The deal to merge Sprint Nextel's WiMax business unit with Clearwire to build a nationwide 4G network is finally complete, but the newly formed company could be doomed before it even gets out of the gate.
On Wednesday the companies said they would combine the two entities to form a new company, called Clearwire. Cable companies Comcast, Time Warner, and Bright House Networks, along with technology giants Intel and Google, are contributing a combined $3.2 billion, bringing the total investment in the company to $14.5 billion.
In many ways the new venture is a win-win situation for Sprint and Clearwire, which, if truth be told, had no other option than to team up. Sprint, which has steadily been losing customers after its failed 2005 merger with Nextel, gets to shed an expensive and resource-sucking venture. And Clearwire, which hasn't been profitable since it , gets more spectrum assets and capital to build the network. Wall Street had been getting fed up with each company, so a deal to merge the entities was a no-brainer.
But as someone who has watched big technology mergers form and unwind over the past decade, I'm not convinced that the new Clearwire will actually make it in the end. That said, I think at the very least the new company will spur quicker innovation of broadband wireless technology and force operators like AT&T and Verizon Wireless to deploy their own networks more quickly. In this respect, consumers will likely have Sprint and Clearwire to thank for helping bring true wireless broadband services to a plethora of consumer electronics devices.
But the big question yet to be answered is whether the new Clearwire will be the company delivering that network and whether WiMax, its technology of choice, will be used to do it.
My prediction is that the new Clearwire still has a long road ahead of it and its success is far from guaranteed even with backing from big names like Comcast, Time Warner, Intel, and Google.
The main reason I am such a skeptic is that the new Clearwire appears to have too many cooks in the kitchen. The new Clearwire has a total of seven major partners with five of those partners holding board seats. That alone should give anyone looking at the viability of this company pause. I can't think of any successful venture of this magnitude that has survived with so many major companies involved.
Atish Gude, senior vice president of Sprint's mobile broadband initiative, said this shouldn't be an issue because the new Clearwire will be run as an independent company.
Still, I am not convinced, especially since it took these seven companies at least two months to dot the i's and cross the t's in their final contract to form the company. What's more, Sprint and the cable companies have been down this road before. In 2005, the companies formed a joint venture known as Pivot that would allow cable operators to resell Sprint's wireless service as part of their bundle of services that includes broadband, TV, and home phone service. The companies were also supposedly working to integrate Sprint's wireless service with the cable services to extend the content and services cable offered to a wireless device.
The joint venture eventually fell apart when it became apparent that the integration was too difficult and that customers weren't all that interested in repackaged Sprint phone service.
Lessons from Pivot
But Tom Nagel, senior vice president of wireless initiatives for Comcast, said the companies have applied lessons learned from Pivot to the new deal with Clearwire.
"We learned a lot from Pivot," he said. "I wouldn't trade that experience for anything. And we have structured this partnership in a completely different way."
For one, Comcast will have more control in the new relationship, he said. Instead of simply reselling Sprint's service, Comcast will own the relationship with the customer and will be able to develop services on the 3G network as well as Clearwire's new 4G network that can leverage Comcast's services and content.
But this leads to another potential problem in the partnership. Four of the main partners will essentially be selling services using the same network to some of the same customers. Sprint will offer its 3G wireless service and will be reselling the 4G Clearwire service under its own brand. Clearwire will in turn be selling its own 4G service, but reselling Sprint's 3G service too. And Comcast and Time Warner Cable will both be reselling Sprint's 3G service as well as Clearwire's 4G service.
Sprint's Gude doesn't see these overlaps in service or customer base as a problem.
"We acknowledge there might be some conflicts and overlap in customers," he said. "But we see this as a good thing. It opens access to different distribution channels and innovation."
For example, he said that a customer who wants to watch his favorite cable TV shows on some WiMax-enabled video playing device, could have that bundled into his cable TV package instead of expecting that kind of service from his or her cell phone operator.
But potential partnership conflicts aren't the only thing threatening this new venture. Another major reason the merger could be doomed is the technology that the companies have chosen to use. While there is no question that WiMax can provide wireless broadband service to a large number of consumers, the problem is that Sprint and Clearwire are the only major operators in the world to date that have committed to using it for mobile broadband service.
Most of the other WiMax deployments are Internet service providers providing fixed wireless broadband service. AT&T and Verizon Wireless in the U.S. and a slew of European carriers have already said they plan to use a competing technology called LTE.
And this means those working in the infrastructure, chip, and device ecosystem will be focusing much of their attention on the much larger LTE market. And there is a chance that WiMax innovation could lag and prices could potentially be higher for WiMax deployments.
That said, executives at Nortel Networks, a telecommunications equipment supplier, say the WiMax network is still big enough and the technology is close enough to LTE, that it shouldn't be too much of a problem.
"The LTE and WiMax networks will both be driven by devices other than cell phones," said Scott Wickware, vice president of Carrier Networks for Nortel Networks. "And that means the integration will be at the chip level and the cost structures are not likely to be that different."
Ultimately, the success of the service, if the company even makes it far enough to full network deployment, will be determined by the pricing and perceived value of the service. So far consumers have not wanted to pay a premium for embedded 3G laptop service. They don't want their laptops tied to a specific carrier and the service itself, which averages about $60 per month, is too high.
Ben Wolff, however, CEO of the new Clearwire, believes the company will be able to find a sweet spot in terms of pricing.