The deal to merge Sprint Nextel's WiMax business unit with Clearwire to build a nationwide 4G network is finally complete, but the newly formed company could be doomed before it even gets out of the gate.
On Wednesday the companies said they would combine the two entities to form a new company, called Clearwire. Cable companies Comcast, Time Warner, and Bright House Networks, along with technology giants Intel and Google, are contributing a combined $3.2 billion, bringing the total investment in the company to $14.5 billion.
In many ways the new venture is a win-win situation for Sprint and Clearwire, which, if truth be told, had no other option than to team up. Sprint, which has steadily been losing customers after its failed 2005 merger with Nextel, gets to shed an expensive and resource-sucking venture. And Clearwire, which hasn't been profitable since it
But as someone who has watched big technology mergers form and unwind over the past decade, I'm not convinced that the new Clearwire will actually make it in the end. That said, I think at the very least the new company will spur quicker innovation of broadband wireless technology and force operators like AT&T and Verizon Wireless to deploy their own networks more quickly. In this respect, consumers will likely have Sprint and Clearwire to thank for helping bring true wireless broadband services to a plethora of consumer electronics devices.
But the big question yet to be answered is whether the new Clearwire will be the company delivering that network and whether WiMax, its technology of choice, will be used to do it.
My prediction is that the new Clearwire still has a long road ahead of it and its success is far from guaranteed even with backing from big names like Comcast, Time Warner, Intel, and Google.
The main reason I am such a skeptic is that the new Clearwire appears to have too many cooks in the kitchen. The new Clearwire has a total of seven major partners with five of those partners holding board seats. That alone should give anyone looking at the viability of this company pause. I can't think of any successful venture of this magnitude that has survived with so many major companies involved.
Atish Gude, senior vice president of Sprint's mobile broadband initiative, said this shouldn't be an issue because the new Clearwire will be run as an independent company.
Still, I am not convinced, especially since it took these seven companies at least two months to dot the i's and cross the t's in their final contract to form the company. What's more, Sprint and the cable companies have been down this road before. In 2005, the companies formed a joint venture known as Pivot that would allow cable operators to resell Sprint's wireless service as part of their bundle of services that includes broadband, TV, and home phone service. The companies were also supposedly working to integrate Sprint's wireless service with the cable services to extend the content and services cable offered to a wireless device.
The joint venture eventually fell apart when it became apparent that the integration was too difficult and that customers weren't all that interested in repackaged Sprint phone service.
Lessons from PivotBut Tom Nagel, senior vice president of wireless initiatives for Comcast, said the companies have applied lessons learned from Pivot to the new deal with Clearwire.
"We learned a lot from Pivot," he said. "I wouldn't trade that experience for anything. And we have structured this partnership in a completely different way."
For one, Comcast will have more control in the new relationship, he said. Instead of simply reselling Sprint's service, Comcast will own the relationship with the customer and will be able to develop services on the 3G network as well as Clearwire's new 4G network that can leverage Comcast's services and content.
But this leads to another potential problem in the partnership. Four of the main partners will essentially be selling services using the same network to some of the same customers. Sprint will offer its 3G wireless service and will be reselling the 4G Clearwire service under its own brand. Clearwire will in turn be selling its own 4G service, but reselling Sprint's 3G service too. And Comcast and Time Warner Cable will both be reselling Sprint's 3G service as well as Clearwire's 4G service.
Sprint's Gude doesn't see these overlaps in service or customer base as a problem.
"We acknowledge there might be some conflicts and overlap in customers," he said. "But we see this as a good thing. It opens access to different distribution channels and innovation."
For example, he said that a customer who wants to watch his favorite cable TV shows on some WiMax-enabled video playing device, could have that bundled into his cable TV package instead of expecting that kind of service from his or her cell phone operator.
But potential partnership conflicts aren't the only thing threatening this new venture. Another major reason the merger could be doomed is the technology that the companies have chosen to use. While there is no question that WiMax can provide wireless broadband service to a large number of consumers, the problem is that Sprint and Clearwire are the only major operators in the world to date that have committed to using it for mobile broadband service.
Most of the other WiMax deployments are Internet service providers providing fixed wireless broadband service. AT&T and Verizon Wireless in the U.S. and a slew of European carriers have already said they plan to use a competing technology called LTE.
