Clearwire recently announced the completion of the Sprint Nextel transaction and the formation of the new Clearwire Corporation. In addition, they received $3.2 Billion from Comcast, Intel, Time Warner Cable, Google and Bright House Networks. As expected, their conference call emphasized all the positive aspects of the deal. Namely, they own lots of spectrum, they are building an all-IP network that is “open”, and will use fourth generation (4G) mobile WiMAX technology (IEEE 802.16e). I’d love to see a nationwide 4G mobile network, but let’s be clear about some of the challenges facing Clearwire.
Network buildout will be long and expensive
It will take years and a lot of cash to build out a nationwide mobile WiMAX network. Remember how long it took for Verizon and Sprint to deploy EV-DO? (And it is still not available everywhere.) Will Clearwire have enough capital for such a long term investment? As Clearwire stated on their conference call, “a good portion” of the $3.2 Billion they received will be devoted to network buildout. But $3.2 billion is not a lot, relatively speaking. According to the Verizon Q3 2008 Investor Report Verizon spent $4.7 Billion on their wireless network in the first three quarters of 2008.
In addition, both Verizon Wireless and AT&T are generating positive cash flow from wireless operations. According to the AT&T Q3 2008 Investor Report, AT&T generated $2.3 Billion in wireless income in the quarter ended 9/30/2008. On the other hand, Clearwire lost $166 million, and Sprint lost $326 Million in the same quarter. When will Clearwire generate positive cash flow? And how long will Clearwire’s investors continue to pump money into the company?
Device Ecosystem will develop slowly
Clearwire needs to develop a broad ecosystem of affordable “tri-mode” WiMAX devices (I am referring to devices that support 1xRTT, EV-DO Rev A, and 802.16e). Why? Well, when subscribers roam out of a WiMAX coverage area, the mobile device must remain connected using EV-DO service. And when EV-DO service is not available, then the device must be able to use 1xRTT service (primarily to provide voice support). Therefore, Clearwire 4G devices must also support 2G and 3G technology.
For the most part, these tri-mode devices are mainly useful on the Clearwire network because most of the world uses GSM. From a device manufacturer point of view, this is a pretty small market. In contrast, there are over 200 mobile service providers in over 100 countries that operate third generation GSM networks. That is a huge market. So a device manufacturer that designs a third generation GSM device can sell that device to network operators around the world.
Device manufacturers follow the money. That is why there is a broad 3G device ecosystem of almost 1000 3G GSM devices from almost 140 different vendors. And conversely, that is why a WiMAX device ecosystem will emerge only after Clearwire demonstrates that they have broad coverage, a rapidly growing subscriber base, and the profitability for long-term viability.
Competitors will not stand still
When you listen to WiMAX advocates you’d think that Clearwire has a three-year “head start” on incumbent GSM network operators. After all, they say, Long Term Evolution (LTE) will not rollout until 2011. But wait a minute, last time I checked, these GSM operators had over 80% of the worldwide mobile cellular market (more than 2.5 Billion subscribers) and they will continue to evolve their service in order to compete with WiMAX. Many operators will upgrade to HSPA Evolved. This enhancement will increase subscriber download speeds into the 1-2 Mbps range. HSPA Evolved will help bridge the gap between the HSPA and LTE.
In addition, high-speed service doesn’t simply rely upon a fast radio access network (RAN). It also requires a fast core network. Operators like Verizon Wireless and AT&T will leverage their profitable operations to build out their core network in anticipation of LTE.
Conclusion
Clearwire has completed an important first step and has partnered with blue chip investors. But they are embarking on a long journey with very significant challenges. It is going to be fun to see what happens.
Recent Comments