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Fitch Warns of ‘Inconsistencies’ with Sprint, Clearwire 4G Plans

By Staff Author | March 28, 2011

Sprint Nextel’s relationship with Clearwire has always been complex, but now a key credit ratings agency is questioning whether it’s on the path to outright dysfunction.

Fitch Ratings said in a new report released Monday that the two companies’ long-term business strategies are diverging – an ironic twist, given that Sprint and Clearwire appear close to resolving a prolonged dispute over wholesale pricing.

“Sprint is spending $4 billion to $5 billion on their network – why spend any money on a duplicative network of Clearwire’s™” says Fitch Ratings Senior Director William Densmore, referring to Sprint’s decision to upgrade its network with better equipment. “It’s unclear to me what direction they’re actually going with this.”

Under its network modernization plan, Sprint is spending up to $5 billion to install multi-mode equipment that will power wireless services on its 800 MHz spectrum and 1.9 GHz spectrum holdings, as well as the 2.5 GHz spectrum it gave to Clearwire in 2007. Sprint CEO Dan Hesse has said that the company may run LTE on its new equipment, though Hesse maintains that WiMAX will continue to be part of the company’s 4G strategy going forward.

If Sprint leases Clearwire’s 2.5 GHz spectrum to deploy LTE or WiMAX, it will essentially be using two separate networks to power the same services – a redundancy that prompted Fitch Ratings to pen its report.

Densmore says Fitch wanted to alert investors to what he calls “inconsistencies” in Sprint’s business plan. “There are a lot of issues that Sprint and Clearwire need to work through,” he says. “It’s something we’re watching closely and it’s a risk in the credit ratings for Sprint.”

A spokesman for Clearwire defended the company’s business strategy with Sprint, saying the two companies have maintained a “close working relationship.”

“As executives from both companies have recently reiterated, we continue to align on our 4G strategy going forward,” the spokesman said.

Attempts to reach Sprint for comment were unsuccessful.

Fitch says that it will be difficult to assess Clearwire’s effect on Sprint’s credit rating until the companies resolve issues with their business strategy, and has not downgraded Sprint’s credit rating at this time.

If Sprint does go ahead with its plan to deploy its own 4G services instead of buying them on a wholesale basis from Clearwire, it’s unlikely that Sprint will want Clearwire to expand its WiMAX network into markets where the two companies would compete head-to-head. Sprint has already been hesitant to invest further in Clearwire, and its reticence is only likely to increase as its dependence on Clearwire lessens.

Clearwire’s wholesale strategy could be left in doubt if Sprint pursues its own independent 4G service. Fitch said it believes the majority of Clearwire’s wholesale subscribers from Sprint could eventually migrate back to Sprint’s network over the long term if Sprint expands its 4G footprint.

However, it won’t be easy for Sprint to extricate itself from Clearwire. Sprint holds a 54 percent stake in Clearwire and could take a significant hit if the WiMAX provider were to fail, so it’s in Sprint’s best interest to ensure that Clearwire stays afloat. One obvious option is for Sprint to acquire Clearwire, but Sprint isn’t in a financial position to make the deal viable.

Densmore thinks Sprint may end up leasing Clearwire’s 2.5 GHz spectrum – the same spectrum Sprint contributed to Clearwire for its WiMAX services four years ago – for Sprint’s own 4G services. The two companies may also enter into network sharing agreements to increase their shared 4G footprint, but those agreements could be complicated if Sprint decides to go with LTE instead of WiMAX, since the two technologies are incompatible.

Fitch’s report didn’t seem to have any effect on investor confidence. Both Sprint and Clearwire’s stock rose slightly over the course of the day, moving against a downward trend in the market.


Filed Under: Carriers

 

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