And this means those working in the infrastructure, chip, and device ecosystem will be focusing much of their attention on the much larger LTE market. And there is a chance that WiMax innovation could lag and prices could potentially be higher for WiMax deployments.
That said, executives at Nortel Networks, a telecommunications equipment supplier, say the WiMax network is still big enough and the technology is close enough to LTE, that it shouldn't be too much of a problem.
"The LTE and WiMax networks will both be driven by devices other than cell phones," said Scott Wickware, vice president of Carrier Networks for Nortel Networks. "And that means the integration will be at the chip level and the cost structures are not likely to be that different."
Ultimately, the success of the service, if the company even makes it far enough to full network deployment, will be determined by the pricing and perceived value of the service. So far consumers have not wanted to pay a premium for embedded 3G laptop service. They don't want their laptops tied to a specific carrier and the service itself, which averages about $60 per month, is too high.
Ben Wolff, however, CEO of the new Clearwire, believes the company will be able to find a sweet spot in terms of pricing.
Sprint Nextel and Clearwire are combining network assets to build a new nationwide 4G wireless network that the companies say has huge benefits for each of them.
Until now, Sprint and Clearwire have been on separate paths to build nationwide broadband wireless networks using WiMax, an IP technology that can blanket entire cities and provides more than five times the speed of 3G wireless networks. Now they are joining forces and creating a new company that will have access to more wireless spectrum than any other company in the entire country.
Cable operators Comcast, Time Warner Cable, and Bright House Networks, as well as tech giants Intel and Google have invested a combined $3.2 billion in the new company, which is valued at $14.5 billion.
Dan Hesse, Sprint's CEO and Ben Wolff, Clearwire's CEO and the CEO of the new joint venture, hosted a conference call Wednesday morning to provide details of the transaction and explain why combining the companies is a good idea.
According to the executives, the companies believe the deal is a win-win for them both. And in many ways, that appears to be the case. Sprint, which has steadily been losing customers after its failed 2005 merger with Nextel, is in no position to spend the capital it would take to build a new 4G network. And Clearwire, which hasn't been profitable since it went public a year ago, doesn't have the spectrum assets or resources to build a competitive 4G network on its own that will rival networks being planned by bigger wireless operators, such as AT&T and Verizon Wireless.
Together with the help of the cable companies, Google, and Intel--Sprint and Clearwire can build the network and still get their new service up and running at least two years before rivals AT&T and Verizon Wireless are able to build similar networks using a technology called LTE.
"As we looked forward it became evident that our assets along with our business priorities lined up with Clearwire's," Dan Hesse, Sprint's CEO said on the call.
As part of the deal, Sprint plans to lease capacity on the new 4G network and offer the service under its own brand as an MVNO or a mobile virtual network operator. This will allow it to sell both its 3G wireless service as well as a faster 4G service.
But in exchange for getting access to a 4G network on the cheap, Sprint will have to give up its coveted 2.5G wireless spectrum asset for a 51 percent stake in the new company. Still, Hesse said it is worth it.
Dan Hesse, Sprint Nextel president and CEO
(Credit: Sprint Nextel)"Because we are an early investor, the economics are favorable," he said. "And it brings us 4G without having to spend the (capital expenditure) we'd have to spend if we built it on our own. We looked at it holistically and decided it makes sense to shareholders."
Also as part of the deal, Clearwire will be able to resell Sprint's 3G service along with the new 4G service. And the cable companies, Comcast, Time Warner, and Bright House, will be able to resell Sprint's 3G service as well as Clearwire's 4G service under their own brands as an MVNO.
Comcast and Time Warner Cable had already developed a joint venture with Sprint to develop a wireless service they could bundle with their existing broadband, home phone, and TV offerings. But the so-called Pivot venture fell apart when it became evident that it was too difficult to integrate services. The cable operators also realized that simply reselling wireless service added little value to their strategy.
"The economics and structure of this deal are completely different than the Pivot joint venture," Tom Nagel, executive vice president of Comcast's wireless division said in an interview. "We will be the provider of the new service and own that customer relationship, which means we can integrate the wireless service into our existing service. And we will also be able to integrate the 4G piece of the network into our services."
Operational efficiencies
Sprint's Hesse and Clearwire's Wolff said that the deal also offered operational efficiencies for each company. For example, Clearwire will lease space on Sprint's existing cell towers to build the network below market rates. It will also be able to use Sprint's long distance fiber network to transport the 4G wireless traffic throughout the country. In exchange for that, Sprint will have access to Clearwire's wireless backhaul network. This high-speed wireless network can be used to more efficiently aggregate Sprint's existing cellular traffic onto its own long distance fiber network for transport around the country.
