- Buyers Guide
It has always been highly likely that Sprint and Clearwire would return to the altar after breaking off their engagement last fall. It now that seems set to happen sooner rather than later, as Sprint’s new CEO Dan Hesse looks for quick action to revive some confidence in his company.
Clearwire’s own CEO, Ben Wolff, hinted at the news during the company’s investor conference last week during which he demonstrated roaming between the Clearwire and Sprint Xohm networks and stated that the companies are working on a unified architecture. This alone would improve the economics for Clearwire, which has performed well in terms of identifying markets with strong demand (even for a late entry broadband service), but which is capital constrained in terms of meeting this demand. The start-up operator recently pulled back its own roll-out schedule, with estimates that it will move from a previous plan of 30.5m POPs (its portion of the network when it was working with Sprint) to about 6m. As part of the company’s capital conservation plan, Clearwire’s European operations are also scaling back and looking for capital/strategic partners. Management of this business unit estimates a cost of $200m-$300m to develop these properties. Clearwire said it ended 2007 with 394,000 subscribers and $151m in revenue, but did not report its net loss. “The upside is that the new plan dramatically reduces the company’s capital requirements, but these changes are likely to have a large impact on our forward estimates and valuation on the company,” wrote analysts at Pali Research in a research note. Clearwire shares slid more than 16% to $12.87.
Such setbacks make the Sprint deal of obvious importance if Clearwire is to be more than a localized operator and instead be truly disruptive. Creating a network based on the same architecture as Xohm, in order to facilitate roaming, already helps boost Clearwire by offering its early customers greater coverage, and should presage a broader alliance with more far reaching effects on roll-out timescales and capex.
Wolff said that the two companies had never stopped talking even after their partnership had been dissolved and that the priority has been to align the architectures of their networks. "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 and were sharing all information from their respective trials. While Sprint has soft launched Xohm in three markets, Clearwire is engaged in its first trial of Mobile WiMAX, in Portland, Oregon (its commercial networks are still based on pre-WiMAX NextNet gear). "All the information gathered from our trial in Portland is being shared with Sprint," Wolff said. "And Sprint is sharing information about their trials with a level of cooperation that moves the ball forward faster."
Even without a formal agreement, the two operators have always been keen not to duplicate effort by competing in the same territories, as shown by a series of spectrum swaps the two have carried out over the past two years in their 2.5GHz holdings. Closer ties with Sprint will enable Clearwire to generate more value from its spectrum more quickly to accelerate revenue flow and therefore be more attractive to potential investors. Although some observers believed the end of the last deal with Sprint spelled death for Clearwire, without a legacy business to worry about it is the more resilient of the two partners and is in a strong position to attract new funding. Its executives have experience in deploying and running commercial networks and have not made too many missteps in the early, difficult days of launching the pre-WiMAX services; its spectrum is valued at between $4.5bn and $6bn, or three times enterprise value (Clearwire is paying $0.30 to $0.40 per MHz per pop for US 2.5GHz spectrum).
Also, the flagship 802.16 provider is too important to the companies that are depending on WiMAX success to be allowed to die. Intel and Motorola, which already hold large stakes in Clearwire and provide much of the equipment and financing, would be obvious candidates to dig in their pockets again. Google is also an option, having recently formed an alliance with Clearwire for search and internet services, and which is keen to support any operators in the US that will back an open access model geared to generating more traffic for Google.
These potential investors, however, will be more attracted to playing the white knight for a full scale national WiMAX network that would have a chance of providing an alternative to AT&T and Verizon in some markets. Hence if Sprint and Clearwire do go beyond roaming and harmonizing their networks and back into full spectrum and network sharing, there will be far more incentive for Intel or Google – or even Microsoft, now that it looks set to step up its own internet services activities with the proposed acquisition of Yahoo – to step up with significant financing. A pooled effort, as operators around the world are realizing as RAN sharing deals become everyday, would greatly reduce the cost and risk for both partners and reassure both current and potential shareholders.
While the level of anxiety is not too high at Clearwire, as its solid performance at the investors’ meeting showed, it is almost hysteria among Sprint Nextel shareholders. This especially after suffering the latest in an almost weekly series of shocks, when the operator said it would take a goodwill charge of up to $31bn on the acquisition of Nextel. This negativity has made the shareholders very wary of investing in a new network, so it is probable that Hesse will opt to go further than mere RAN sharing. Look for a potential spin-off of Xohm into a joint venture with Clearwire, backed by new outside investment. This would take Xohm off the balance sheet, saving the main company from the estimated $5bn spend it needs to make to create Xohm over the next few years. Then Sprint could still lease back the service to offer its customers – while keeping its options open to upgrade to LTE in the future, should it see WiMAX to be failing.
As well as the usual suspects, insiders told the Wall Street Journal that electronics retail chain Best Buy is also interested in taking a stake in a Clearwire-Xohm combination. The company is stepping up its wireless activities and is also rumored to be mulling a bid for European mobile retailer and MVNO, Carphone Warehouse. Another rumored contender is online retailer Amazon, which launched its innovative e-book reader on Sprint’s CDMA network. Amazon is said to be interested in working with the operator to ensure that the WiMAX system is heavily geared to multimedia devices and content, in order to stimulate sales of its products. Such a deal would be very helpful to the WiMAX cause, reinforcing the association that Intel has worked hard to create between the 4G-style network and new mobile internet content models and devices. Google, much as it favors this model, may not follow through with dollars, as a Sprint-Clearwire venture is perhaps more likely to gain support from a vendor with an immediate interest in making WiMAX real. For Hesse, and to a lesser extent Wolff, any backing would be welcome to stop their greatest hopes of differentiation from the major operators being stillborn for lack of capital and shareholder support.
Sprint has sought to put an end to speculation that it might sell its Nextel Direct Connect iDEN network. The firm last week released a statement from CEO Dan Hesse saying that Sprint will focus on enhancing Direct Connect in 2008 with extra functionality and features such as 'Push to X', an enhancement of the Push to Talk feature that made Nextel famous. Enhancements will support many forms of messaging including video.
The Push to X facilities were to be provided by Qualcomm’s QChat technology, which Sprint was supposed to deploy this quarter across its CDMA network. However, the statement did not refer to QChat, arousing speculation that Sprint will miss its deadline to roll out this advanced technology.
Penetration - Number of Markets
• 15% or more - 9
• 10% to 14% - 13
• 7% to 9% - 8
• 6% or less - 3
Total - 33
Sprint said it will take a material goodwill impairment charge, which could amount to all of the $31bn goodwill on its balance sheet. Sprint reviewed the net book value of its wireless unit and found that it exceeds the fair market value of the unit.
This can indicate that intangible assets like good customer relations, good employee relations and the brand name of Sprint's wireless unit have depreciated; but most importantly in this case, goodwill also refers to the gap between what a company pays for its acquisitions and what those acquisitions are actually worth, so Nextel is likely to be the main factor in the huge charge.
The carrier plans to report the change in its fourth quarter results, but said it will not affect its current cash balance or force it to violate any of its debt arrangements.