Spinoff Gives Sprint, WiMAX a Second Wind

Talk about a win-win. Or rather, a win-win-win. This week Sprint-Nextel Corp. got rid of a giant albatross that had been hanging around its neck, while WiMAX got the shot in the arm it needed. And Clearwire Corp. has found a way to prevent its business model from becoming obsolete.

By selling its “Xohm” WiMAX business unit to Clearwire in return for a 51 percent ownership stake, the financially struggling Sprint now is relieved from the burden of building out and operating another nationwide network. As Sprint CEO Dan Hesse said: “The economics of this deal are very, very favorable. It allows us to bring 4G products to market without the capex required if we did it on our own.”

More importantly in the long run, WiMAX (and by extension Clearwire) wins, too. Pre-Xohm Clearwire, which has deployed DSL-replacement fixed WiMAX service in several markets, has a mobile WiMAX trial running in Portland, Ore. But it lacks the spectrum coverage, finances, business arrangements and R&D expertise to get mobile WiMAX deployed nationally with deep coverage on its own, leaving it stuck in the fixed-line-replacement, apples-for-apples business.

Meanwhile, after a previous arrangement with Sprint fell through due to the nebulously described “complexities” of the deal, and with Sprint’s own plans in question amid executive chaos and poor earnings reports, WiMAX’s future in the States looked uncertain. But the “new Clearwire,” a $14.5 billion company, will have all of Sprint’s $7.4 billion in WiMAX assets — physical, intellectual and spectral — and a sole dedication to bringing WiMAX to market, with no competing lines of business to siphon off resources. It also holds 40 billion MHz of PoPs, the deepest spectrum position of any company in the country. And that means WiMAX has a fighting chance of happening, said ABI Research analyst Phil Solis.

"This mobile WiMAX network will still maintain its time-to-market advantage, even with Verizon Wireless' aggressive LTE plans nipping at its heels," he said.

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Aggressive Goals

Clearwire accordingly has an aggressive goal of covering 15 million PoPs by the end of the year, more if it can access additional capital, said Clearwire CEO Ben Wolff. It also will reach 120 million to 140 million people by the end of 2010 — which is when LTE from Verizon Wireless and AT&T Inc. will just start becoming reality, and still be nowhere close to widespread commercial deployment, said Xohm chief Barry West, who will soon become president of Clearwire.

Clearwire, in other words, will have a clear time-to-market advantage, which will help with the ROI profile of the network build. Wolff said it would take $2 to $2.3 billion in revenue to achieve cash flow positive, but when you’re the only 4G game in town, ramping that up doesn’t sound as daunting as it might otherwise. Especially when you consider that WiMAX delivers four times the performance of legacy technologies at one-tenth of the cost.

“This fundamentally changes the economics of delivering applications,” Wolff noted, saying it was too early to name planned price points. “It’s a lower cost of delivering bits, and we’re finding we’re able to get customers to the same ARPU levels as [legacy data plans] because there’s better bandwidth even with a limited footprint. Obviously the economics are favorable. We’re staying focused on value proposition, and we can compress pricing if we need to.”

Further helping out the business plan is a long-term relationship with Sprint wherein Clearwire will lease tower space and other network infrastructure at below-market rates, and will use Sprint’s backhaul, long-haul network, back office and sales channels at “favorable” price points. And, it will become an MVNO for Sprint’s 3G services. Wolff said the two companies already have spent a good chunk of effort to make sure the two networks will work together.

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Meanwhile, the new Clearwire expects to offer mobile wireless Internet services on a broad array of new devices — handsets, consumer electronics and more — that will be made possible by integrated WiMAX chipsets and a commitment to an open architecture. One of the most strategic of the new company’s investors is Intel Corp., which pitched in $1 billion and has pledged to work with manufacturers to embed WiMAX chips into Intel Centrino 2 processor technology-based laptops and other Intel-based mobile Internet devices. It also will act as a distribution partner, and will market the Clearwire service in association with Intel's performance notebook PC brand.

To bolster its open-access bona fides, Clearwire has partnered with buzz kid Google Inc., another strategic investor, to develop Internet services, advertising services and applications for 4G. Google also will naturally be the search provider, while Clearwire will support Google's open-access Android operating system software in its future voice and data devices. Google and Intel have options to enter into 3G and 4G wholesale agreements with Sprint and Clearwire, respectively, but so far have no plans to do so.

“The transition from having Internet connected to a location to it being connected to a person means that a revolution has begun,” said Wolff. “Our road map is clear and unencumbered, and we are fundamentally changing the game with open access.”

In 2008, Clearwire will launch express cards in existing markets, and mobile WiMAX PC cards, USB-driven devices and embedded chipsets in PCs will happen later this year. “In 2009, we expect the game to change again, with WiMAX chipsets embedded in products of all shapes and sizes,” said Wolff. “Today that [model] is available only in a wired environment. We think this mitigates any perceived risk about our business, because this is a game-changing business model.”

Consider: In the Portland, Ore., trial the network is delivering 6mbps downlink and 2 to 3mbps up, while whizzing along at 60mph on the freeway.

Sprint Relieved

For its part, Sprint still benefits as the majority stakeholder, with decreased risk. It won’t be involved in the day-to-day operations at Clearwire, said Hesse, but it will have strategic input on the portfolio and the go-to-market strategy. And, it will become an MVNO for the 4G services, to bundle those in with its existing services.

“This way we can focus time and resources on core operations,” said Hesse. Meanwhile, Sprint has new 3G resellers in Clearwire and the cablecos that are strategic investors in Clearwire. And, Clearwire is a new customer for infrastructure and other core services as noted earlier.

There have been months of speculation as to how the financially struggling Sprint could press ahead, or not, with its plans to build out the nationwide WiMAX network (price tag: $5 billion) considering massive profit losses and criticism from investors that it has lost focus on its core businesses.

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But part of the problem was the fact that the horse had left the barn already: The company had spent several years and much capital gathering its considerable licensed 2.5GHz spectrum holdings. It also has cut deals with everyone from device manufacturers to third-party application providers to make good on the vision that West has laid out since the beginning and that Wolff has touted now: Consumer electronics companies and handset manufacturers alike are planning on marketing mobile Internet devices under their own brands rather than becoming locked to a carrier.

According to ABI, that ecosystem eventually will contain hundreds of vendors, chipmakers, display and device manufacturers, application developers and service providers. Add in the fact that manufacturers like Motorola Inc., Nokia Siemens Networks, Samsung and Nortel already have tied much product development to Xohm for devices and network builds, and unloading the business unit became a dilemma. But the new Clearwire simply will take over those existing relationships and deals, and all proceeds according to plan.

“This was a complex puzzle to solve,” said Hesse. “We wanted to maximize the value of the enormous position we have in 2.5GHz, leverage the time-to-market advantage over competitors and other technologies, ensure a national footprint, take advantage of the natural synergies between 4G and 3G, make good on promises to our partners for applications and distribution, and find the financial flexibility to grow the WiMAX business while focusing on our core CDMA and iDEN opportunities.”

The spinoff further gives Sprint the flexibility to go in different directions as warranted. Hesse said that Sprint is not precluding “other options” as to what it may consider to deliver 4G technology to customers — meaning it might be hedging its bets and leaving the door open to building out LTE in the future.

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