As for the build out, the companies are each continuing as previously planned. Eventually, the companies expect the network to include some 120 million to 140 million points of presence or POPs. Wolff said that Clearwire has about 30 million POPs in development right now. And Sprint expects to have 15 million POPs built by the end of the year.
Wolff added that he expects the network construction to accelerate in 2009 and 2010, with much of the build-out happening in 2010.
"This is one of the largest and fastest network build out plans ever done," Wolff said. "It is a massive undertaking. Our current capital will get us to a 110 million POPs by mid-2010."
He said the company could either slow or accelerate the construction plan depending on whether it raises more capital.
Initially, the company will focus its network build on thoroughly covering the top 100 markets, he added. But Wolff said Sprint's 3G footprint, which will augment the 4G network, will have a wider footprint for some time.
As for the cost of the new service, Wolff wouldn't talk specifics, but he said the efficiencies already inherent in the WiMax technology would provide four times the performance at one time the cost, which means that on a per-bit basis, the service will cost less to deliver than 3G. What that means in terms of pricing for consumers is still unknown. Today's 3G PC-card wireless broadband services for laptops are priced around $60 a month and are believed to be too high for most consumers.
"We are focused on the value proposition of WiMax," he said. "And we have the ability to compress pricing if we need to in order to attract customers. We will have to see how it goes. But the economics are attractive."
Is Sprint Nextel getting ready for a fire sale?
It sure looks that way following speculation around Wall Street on Monday of a possible sale or breakup of the beleaguered wireless operator. First, The Wall Street Journal reported that German phone company Deutsche Telekom was considering buying the company. Later the same day, another Wall Street Journal article cited sources who said Sprint Nextel is considering unloading its Nextel assets, a move that might make the $22.3 billion wireless operator more attractive to potential buyers.
While a Deutsche Telekom sale seems like a long shot, it's not surprising that the company is considering spinning off the Nextel unit. If Sprint Nextel is able to unload the Nextel network, it could open it up for sale to another bidder--just not Deutsche Telekom.
Why? There are three reasons.
Bigger isn't better
According to the WSJ article, Deutsche Telekom is looking to expand international wireless networks as its wireline business declines. In particular, the company is looking to bulk up its U.S. subsidiary, T-Mobile USA, which is among its fastest-growing properties. The company added some 3.6 million subscribers in 2007 for a total of about 28.7 million subscribers.
If T-Mobile USA acquired Sprint Nextel, it would gain an additional 53.8 million subscribers and become the largest U.S. cell operator, surpassing both AT&T and Verizon Wireless, the No. 1 and No. 2 cell phone carriers, respectively, in the country today.
But making T-Mobile bigger wouldn't necessarily make it better. The main problem is that T-Mobile USA and its European counterpart, T-Mobile, use a different wireless standard than Sprint Nextel. T-Mobile is GSM-based, whereas Sprint uses CDMA and Nextel uses i-DEN.
If Deutsche Telekom tried to merge T-Mobile USA with Sprint Nextel, it would end up with a huge integration nightmare as it tried to accommodate not just two different technologies, but three. In fact, it would essentially be repeating the same mistake that doomed the 2005 merger between Sprint and Nextel.
Sprint Nextel has been bleeding customers since that acquisition, as Nextel customers, in particular, have dumped the company due to poor service. In early 2006, Nextel had roughly 16.6 million subscribers. By the end of 2007, it had about 13.2 million, according to the WSJ article. And some experts think that number could shrink even further to about 5 million to 7 million in two years.
"When you're looking for market share and scale advantages, it's critical that the technology piece works," said Charles Golvin, an analyst with Forrester Research. "And (Deutsche Telekom and Sprint Nextel) don't have that. They'd have a whole bunch of integration issues, just like they did with the Sprint Nextel merger."
Regulatory headaches
Spinning off Nextel could help alleviate some of the integration headaches for a potential buyer. That said, I still don't think Deutsche Telekom would buy Sprint, mainly because I don't think U.S. regulators would accept the deal.
