In a Race to Grab Customers, Clearwire May Grab $1.1B More Debt

Clearwire (s clwr) on Thursday announced plans to take on up to $1.1 billion in additional debt to help expand its national WiMAX mobile broadband network in the U.S. This strategy follows last month’s cost-cutting plan, which included layoffs for 15 percent of Clearwire staff and delays in new products. The new debt plans will add to the company’s existing $2.81 billion in long-term debt, per Clearwire’s most recent quarterly income statement.

As we pointed out back in February, building a next-generation network to cover wide regions of the U.S. doesn’t come cheap. The billions invested by Clearwire, Sprint (s s) and other partners will only pay off if the WiMAX network remains financially viable. When it first launched the national WiMAX network just over two years ago, Clearwire had a “first to market” advantage, but that’s all but gone now; our 4G tale of the tape shows that T-Mobile’s HSPA+ and Verizon’s LTE networks already cover nearly as many people, if not more, than Clearwire. And depending on signal strength, speeds are generally better with T-Mobile and Verizon (s vz), both the advertised throughput as well as actual hands on testing.

So Clearwire is no longer the sole “4G” network provider in the U.S., which negates the marketing and service advantages it once had. Now to succeed, it needs a new differentiator, which it has in the form of a pre-paid brand and the fact that it has no usage caps. By comparison, Verizon’s (s vz) new LTE plans are 5 GB or 10 GB for $50 and $80 per month, respectively. T-Mobile’s data plans aren’t capped, but after 5 GB of usage in a billing period, the company can slow down speeds until the next billing cycle.

That’s a significant advantage for Clearwire, because as mobile broadband networks gain speed, customers tend to use them more, meaning they’d bump into a usage cap sooner. For now, Clearwire can continue to offer unlimited service even as more people jump on its WiMAX because with 120 MHz of spectrum, the company has more spectrum than its competitors. The company can sell off some of that excess spectrum to raise much-needed capital; indeed, it was reported to be looking at doing just that in June. However, that too would begin to degrade a key advantage Clearwire currently enjoys.

From a customer point of view, it’s clear we’d all like unlimited mobile data plans, and for now, Clearwire can and does offer just that for a lower monthly fee than competitors. However, taking on a staggering amount of additional debt indicates to me that the data operator continues to walk a financial tightrope.

To boost cash flow and profits, which will help pay down debt without incurring any more long-term obligations or interest, Clearwire needs more customers than the 2.84 million it reported last quarter, and it must reduce the gross cost to add a new retail subscriber, most recently reported at $505 per user. It doesn’t take a mathematician to figure out that the break-even for each new retail customer acquisition is roughly a year when the ARPU is $42.74 per month!

As a consumer, Clearwire’s service is surely appealing; all-you-can-eat data for a low price each month sounds great. I agree with Clearwire’s CCO, Mike Sievert, when he says the company’s network provides a great balance between speed, capacity and value. With the right amount of spectrum, this pricing model could work for a network that’s already built, although the variability of growing data demand is moving providers away from unlimited use, one by one.

Instead, this situation illustrates that hopes of unlimited data, a limited resource due to spectrum and backhaul constraints, isn’t in the cards for other U.S. carriers. It’s simple supply and demand, which means either tiered data, congestion pricing or the dreaded bandwidth caps that help carriers manage their network use.

Image courtesy of Flickr user omniNate

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