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WiMAX conservatives will gain more than revolutionaries

October 16, 2008
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In some ways, Sprint Nextel's early embrace of Mobile WiMAX has done the 802.16 cause harm as well as good. It has subverted the marketing agenda almost entirely towards wide area mobile broadband and established carriers, taking the spotlight off the markets where the prospects for WiMAX are far more assured - fixed and nomadic or metrozone broadband, largely for underserved areas or to complement fixed models. This mismatch has only been emphasized in the past few weeks, with the success stories coming from traditional deployments and vendors, like Alvarion, and further doubts hanging over the ambitious Sprint/Clearwire joint venture plan.

So as the industry continues to set too much store by the ups and downs of Sprint and Clearwire - and associate them intimately with the rise and fall of WiMAX as a whole - both partners have reported a disappointing quarter, with Clearwire's widening losses particularly in the spotlight. However, Clearwire insisted that the formation of the joint venture to create 'the new Clearwire' with Sprint Xohm is on track, a statement that boosted its shares by 2.5% to $9.21 last Wednesday.

"The infusion of $3.2bn in capital from our strategic investor group upon completion of the transaction will fuel our nationwide mobile WiMAX network deployment, which we believe will fundamentally transform the wireless communications landscape and the way all of us use the internet," said CEO Ben Wolff.

However, in the meantime the expenses of putting the new Clearwire together are weighing heavily on the provider, which reported a net loss of $199.1m, or $1.21 a share, compared with a net loss of $118.1m, or 72 cents a share, a year earlier. The results included $27.9m in impairment losses on investments, and expenses of $10.2m related to the joint venture process.

On the bright side, revenue jumped 65% to $58.6m, representing an increase in subscriber levels ahead of analyst estimates (though they had predicted lower losses too). Clearwire added 18,000 subscribers to end the quarter with 461,000 customers, up 54% from a year earlier, despite a reduction in sales and marketing efforts as the operator prioritizes its limited resources on network deployment. This helped it reduce the cost per customer addition by 14% to $404. Despite the marketing cutback, ARPU was up 3.6% to $39.28 on higher sales of new services and the movement of subscribers from promotional to traditional rate plans. However, churn rose to 2.6% from 2%, a figure far higher than that considered acceptable for a successful carrier, and somewhat concerning in a new provider offering a differentiated service to a carefully targeted demographic and geographical base. Gross margin fell to 28% from 34% as the company leased more network towers for the upcoming Mobile WiMAX roll-out, and total operating expenses increased 41% to $205.2m. Spectrum leasing costs soared by 92% to $28.5m.

Clearwire affirmed its March prediction of 2008 revenue in a range of $205m-$215m although analysts are looking for $234m to have real confidence in the company. Wolff expects lower 2008 capex of $220m-$240m, down from $275m-$290m.

Clearwire is just rolling out its first Mobile WiMAX networks but most of its current customers are still using its proprietary equipment from NextNet/Motorola, for fixed and nomadic access services, a far cry from the 4G-style mobile broadband services promised by the new Clearwire once smartphones and other advanced devices emerge. That only highlights that, even in developed markets like the US, there is revenue and growth to be made in basic broadband access, and that this should be the bedrock for WiMAX equipment and operators for some time to come, before demand for mobile broadband is well established, and the devices and applications to support it launched.

This suggests that, in the short term at least, the magic formula is Mobile WiMAX without much mobility - instead delivering the spectral efficiency and standards economics of the 802.16e standard to largely traditional, often fixed, services, with sexier mobile and multimedia options held in reserve for the future. So the vendors offering that combination, especially those with a focus on underserved markets, are prospering despite the global slowdown and uncertainty over the speed of WiMAX certification and operator commitment.

Alvarion has been the star this quarter, both in its own right and through its new OEM deal with Nortel, which has backed away from its homegrown 802.16e to offer systems from its Israeli partner instead. A couple of years ago, Alvarion was widely expected to lose its lead in the proprietary broadband wireless access market (then worth under $1bn) under pressure from tier one WiMAX vendors. Instead, it has seen several of those vendors demonstrating lukewarm commitment and sales - some waiting to see whether the mobile broadband opportunity with global carriers really does materialize; some focusing more heavily on LTE. Motorola and Alvarion stay in the lead then, with some action from Alcatel-Lucent and Huawei, as well as the various WiMAX start-ups.