Right now, the U.S. wireless market with four major competitors is viewed as a competitive-market success story. And it's conceivable that U.S. regulators could block the sale between the No. 3 and No. 4 wireless companies, which together would become the No. 1 wireless operator in the country. Additionally, it's likely that U.S. regulators wouldn't like the deal, because it would mean that a foreign company--Deutsche Telekom--would control the largest wireless communications network in the country, something security experts probably wouldn't like.
Better options elsewhere
That said, spinning off Nextel could help attract other bidders for Sprint. The WSJ reported that the company is examining several options. It has supposedly been in talks with Nextel co-founder Morgan O'Brien, who also founded a public service wireless company called Cyren Call. O'Brien is supposedly putting together a consortium of investors to acquire Nextel, which pioneered the push-to-talk, walkie-talkie phone service. The idea is that the Nextel network and service, which is already used by construction workers, airline workers, and public safety workers, would be combined with other spectrum assets to create a nationwide public safety network.
Cyren Call has been working closely with the Federal Communications Commission to develop a plan for the sliver of spectrum in the 700MHz spectrum auction known as the D block, which was created to help build this nationwide public safety network.
The spinoff of Nextel would finally cement the $35 billion tie-up between Sprint and Nextel as a major failure. Sprint would likely only get a fraction of what it paid for the company if it sold it today. But dumping Nextel would make it easier for Sprint's management team to more nimbly direct its core PCS business. It might even give executives room to focus more attention on its next-generation WiMax network called Xohm.
But word has it that Sprint is also looking to spin off that business. The company has supposedly been in talks with Clearwire, which is also building a nationwide WiMax network, to form a joint venture backed by Intel and Google and possibly cable operators Comcast and Time Warner. The idea is that splitting up all of Sprint Nextel's assets could bring more value to the company than keeping everything together.
Right now, one thing is certain. The Sprint executive team, led by CEO Dan Hesse, seems to be examining all its options. With second-quarter earnings coming out next Monday, there's likely to be more speculation over the next couple of weeks about what the company will do next. So stay tuned.
Sprint Nextel and Clearwire are still collaborating on building their Wimax networks and the companies have made significant headway on a roaming deal, Clearwire Chief Executive Ben Wolff said on Wednesday.
Wolff, who spoke at the company's analyst conference in Portland, Ore., stopped short of making any big partnership announcement with Sprint. And he declined to comment on a Wall Street Journal article published Tuesday that said Sprint was considering spinning off its Xohm network and combining it with Clearwire's network.
In July, Sprint and Clearwire said they would partner to build out their networks and commercialize the service. But Sprint ditched the deal in November, after shareholders had ousted Sprint CEO Gary Forsee.
Wolff said Wednesday that the two companies never stopped talking even after their partnership had been dissolved. He said the companies have been working closely to align the architectures of their networks and to help ensure that people can roam from one network to another.
"If we weren't aligned on features and functionality, roaming would be difficult," he said. "So having alignments is a big step."
He also said the companies have been doing joint interoperability testing with device makers.
"All the information gathered from our trial in Portland is being shared with Sprint," he said. "And Sprint is sharing information about their trials with a level of cooperation that moves the ball forward faster."
To demonstrate the collaborative strides the companies have made, Wolff made a VoIP (voice over Internet Protocol) phone call to Sprint CTO Barry West. The call went over Clearwire's WiMax network in Portland and ended up in Northern Virginia on Sprint's WiMax test network at the company's headquarters.
The fact the companies are still talking and working together offers some hope that a Xohm spinoff could be in the works. Many analysts believe that Clearwire, which was started by wireless pioneer Craig McCaw, needs to combine its network with Sprint to survive.
"Without a spinoff and Sprint's footprint, Clearwire is dead," said Patrick Comack, an analyst with Zachary Research. "And I don't think Sprint shareholders want the company betting the farm on this technology.
Sprint would benefit from spinning off its network too, because it wouldn't have to dish out the $5 billion that it initially projected it would spend to build the network. Instead it could focus on getting its core cell phone business back on track. Comack believes the deal could be structured in such a way that, if WiMax is a success, Sprint could lease back the service for its customers. And if it's a failure, Sprint would still have time to use a competing technology, LTE, to build its 4G network. AT&T and Verizon Communications have already said they plan to use LTE to build their next-generation networks.
"Sprint needs to clean itself up and focus on running a regular 3G wireless company before they start focusing on building a 4G network using unproven, futuristic technology," Comack said. "The WiMax network should be off Sprint's balance sheet, and then the Gary Forsee nightmare will be over."
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