site that doesn’t have much traffic? 2 T1 would be fine, as customers would still experience near 3Mbps speeds if they were on a barely used site. One advantage of a pure IP network is that you can oversubscribe your backhaul in addition to your air-interface. The reality is that Clear has an advantage here compared to a trunked network, not the other way around.

I think you know all this already and are just trolling.

JL

Stick a fork in those dodos, they are done, both WiMAX and Sprint. Sprint blew it when they saw customer care as a a place to save money and their customers as an unwanted bother. WiMAX, well, that one prolly never should have been born. It is a shame when you see folks who are locked into a death spiral with the end being certain just the spinning path down the bowl being in question and that is what we are seeing here.

Jay C

Anonymous wrote: The next huge roadblock is that Sprint or Clear’s spectrum is at least 2 to 3 times less efficient at getting signals to their users whether they are in a building or on foot. Sprint will need to have many more locations, 2 to 3 times, than Verizon will have to have with LTE. Verizon spent their money on much more expensive and efficient low frequencies to give them an extreme coverage advantage over Sprint’s WiMax.

While its true that Verizon has spectrum that offers better coverage, Clear has the capacity advantage. Verizon has 24 MHz of 700 MHz spectrum. Clear has 100MHz and up in some markets of 2.5Ghz spectrum. So Verizon may still have to put more towers to offer its customer an acceptable experience. I’m not an engineer so I don’t the exact numbers. An example of this is AT&T 3G issues with the Iphone. Its towers in some metro areas cannot handle the traffic and AT&T subscribers get upset.

You did hit the big issue. Backhaul. It will be a problem for all wireless providers, but less so for AT&T and Verizon who have strung fiber throughout as well as Cable companies who have made significant investment in wired broadband. Pure wireless providers like Sprint, T-Mobile as well as WISPs are going to have to solve this or they will not be able to compete.

Glenn Fleishman

To add what Neal wrote in response to HSK’s statement: “IMO, if Verizon AND ATT are looking at moving to LTE as soon as next year, then things will be even more difficult for Sprint and even the cable guys.”

WiMax is already a much more mature product than LTE, despite the lack of widescale rollouts of WiMax. There’s an ecosystem of major hardware makers (Samsung, Intel, Motorola, Zyxel, and others) that already have Clearwire/Sprint compatible technology. WiMax CPEs (home gateways) and laptop cards are already available with just two markets installed in the U.S.

LTE is still a lab product that’s moving very rapidly to production. You cannot buy an LTE card for love or money right now, and there are no production networks. Despite all the great news about LTE, and its inevitable evolution for most cellular networks, it’s definitely a multi-year proposition.

As Verizon and AT&T start to roll LTE out in earnest, which may be 2010, but I suspect as Neal writes that later is more likely outside of a few major cities, Clearwire will either be up and running in many major metropolitan areas–or will have been abandoned. There’s no middle ground. If Clearwire doesn’t have SF, New York, Atlanta, Chicago, etc., installed and operating by early 2010, it will have a hard time fighting.

Anonymous

You all are missing three great issues that makes WiMax a deadend technology and a smart move for Sprint to move part of the pain of this future business failure to other parties.

There is no way Sprint or Clear can make money on this venture, especially in this economy, as they must pay billions annually for 6 to 10 dedicated T1 lines as compared to 1 or 2 for their typical sites whether customers use their service or not. Do the math on how many customers at $10 to $15 ARPU are needed per site just to break even on the backhaul. Average T1 costs of $500 to $750 per line per month. Sprint should have put more effort into a low cost backhaul solution before committing their reputations to Wimax or any technology of this great reoccuring operation expense.

The next huge roadblock is that Sprint or Clear’s spectrum is at least 2 to 3 times less efficient at getting signals to their users whether they are in a building or on foot. Sprint will need to have many more locations, 2 to 3 times, than Verizon will have to have with LTE. Verizon spent their money on much more expensive and efficient low frequencies to give them an extreme coverage advantage over Sprint’s WiMax.

Lastly, and it should have been firstly, economies of scale. Mr. Rowley is kidding himself to think chip costs for a one carrier custom technology will be less than LTE chips targeted at the rest of the industry’s purchasing power. Forget any other reason and just the fact that each radio station and handset for WiMax can never be as cheap as LTE and the fact Clear has to invest in many more; Does anyone do simple math anymore?

I want Sprint to win at wireless. I’ve been a long time customer. I just can’t understand why these obvious assessments aren’t being made by the media as well as the Clear leadership. I thought the smoke and mirrors throw money at any flashy investment and it’s bound to work philosphy died with the tech bubble?