Alvarion's early move into 802.16e and partnerships with Nortel and others propelled it to record revenues and WiMAX shipments in its second quarter. Revenue came in at $69.7m, a 21% year-on-year increase, with WiMAX revenues topping $38m, or 55% of the total. "Current customers are expanding their networks, bookings are strong, and the pipeline of potential new business is large and growing. This further increases our confidence in our ability to achieve the upper end of our target revenue range of $275m-$300m for 2008," said CEO Tzvika Friedman.

The vendor's smaller rivals are seeing mixed fortunes, often decided by their progress in rolling out 802.16e. Canada's Redline remain highly dependent on the older 802.16d standard and recently adjusted its Q2 outlook, cutting revenue forecasts from $15m to about $9m. The company said some customers are delaying spending on WiMAX, especially because of "a softening in the overall demand for WiMAX products based on the current 802.16d standards as operators consider whether or not to wait for the next generation of Mobile WiMAX technologies". CEO Majed Sifri said in a statement: "Some prospective and existing customers have delayed their roll-outs and purchasing decisions as they review the option of adopting a next generation Mobile WiMAX solution. We believe that market opportunities remain strong due to the demand for broadband access, but the timing of customer decisions has become more difficult to predict."

Another contender, Airspan, which has an equipment deal with Fujitsu Networks, also saw a slow Q2, but is further ahead in 802.16e and has the bonus of the Japanese alliance. So its outlook for the year was more bullish than Redline's. The company reported a 3% decline in Q2 revenue to $21.4m but stated: "The business outlook in the second half looks improved from the recent past as more operators utilize fixed WiMAX, and Mobile WiMAX increases in momentum. Given the current market perspectives, we anticipate that our full year revenue will be in the range of $90m and WiMAX will continue to increase as a percentage of our customer wins and revenues."

The moral, then, seems to be that success in 2008-9 will come to those who go with the standards flow and don't try anything too radical or clever, unless they have a lot of cash or other revenue streams to support them through a period of customer and general economic uncertainty, and of transition to mobile broadband models. Unfortunately, all these rules have been broken by would-be WiMAX disruptive player NextWave Wireless, which looks in real danger of running out of money by the end of the year.

Having been disappointed with the proceeds so far from its sale of its US spectrum assets - it sold 63% of its AWS holdings for $150.1m last month, though it still retains substantial 2.3GHz/2.5GHz assets - NextWave is now making it clear that it is in imminent danger of running out of money. It had looked to step back from its over-ambitious chips-to-equipment-to-spectrum business model by selling off its licenses, to fund development of the WiMAX hardware and especially the TDD mobile TV technology acquired with IPWireless. But it raised less than expected from the initial sale and then said it would use the funds to pay down and collateralize debt, rather than support ongoing operations.

This sparked doubts over the company's ability to raise sufficient cash for its ambitious product roadmap, which spans IPWireless' TDtv system, originally built for TD-CDMA and now adapted for WiMAX; plus WiMAX CPE chipsets and plans for base station chips and a full equipment range; and possibly a move into LTE. In all these product areas, NextWave was entering a crowded market with insufficient cash to take on the big players, except in the case of its one true differentiator, the TV system. Now it is facing reality, saying in its quarterly 10-Q regulatory filing that "if the Company does not obtain further financing in September 2008, it would not be able to meet its financial obligations at the beginning of the fourth quarter of 2008, will not be able to continue its operations in the normal course of business and may be forced to restructure its obligations. If the Company successfully obtains financing, it will continue to seek buyers for its US spectrum assets as previously disclosed, and will explore additional options for further cost reductions. "

The company is exploring various financing options, but the fact remains that most of the growth it did see in Q2 revenues came from IPWireless and its other video-related subsidiary, PacketVideo, suggesting that it would do well to focus entirely on this market, where it has real competitive advantage. In the more general WiMAX space, it is behind the game and being hit by a slower than expected take-off. Also in the filing, it stated: "We are feeling the effects of a slowing global economy on our business. This has resulted in lower than anticipated sales of our 3GPP and Wi-Fi based network products and a delay in WiMAX network deployments that will continue to impact projected sales of our WiMAX semiconductor products." In addition, "delay in global WiMAX network deployments ... will continue to impact the timing and volume of projected commercial sales of its WiMAX semiconductor products. In addition, the Company's efforts to sell certain of its US spectrum assets on favorable terms has been delayed by current market conditions, as well as regulatory and other market activities involving potential buyers.

For Q2, NextWave reported revenues of $31.8m, a 22% year-on-year increase, and an operating loss of $65.7m, down 17%.

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