It’s been nearly two years since Clearwire launched its WiMAX network in Portland, Ore., in January 2009 and became the first major operator in the United States to offer next-generation mobile broadband services.
Since then, Clearwire and its majority shareholder, Sprint, have operated in a vacuum, turning on their mobile broadband network on in more than 60 markets, including New York City, Chicago and Las Vegas, with very little competition from other mobile broadband services.
Now, the two companies face major financial woes and imminent competition from Verizon Wireless’ LTE network, and 4G claims from MetroPCS Communications and T-Mobile USA.
Clearwire’s financial problems have forced it to cut 600 staffers, delay pieces of its network build and suspend the launch of Clear-branded smartphones. Worse, the company is experiencing a cash crunch that threatens its ability to stay afloat.
Clearwire will run out of cash as early as the middle of next year without additional funding, according to Sprint SEC filings, and Clearwire said in its recent 10-Q that heavy losses and difficulty getting funding “raises substantial doubt about our ability to continue as a going concern.” Clearwire is looking at several ways of securing capital and is seeking bids on its considerable spectrum resources, according to Sprint’s recent 10-Q report.
Sprint owns a 54 percent stake in Clearwire, so Clearwire could be considered a subsidiary under certain loan agreements, it said in a Nov. 5 SEC filing.
According to the document, If Clearwire defaults, if could have a “material adverse effect” on Sprint, which is looking at ways to “eliminate the potential for Clearwire to be considered a subsidiary of Sprint.”
Clearwire’s ongoing funding woes have exasperated the already-strained relationship between the two companies. Sprint CEO Dan Hesse and two of the company’s top executives resigned from Clearwire’s board of directors in September, reportedly on an “abundance of caution” over antitrust concerns.
The companies haven’t reached an agreement over funding and disagree over their retail strategy. The industry is rife with speculation that Sprint wants Clearwire to cut its brick-and-mortar presence to focus on wholesale, but Clearwire doesn’t want to depend on Sprint for new subscribers.
“Clearwire needs money to survive and Sprint wants them to do certain things like shut down retail and invest more capital in existing markets in order to get that money,” says BTIG Research analyst Walter Piecyk. “So basically we have a high stakes negotiation and we are waiting to see who blinks first.”
Clearwire’s financing isn’t the only wrench in the works. Sprint is dealing with an aging CDMA network that requires an estimated $3 billion modernization project. Defaults at Clearwire could trigger defaults at Sprint, potentially disrupting 4G services and forcing it to refinance its bonds, Piecyk says.
Stifel Nicolaus analyst Christopher King predicts Sprint will have to buy the remaining 46 percent equity stake in Clearwire in the long term. “Sprint Nextel has no 4G strategy or spectrum without Clearwire,” King says. “Simply put, Sprint Nextel needs Clearwire.”
Clearwire’s funding woes are a major threat to both itself and Sprint and could provide an opportunity for its competitors to catch up if they interfere further with network deployment plans.
T-Mobile USA and MetroPCS are marketing their respective HSPA+ and LTE deployments as 4G, and Verizon Wireless’ LTE network is set to launch in 38 markets by the end of the year. LightSquared’s hybrid satellite-terrestrial LTE network will launch in the second half of next year, coinciding with the launch of AT&T’s LTE network, which is slated to come online around the same time.
The Device Advantage
Even if Sprint and Clearwire sort out their tangled relationship and secure the necessary funding to stay afloat, there’s still the matter of competition.
Todd Rowley, Sprint’s vice president of 4G, says the carrier’s device lineup will help keep it ahead of the pack as competitors come to market.
“It’s about more than just a dongle,” Rowley says. “It’s about embedded laptops, modems, handsets, all kinds of M2M solutions. We think that will continue to be a major differentiation point for the foreseeable future.”
Sprint sells seven WiMAX devices: the HTC Evo and Samsung Epic, three USB dongles, a personal hot spot and a desktop modem. The carrier’s two Android-based smartphones have been hugely popular, and ABI Research estimates Sprint will sell nearly 3 million of the devices by year-end.
Clearwire carries three personal hot spots, three USB dongles and a home modem, and its Rover prepaid brand has its own personal hot spot and USB dongle. To top things off, Best Buy carries more than 20 laptops that come pre-equipped with WiMAX service.
Clearwire can also leverage is considerable spectrum holdings to keep attractive unlimited pricing plans even as the data consumption of its average subscriber tops 7 GB a month. Clearwire had about 1 million retail customers and 1.8 million wholesale subscribers by the end of September.
Clearwire Chief Commercial Officer Mike Sievert says the company “welcomes the competition” and touts its spectrum portfolio as the “first piece” of its competitive positioning. “We can keep up with the data demands of our customers,” he says. “7 GB of data per month – that requires tremendous capacity.”