Fotchy Chris

This is the problem with sprint, they were stupid over 6 years ago by tryin to spread they’re resources far beyond reach. They tried to intergrate the iden and cdma networks to early, they pissed away 5 billion tryin to setup the wimax technologies, and then let they’re customer service go. Whether you agree or not, they should’ve left Nextel alone after they bought it. Nextel was making real money, and normal customers were willing to pay and use older looking phones just for the sake of dispatch. They should’ve just continue to build out it’s network, slowly test and intergrate the cdma and iden technologies, and let the Europe and Asia counterparts work out the kinks with wimax first, then bring it over here….

Brian

It’s unfortunate that you are so right about this. I feel like Sprint has the right idea but, with the current infrastructure, there’s no way for them to compete effectively. They could be as much as 10 years too early with this strategy.

It will be great when the connection is a commodity (like highways are for shipping companies) but we’re not there yet, and likely won’t be for a lot of years. Can Sprint survive that long? I have no idea. But, hopefully, we’ll see a day where there are competing pipes to put pressure on ISPs for service, pricing, bandwidth caps, etc.

Neal Lachman

@HSK… just thought I’d paste a piece of our research.

1.4. Long Term Evolution Challenges

LTE, also referred to as E-UTRAN (Evolved UMTS Terrestrial Radio Access Network), is expected to be deployed in the first markets from end 2010/begin 2011 onward, after its certification by the ITU, which the mobile industry hopes will happen somewhere in 2009. Widespread rollout of LTE is expected only after 2012/2013, when the mobile operators will have milked their legacy cows to the maximum amount possible.

Also, everything regarding LTE is subject to possible change since the specifications outlined (in many marketing papers from vendors and hopeful operators) are only stated requirements and –despite some successful tests- not yet 100% guaranteed as achievable.

“Successful” tests on pre-standardized equipment have to be taken with the usual bits of salt, since it is basically a marketing ploy. The most important fact remains that the tests have usually been conducted by one user under programmed/controlled circumstances. For example, one of the most “successful” tests was done by NTT DoCoMo (Japan). In its jubilant Press Release, the company announced that it “has recorded a downlink transmission rate of 250 Mbps over a high-speed wireless network in an outdoor test of an experimental Super 3G system for mobile communications.”

However, analysis of their test will show that:
• The antenna configuration was 4×4 MIMO
o Speed is optimal at 4×4 MIMO: theoretically 326.4 Mbps per 20 MHz
o 2×2 MIMO configuration is lower: 172.8 Mbps per 20 MHz spectrum
• They used the maximum bandwidth possible qua spectrum: 20 MHz
o Reality will show that most operators will opt for lower spectrum slices for economical reasons (1.4 MHz, 3 MHz, 5 MHz, 10 MHz, 15 MHz)
• The expected number of active users per 5 MHz is 200
o This means that the 250 Mbps on the 20 MHz spectrum would actually be shared by at least 800 users
• The test was done in a controlled environment, configured to be optimal. Market conditions differ greatly from labs.
Below, we further analyze LTE challenges in terms of technology and deployment, and we discuss the threats facing Verizon and AT&T’s LTE plans.
[further text and table removed – confidential]

1.5. Long Term Evolution Advanced Challenges

LTE Advanced is in the conceiving phase as of Q308. It is believed that the cellular technology industry will build on the aspects of LTE in order to further advance the downlink (hoping for 1 Gbps) and uplink (500 Mbps) capacities. While some preliminary efforts have been made to reach agreement on the potential specs and requirements of LTE Advanced, the industry has yet to launch LTE 1.0.

[further text and table removed – confidential]

HSK

Could someone jump in regarding LTE? IMO, if Verizon AND ATT are looking at moving to LTE as soon as next year, then things will be even more difficult for Sprint and even the cable guys.

Glenn Fleishman

What I’m really intrigued about is, when Clearwire has some big cities lit up, whether their intent to have far fewer controls over data usage make a difference in loosening the 5GB/month policies at other carriers. Clearwire does have some mobile plans with limits, but they’re both explicit and more reasonable, and they’re advertised clearly up front as to the tiering based on usage. Consumer can get “unlimited” mobile plans with no footnotes; businesses can pool gigabytes/month among a set of users.

Neal Lachman

Stacey,

Unlike others, you really got it right. I am very impressed with your perceptiveness. This is what we call the Product Lifecycle Dilemma.

1) Others, including the Dutch incumbent (KPN) thinks the same nowadays… from infra owner they want to become a service provider. My analysis of their dreams is here. http://glassified.wordpress.com/2009/01/02/nationwide-ftth-analysis/

2) I also analyzed the product lifecycle dilemma of FiOS and Clearwire. There is still hope for Clear though, as explained in the last section of this analysis. http://glassified.wordpress.com/2009/02/03/croslins-theory-of-disruptive-lifecycles/

Neal Lachman
http://ngdic.wordpress.com

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