Sprint to buy out Clearwire: Why it matters (FAQ)

CNET gives you the skinny on what this deal means for consumers and the broader wireless industry.

Sprint CEO Dan Hesse. Lynn La/CNET

Sprint Nextel took another step toward securing its future by coming to an agreement with Clearwire to buy all of the remaining shares it doesn't already own.

The deal gives Sprint full control of Clearwire's impressive swath of spectrum, as well as its existing 4G WiMax network, which the company was planning to upgrade to 4G LTE next year. It also ends years of drama between the two companies, with Clearwire getting absorbed into Sprint.

So why does this matter? This deal has ramifications for consumers of both Sprint and Clearwire, and could have an impact on the broader wireless industry. The two will ultimately be controlled by SoftBank when it takes over next year. CNET answers all of your questions here.

So what's going on?
After months of talk and speculation, Sprint finally pulled the trigger and struck a deal to buy the 49 percent of Clearwire stock it doesn't already own, bringing it under its full control. Under the deal, Sprint will pay $2.2 billion, or $2.97 a share, to scoop up the rest of Clearwire.

While Sprint argues that's a 128 percent premium over the price of Clearwire prior to when word got out that it was in talks for a deal with the company, it is still below the $3.37 a share that Clearwire was trading at on Friday.

Sprint CEO Dan Hesse argued that the price represented a fair value for Clearwire. In making his case that the company was worth more than the sum of its parts, he compared it to a pair of shoes. While the pair may be worth $100, one shoe isn't worth $50.

OK, but what's a Clearwire again?
You can be forgiven if you're not aware of the company. Clearwire provides 4G wireless service through its WiMax network. While it has a limited retail presence called Clear, few people are aware of it. The company primarily serves to sell its wireless service to other companies on a wholesale basis.

Its largest customer by far is Sprint, which has used its network for years to power its 4G phones. Remember the original Evo 4G? That ran on Clearwire's network. Sprint, however, no longer sells WiMax phones, preferring to go with devices that run on its own LTE network. As a result, Clearwire supports existing Sprint customers with older devices and Sprint's prepaid services, Virgin Mobile and Boost Mobile, which still offer WiMax phones.

So why is Sprint buying up Clearwire?
As with most of the recent deals in the industry, this one was largely motivated by spectrum. Clearwire has a valuable swath of spectrum that covers the country, which Sprint can use to augment its own 4G services. While Sprint had a majority stake in Clearwire, the relationship was structured so that the Clearwire board acted independently.

That structure ensured Clearwire's board would act in the best interest of the company and all of its shareholders, and not just Sprint. But it also resulted in some drama in the past.

What kind of drama?
Sprint and Clearwire famously clashed over the price that Sprint had to pay to run on Clearwire's network. Clearwire felt that Sprint was underpaying for the amount of traffic it ran on Clearwire's network, while Sprint believed that it was getting squeezed by a company with little leverage.

The result was stalled talks and Clearwire nearly losing its ability to meet its financial obligations as Sprint balked at paying a higher rate. It publicly manifested itself when Sprint unveiled its own 4G LTE plans and said start-up LightSquared would be its partner in moving to the next-generation network.

Sprint and Clearwire ultimately made up, and Clearwire would play a part in its LTE plans. It didn't hurt that LightSquare imploded under the weight of regulatory scrutiny over potential interference on GPS devices from its network.

OK, but what does this mean for Sprint and Clearwire customers?
For now, not a lot. Sprint will continue to support and use Clearwire's WiMax network for existing customers with older phones, although Hesse said that the equipment would eventually be replaced with LTE radios.

Likewise, Clearwire will continue to support its 1.3 million retail customers.

"They are a very good customer base that understands the value of data and the network we've built," Clearwire CEO Erik Prusch told CNET. "I think they're a good value to Sprint."

Clearwire also has a small number of wholesale customers, including the recently unveiled FreedomPop home broadband service. Prusch wouldn't get into specific plans, but he said the smaller wholesale customers occupy a unique niche in the wireless industry, which bodes well for them.

Ultimately, once Clearwire gets its 4G LTE network up and running, Sprint could see better coverage and less congestion.

So can Sprint and Clearwire just combine their spectrum?
Well, not exactly. Sprint and Clearwire each own spectrum at different frequencies, so they aren't compatible. Furthermore, they each must run on a different flavor of LTE, further complicating matters.

Sprint, for instance, runs on a version of LTE called FD-LTE, which is the same version used by Verizon Wireless and AT&T. Clearwire will use TD-LTE, a slightly different standard used by a few other international carriers.

The incompatibility issue has been long known, and Sprint and Clearwire have already been working on designing devices that include radios for both versions of LTE. Clearwire's version of LTE is also being used by SoftBank. Qualcomm earlier this year said it was building a chip to support both standards.

Prusch said there was an opportunity to build an iPhone that was compatible with its flavor of LTE and spectrum, which would be compatible with SoftBank and China Mobile.

"The iPhone is one device, but it's not the only device," he said.

SoftBank? Why does that name sound familiar?
It's the Japanese wireless carrier that agreed to buy Sprint in October. A deal between Sprint and Clearwire now was important so that SoftBank can roll it all up into one company in a simpler, cleaner deal.

Hesse said it was important to strike the deal with Clearwire now because it wouldn't affect the timing of the approvals SoftBank and Sprint still need to get from regulators.

Ultimately, the trio of SoftBank, Sprint, and Clearwire can work together to drive the creation of smartphones and other mobile devices that are compatible on all networks, which could lead to more unique and innovative products.

How does this affect the industry?
Sprint faced a lot of questions over how it was going to compete against the other national carriers, all of which have taken steps to augment their spectrum position. Verizon scooped up a large collection from the cable companies, while T-Mobile and MetroPCS have opted to merge. AT&T, rebuffed from its T-Mobile takeover, has bought several smaller assets.

To maintain its position as the No. 3 player, Sprint needed a strong portfolio of spectrum, Hesse said. The continued supply of spectrum will allow the carrier to expand and improve its wireless service, which means potentially better coverage for you.

 

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