Can Clearwire Survive Without Sprint?
Sep 22nd 2011 6:59PM
Updated Sep 22nd 2011 7:00PM
The only thing certain about Clearwire (NAS: CLWR) is how it was formed. Its future is anyone's guess. The company, as we know it today, is the spawn of the 2008 marriage between the spectrum-rich original Clearwire and Sprint Nextel's (NYS: S) WiMAX business. Intel (NAS: INTC) and Google (NAS: GOOG) were also partners in the venture.
Sprint had linked its growth as a smartphone provider to early adoption of 4G broadband wireless, and it placed its bet on WiMAX 4G technology with Clearwire providing the network.
But it looks now like Sprint put its money on the wrong long-term 4G technology. In an industry where speed is king, LTE 4G now rules, not WiMAX. So in July, Sprint signed a $9 billion with LTE provider LightSquared. Clearwire's shares fell significantly on that news.
That must have been quite a disappointment for Clearwire, especially after Sprint agreed in April to pay it $1 billion through the end of 2012. Sprint still has a need to service its present WiMAX customers. Indeed, Sprint CEO Dan Hesse told listeners of the second-quarter earnings call that it even added 1.7 million WiMAX subscribers that quarter. But even so, it's obvious that its long-term 4G commitment will be with LTE.
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It's obvious, too, that for Clearwire to stay alive, it will have to change horses and become an LTE network provider. But to do that, Clearwire says it will need to borrow an additional $600 million to add to its present $4 billion pile of long-term debt. Even without growing into an LTE network, the company would also need another $150 million to $300 million just to upgrade its present WiMAX network.
That's money that Clearwire would have to borrow, and even Sprint, as its majority owner and biggest wholesale customer, is not exactly pushing to the front of the lending line. In fact, when Clearwire borrowed $1.33 billion last December, Sprint did not buy any of that debt. As another little kick in the teeth, Sprint also reduced its holdings in Clearwire's voting shares to just under 50% to minimize its liability in case Clearwire defaults on its loans.
What Clearwire wants to do is build up what's known as a TDD-LTE network. The TDD stands for time division duoplex. The other flavor of LTE is known as FDD-LTE, or frequency division duoplex, and the different LTEs are not compatible. Verizon's (NYS: VZ) version of LTE is FDD. AT&T (NYS: T) has just begun using its 4G FDD-LTE network. What it previously marketed as "4G" was based on HSPA+, which is more of an enhanced version of 3G.
There is always nitpicking among technophiles about which technology is better suited for this or that, but for Clearwire there would be some clear advantages for going with TDD-LTE. The main one would be that its WIMAX system is also TDD-based. That means new TDD-LTE equipment could be combined with Clearwire's present WiMAX equipment, a potential for big cost and time savings.
Another advantage is that China Mobile (NYS: CHL) , the largest wireless carrier in the world with more than 600 million subscribers, is a proponent of TDD-LTE. Clearwire and China Mobile have just announced a collaborating effort to develop TDD-LTE devices. As yet, there are no commercially available TDD-LTE chipsets, so the economic clout that so many potential customers bring should speed up availability of that equipment.
But wait ...
It may appear that Sprint is ready to cast Clearwire aside, but LightSquared, Clearwire's apparent replacement, comes with plenty of its own baggage, technical and political.
First, LightSquared is embroiled in a controversy with GPS manufacturers that say its network interferes with their satellite signals. LightSquared has proposed solutions that involve using only parts of its available spectrum, lowering the strength of its signals, and developing special filters for precision GPS receivers. These solutions have not yet been proven to work.
As for politics, LightSquared now has to fight accusations that it tried to use political donations to get the White House to pressure an Air Force general to testify at a congressional hearing that LightSquared poses no real threat to GPS interference. The picture gets murkier and murkier.
The ballad of Clearwire and Sprint
Sprint's own survival has been strongly in question since AT&T proposed acquiring T-Mobile. But now that the Department of Justice has sued to stop the merger on antitrust grounds, Sprint can relax a small bit and maybe even see a ray of sun coming through the clouds.
But the future looks somewhat darker for Clearwire, and out of its own hands to a large part. I think much of how it fares will depend on LightSquared's fate. If LightSquared can't prove it can co-exist with present GPS systems, the FCC won't allow it to operate. That means Sprint will have to look for another 4G LTE provider, and there just happens to be one close at hand.
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At the time this article was published Fool contributor Dan Radovsky owns shares of AT&T. The Motley Fool owns shares of China Mobile, Intel, and Google and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Intel, AT&T, China Mobile, and Google and creating a diagonal call position in Intel. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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