Why Clearwire needs Sprint now more than ever

The situation at the 4G wireless service provider just keeps getting worse, so here's what it needs to do, says Roger Entner.

Editors' note: This is a guest column. See Roger Entner's bio below.

One thing is clear about Clearwire: no matter what happens, it needs Sprint more than ever.

Just look at 2011. The 4G WiMax service provider's best news was the increase in subscribers, from 4.4 million to 10.4 million . Impressive as that was, it came solely on the back of Sprint.

With growth like that, and lingering fears about its survival, you'd think Clearwire would play nice. But Clearwire played a high-risk game of chicken with Sprint during negotiations to extend its resale agreement, and now it's in a bigger mess than ever.

This ill-advised negotiations tactic pushed Clearwire and Sprint to the brink. As both companies insisted the other needed them more, the deal wasn't closed until the very day Clearwire could have gone into default in December .

As if that wasn't enough excitement, the next day, half of its strategic investors -- Comcast , Time Warner Cable, and Bright House -- decided to stop selling Clearwire services and provide Verizon services instead. Not exactly a vote of confidence.

Could things get worse? Of course. Just a few months later, Google, another strategic investor threw in the towel. Google sold its $500 million initial investment for $66.5 million to Credit Suisse, Bloomberg reported.

How did Clearwire get into this mess
First, let's look at how it got here. In early 2011, things looked pretty good for Clearwire. Sprint's 4G WiMax devices were adding more than a million customers a quarter -- a well-needed boost for both companies. Extending the WiMax wholesale agreement between the two companies was a priority. Clearwire knew that its WiMax network gave Sprint an advantage so Clearwire thought it had Sprint over a barrel.

So it pushed for a nonsensical premium from Sprint rather than the more appropriate market rate or slight discount. The negotiations continued on and on for months. There was no progress, with two important deadlines looming: Sprint's Network Vision investor conference on October 7 and a large Clearwire interest payment on December 1.

October 7 came and Sprint had to announce that it hadn't renewed the contract with Clearwire. In a fit of hubris, Clearwire thought Sprint would be forced to agree to its terms to save its 4G strategy (and regain Wall Street credibility). Although Sprint's share price did drop, Clearwire's all but collapsed because Sprint presented a 4G strategy that didn't critically rely on Clearwire beyond 2014.

In the next two months, as a possible debt payment default by Clearwire approached, Clearwire realized it needed to make a deal. Sprint was its only option. So they inked the new agreement, which enabled Clearwire to make a huge debt payment. The result is pretty good for both companies. Sprint will pay Clearwire a fixed $926 million for unlimited WiMax access for its customers. (In the old agreement, it had to pay by the megabyte.)

Sprint also will pay Clearwire for bandwidth to its TDD-LTE network -- a variant of the 4G LTE network used by Verizon Wireless and AT&T -- if Clearwire gets its network up in time. With this new agreement in place, Clearwire avoided bankruptcy and acquired additional funding. With a 49 percent voting share (54 percent ownership stake), bankruptcy would have been inconvenient and might have presented some PR challenges for Sprint, but not been lethal for Sprint.

Clearwire's last remaining strategic investor, Intel Capital , seems to have forgotten it still owns a part of Clearwire. It neither bailed nor participated in the refunding of Clearwire. Intel's initial intent was always obvious: create a showcase for a successful WiMax operator and make WiMax a global standard. After all, WiMax is essentially an Intel invention. Now that Clearwire is moving to using TDD-LTE, the WiMax play in the U.S. appears to have withered on the vine, and with that it is only a matter of time until Intel will sell its strategic stake in the company.

Is there any way for Clearwire to get out of this bind?
So, after a year like that, how can Clearwire get on track? Clearwire has made an important first step by being able to win Leap Wireless' Cricket as an additional client. The remainder won't be easy, because Clearwire has to add TDD-LTE to its current footprint rapidly. This will make it worthwhile for Sprint, Leap Wireless, and other operators to get on board.

Clearwire has even been able to persuade Wall Street and Sprint to invest billions more in it. It will also need to get the handset manufacturers on its side. Sprint has committed to help Clearwire develop TDD-LTE devices and Clearwire has just agreed with China Mobile, which uses the same technology, to work together on devices.

For operators and manufacturers, it's all about economics. And it will only make sense for them to include Clearwire-compatible electronics in their devices if the network is widely available. The end of Sprint putting new customers on Clearwire's WiMax network is in sight. With the iPhone 4S at Sprint, it added 1 million customers in the fourth quarter 2011 , half the number added the previous quarter.

Even if Clearwire is doing everything right, there is the regulatory risk nobody is talking about: the FCC is developing a track record of being utterly unpredictable. Consider what happened with LightSquared . In roughly a year's time, the company went from being the FCC's choice to create a fifth national wireless provider to being the company that got its regulatory approvals put on hold by the FCC.

And let's not forget about Dish . The FCC has pulled the rug out from under Charlie Ergen's Dish by deciding, after months of comments and negotiations, to wait until after the November presidential election before it lets Dish know if the company can use its MSS spectrum to provide terrestrial wireless broadband services. At a minimum, the FCC is proving it is unpredictable.

How is this relevant to Clearwire? In the FCC's wireless competition reports , the agency appears to view only half of Clearwire's spectrum as suitable for wireless broadband.

Why? There's no clear explanation. If the FCC truly believes only some of Clearwire's spectrum is suitable for broadband, will the FCC try to reclaim it or bar Clearwire from using it to support wireless broadband? No one knows except the FCC, and that could present a very real risk to Clearwire.

With all of this, will more investors come forward to fund the remainder of Clearwire's network build out?

 

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