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Industry News

AT&T tries to block Clearwire, betraying nerves about mobile broadband

August 14, 2008
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It is essential to Sprint Nextel's ambitions to steal a march on larger rivals in mobile broadband that its Clearwire joint venture is signed and sealed, and can kick off full scale roll-out, as soon as possible, in order to maximize the narrowing window with Verizon's and AT&T's LTE plans. One of those giants, AT&T, may have dashed hopes that the 'new Clearwire' will be a reality by year end, filing a petition with the FCC to bar the merger.

Sprint Nextel agreed earlier this year to put its Xohm unit — home of its WiMAX network, 2.5 GHz spectrum and open access mobile broadband vision — into a $14.5bn joint venture with Clearwire, owner of the other major US 2.5 GHz WiMAX business, with backing from Intel, Google and three cablecos. This was an important move for the ailing Sprint, reducing the risk and cost of its mobile broadband activities but attracting sufficiently powerful backing to make it possible that its strong vision could actually be translated into reality, and a profitable business. Even with only part ownership, Xohm/Clearwire will remain Sprint's most promising asset, given its massive spectrum holdings and early march into 4G-class services — and the likely slow decline of the core CDMA business. This will only be true if the merger can be achieved quickly and without significant watering down of the agreed terms, otherwise even the huge spectrum capacity advantage of the new Clearwire (over 110 MHz in most markets) will find it hard to outweigh the greater scale, market weight and funds of Verizon and AT&T with their newly acquired 700 MHz spectrum and LTE plans.

AT&T will be well aware that the new Clearwire represents a greater competitive threat than the wounded Sprint on its own, especially with the participation of three cable operators — Comcast, Time Warner Cable and Advance/Newhouse. AT&T and Verizon see the cablecos as the greatest challenge to their own DSL/fiber/3G/LTE roll-outs for quad play and fixed/mobile broadband. In its filing, the largest US telco argues that the proposed merger, "openly states that they [Sprint Nextel and Clearwire] intend to compete with other national wireless providers — including AT&T — yet they fail to make the required showings necessary for the Commission's review." The company is basing its objections largely on FCC rules on the amount of spectrum an operator can hold in any market, the 'spectrum screen' that is also being used by opponents of Verizon's planned acquisition of Alltel.

Smaller rural operators are particularly disadvantaged when the larger carriers amass large spectrum holdings, and some of these are supporting AT&T against Clearwire, calling for the spectrum screen to be applied.

"AT&T submits that the Commission's prior treatment of mergers and competitive combinations in the mobile services market compels the application of the initial spectrum screen to the New Clearwire applications. And, in so doing, consistency and logic dictate that the BRS/EBS spectrum held and controlled by the applicants must be considered," stated AT&T, referring to Sprint's and Clearwire's 2.5 GHz holdings.

The FCC eliminated spectrum caps in 2003, but currently applies a spectrum screen in wireless transactions to assess any potential anti-competitive problems in markets where combined wireless assets (in any bands) exceed 95MHz, as the new Clearwire's would in many areas. However, the regulator decided when it devised the spectrum screen that it would exclude AWS and BRS frequencies from an operator's total, because airwaves in both areas are not significantly available throughout the country due to relocation and band realignment issues.

AT&T argues that is no longer a valid point of view because Sprint and Clearwire have amassed such vast holdings across the country. The FCC can still examine AWS and BRS spectrum holdings on a case-by-case basis in situations where the 95MHz per market limit is exceeded, but doing so is discretionary.

"The applicants themselves have positioned their company as the single largest holder of broadband mobile spectrum in the country, and stated their intent to apply those assets to competing with traditional mobile carriers such as AT&T," stated the AT&T filing. "While AT&T does not fundamentally oppose the underlying transactions, the regulatory process must be consistent for all entrants, including New Clearwire, and regulatory parity therefore requires an examination of the reformed company's spectrum aggregation."

Given that AT&T in its current form has been created from a series of mega-mergers, which have seriously reduced the number of competitors in the US market, it seems unlikely, even after a change of administration, that the FCC will block Clearwire, but it could potentially insist on some spectrum divestments in markets where it will face little competition, such as some rural areas.

In the 2.5 GHz (BRS) and 2.3 GHz (WCS) bands, the FCC has recently tended to try to stimulate new services by insisting on strict build-out deadlines, rather than by fragmenting the market with forced divestments. When Sprint and Nextel merged, they kept their significant 2.5 GHz holdings on condition they met FCC coverage targets, and similar mandates were brought into play regarding AT&T's 2.3 GHz spectrum when its merger with BellSouth was under consideration. These mean that AT&T itself will soon be starting deployment in 2.3 GHz, probably using WiMAX, though this is likely to be a fixed wireless system in the southern regions, rather than a real competitor for Clearwire.

Though a block on the joint venture is unlikely, any delay or uncertainty is harmful, and will further knock the current Clearwire's share price, which has been suffering lately anyway. Its stock hit a 52-week low on the Nasdaq last Tuesday, dropping as low as $8.98. The shares have generally been falling in price since early June but started to dip below the $10 mark at around July 17 and have remained depressed since. This is despite recent upgrades from analyst houses RBC Capital Markets and Citigroup, which set target prices of $17 and $13 respectively.

Supporters of the Clearwire venture include the Wireless Communications Association International (WCAI), the main broadband wireless industry body, which said in a filing that the venture presents the FCC "with a unique opportunity to maximize the benefits of its new 2.5 GHz band plan and to spur widespread deployment of WiMAX technology by New Clearwire and others."

The Catholic Television Network said the WiMAX deal "will benefit EBS licensees by facilitating the deployment of advanced wireless broadband networks on EBS spectrum." Churches and religious or educational broadcasters are major holders of 2.5 GHz licenses, many of which are now being leased to Sprint or Clearwire. Meanwhile, the current FCC is keen to support a wireless alternative to the telephone/cable broadband duopoly.

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