AT&T stopped offering new customers unlimited data last summer, and Verizon Wireless just rolled out tiered data services. T-Mobile sells unlimited Web plans for its handsets, but caps its data plans at 5 GB.
Verizon, T-Mobile Champ at the Bit
The competition certainly has moved fast. T-Mobile’s recent marketing shift puts its HSPA+ network up against Clearwire’s WiMAX offerings, and Clearwire will go head to head with Verizon’s LTE service in several top markets by the end of this year, including New York and Las Vegas. Clearwire also must contend with MetroPCS, which is marketing its LTE deployments as 4G although it’s not clear what speeds are being offered because of the carrier’s meager spectrum position.
Yankee Group researcher Chris Nicoll says Clearwire’s decision to go after Tier 2 markets for its first deployments left it more vulnerable to competition in top cities.
“They didn’t put a lot of competitive pressure on Verizon or AT&T and made no attempt to capture the Tier 1 cities. The Tier 2 strategy gave AT&T and Verizon a couple years to think about their own 4G strategy and it allowed the LTE technology a lot of time to mature,” Nicoll says. “They went with the fastest way to reach as many people as they could, but created an opening for AT&T and Verizon to step in.”
Clearwire also has to deal with spotty in-market coverage. Its detailed coverage maps reveal service that varies widely on a block-by-block basis and the high frequency at which Clearwire’s network operates makes in-building coverage more challenging.
“Their strategy now has to be on infill,” Nicoll says. “They’re going to have to offer more ubiquitous coverage.”
Verizon has kept a close eye on the quality of Clearwire’s WiMAX network as it moves to deploy LTE.
“The network is the foundation for our brand,” says Lindsay Notwell, Verizon’s executive director of 4G implementation. “We’re going to have the best network and we work backwards from there.”
Verizon claims its LTE network will be faster than Clearwire’s WiMAX network with real-life downlink speeds of 5-12 Mbps and latency of 30 milliseconds. Clearwire says its WiMAX network clocks in at 3 to 6 Mbps on the downlink, with bursts over 10 Mbps, though the carrier’s trial runs of LTE blow those speeds out of the water.
Notwell says Verizon’s public estimates for the speeds offered by its LTE network were on the low end of its capabilities. “I expect you’ll see faster speeds when we launch,” he says. “This will unwire applications that have to date been relegated to the wired environment.”
T-Mobile is also banking on the speeds of its services. The carrier is basing its marketing of HSPA+ as 4G with the claim that its network offers typical download speeds that match competing WiMAX and LTE technologies, and plans to roll out dual carrier HSPA+ technology next year, which offers theoretical peak download speeds of 42 Mbps. Its current deployments clock in at 5 Mbps on its myTouch 4G phone “in some cities” with peak speeds of 12 Mbps, T-Mobile says.
MetroPCS has not released details about its LTE speeds. Though MetroPCS is marketing its LTE offerings as 4G, its limited spectrum resources prompted the carrier to warn investors in a May regulatory filing that “because of the limited amount of spectrum available to us in certain metropolitan areas, we will be required to deploy LTE on 1.4 or 3 MHz channels adjacent to our existing CDMA network in those metropolitan areas.”
MetroPCS is believed to be deploying its LTE network in its AWS spectrum holdings, which run in the 1710-1755 MHz and 2110-2155 MHz bands. It is unclear what speeds can be obtained in those frequencies.
Rising Tide Lifts All Ships?
Nearly three-fourths of wireless subscribers don’t know or understand what 4G is and more than half don’t know what 3G is despite years of marketing on the parts of carriers, according to recent research conducted by Yankee Group.
Pitching 4G services to potential customers will get a lot easier as T-Mobile, Verizon and MetroPCS ramp up their own marketing efforts.
“Having additional networks come online gives credibility to the market and encourages device vendors to make the investments to expand the types of devices that are available to consumers,” says Ken Rehbehn, a 4G mobile wireless infrastructure analyst with Yankee Group. “There will be more competition, but there are benefits to getting scale established for mobile broadband.”
However, Rehbehn cautions that Clearwire needs to maintain a top-notch network as competitors come to market, especially Verizon Wireless. “Clearwire’s head start advantage can slip quickly if Verizon is brilliant in executing its plan,” Rehbehn says. “They need to get beyond coverage that leaves holes in the middle of metro areas.”
Clearwire needs more money, more time and more devices to maintain its lead as the breadth of its network helps it maintain its lead over the following months. The competition is catching up fast, and even in a rising-tide-lifts-all-ships scenario, Clearwire will still have work to do to stay ahead of the pack.