Sprint Confirms Details of WiMAX Joint Venture

Sprint Nextel has confirmed that it has struck a deal for the WiMAX network deployment that will see it essentially merging the unit with Clearwire to create a US$14.5-billion entity. As reported by the Wall Street Journal, a consortium of other companies will invest a total of US$3.2 billion in the venture including Intel (US$1.00 billion), Comcast (US$1.05 billion), Time Warner Cable (US$550 million), Google (US$500 million), and Bright House Networks (US$100 million). The new Clearwire is targeting a network deployment that will cover between 120 million and 140 million people in the United States by the end of 2010.

Although the new venture will take the name of partner Clearwire, Sprint will maintain a 51% equity ownership stake. This will mainly be bought through contributing all of its 2.5 GHz spectrum and WiMAX assets including hardware, software trademarks, and other intellectual property into a subsidiary of the new company. The new Clearwire will also gain access to Sprint infrastructure including towers, fibre networks, and IT support at "favourable rates". Sprint values its overall contribution at US$7.4 billion. This will value existing Clearwire shareholders stake of around 27% of the company at US$3.9 billion, while the new strategic investor/partners will own 22%.

Sprint will name 7 of the 13 directors on the board with 1 of them being independent. Four will be named by the strategic investors with one being independent. One will named by Eagle River, the investment company controlled by Clearwire founder Craig McCaw, and one independent member will be nominated by the independent nominating committee. McCaw will serve as non-executive chairman of the board while the CEOs of Sprint, Comcast, and Time Warner Cable will all take a seat at the board for an initial one-year term.

Not Just WiMAX

The deals announced also cover resale agreements for Sprint's 3G services. Google will help to develop suitable services, including advertising and applications specifically for mobile WiMAX devices, while also being the search provider and preferred applications partner. Clearwire and Google will develop an "open internet business protocol" for mobile broadband devices while the "Android" operating system will be supported in future voice and data service provided by Clearwire.

Google will also become the default provider of web and search services for Sprint. The deal will enhance integration of services with location information and also place Google services "on deck". Google search, Maps for mobile, Gmail, and YouTube applications will be pre-loaded as applications on selected devices as well as being available through the web portal.

Intel will continue its efforts to embed WiMAX in chipsets while adding the service capability to marketing efforts for its chipsets (e.g. "WiMAX inside"). Intel has already been a significant investor in Clearwire and sees WiMAX as a significant element of its chipset strategy. Effective WiMAX usage could help it to compete with the dominance of ARM processors in the mobile market, particularly where they clash in the emerging mobile internet device (MID) market. Sprint has been pushing for the development of a range of new devices such as the Kindle eBook, which can use the WiMAX network

Outlook and Implications

AWS Spectrum Questions: Although it appears that the new investors are making cash investments, it is possible that a portion of the investment from the cable companies will include the AWS spectrum purchased by the members of the SpectrumCo alliance. The consortium spent US$2.4 billion in 2006 and has yet to confirm what it plans to do with the spectrum (see United States: 19 September 2006: FCC AWS Auction Ends at US$13.9 bil.). This is in the 1710-1755 MHz and 2110-2155 MHz bands, which adds a minor complication to equipment compatibility, but it should still be suitable for hosting WiMAX services.

If this is not the case, then the rationale for holding on to these spectrum assets becomes more questionable particularly as Sprint also noted that it has forged new, simpler agreements with cable companies Comcast, Time Warner Cable, and Bright House Networks for wholesaling Sprint's 3G services. The recently cancelled Pivot project to develop convergence services has likely shifted over to the WiMAX service that has likely been designed to obviate the provisioning problems that were discovered through Pivot (see United States: 24 April 2008: Pivot Finished as Cable Companies Part from Sprint Joint Venture). Sprint will also sell Clearwire through a resale arrangement.

Clearwire So Far: Clearwire counted 394,000 subscribers at the end of 2007, 91% up on a year and previously matching revenue growth, although at US$45.4 million for the quarter this shows it is still early days with earnings before interest, tax, depreciation and amortisation (EBITDA) loss of US$83.1 million up 62% year-on-year as network expansion continues. The network has increased from covering 36 domestic and international markets with 9.6 million people a year earlier to 50 markets covering 16.3 million at the end of 2007.

International Operations: Although this announcement focuses on the United States, Clearwire also has operations in a number of other countries—mainly Ireland, Belgium, and Spain—and also owns spectrum and non-controlling stakes in similar businesses in several other countries. Google and Intel are likely to maintain this international approach. The remaining partners in the new Clearwire may view these assets as a necessary element of a wider strategy to build an international WiMAX market, or a non-strategic element that is surplus to requirements.

Opportunity: Cost per gross acquisition at Clearwire remains high at US$440, which with ARPU of US$37 per month puts payback at 12 months. The heavyweight backing and expansion this deal will enable in terms of sales channels and marketing capacity, as well as continued expansion to create a more ubiquitous network, should help to enhance Clearwire as a more mainstream brand and lower acquisition costs to a more viable level—provided that the market demand is sufficient.

WiMAX is positioned as both a potential replacement for DSL and cable networks and for 3G cellular wireless data. Although it has the potential to provide some degree of competition, it lacks the speed potential of the fixed-line networks and the ubiquity of the cellular networks. These are also on an upgrade path that has been compressed, with Verizon aiming for a launch of long-term evolution in 2010 (see United States: 7 April 2008: Verizon Details Spectrum Position).

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