Sprint Nextel and Clearwire are combining network assets to build a new nationwide 4G wireless network that the companies say has huge benefits for each of them.
Until now, Sprint and Clearwire have been on separate paths to build nationwide broadband wireless networks using WiMax, an IP technology that can blanket entire cities and provides more than five times the speed of 3G wireless networks. Now they are joining forces and creating a new company that will have access to more wireless spectrum than any other company in the entire country.
Cable operators Comcast, Time Warner Cable, and Bright House Networks, as well as tech giants Intel and Google have invested a combined $3.2 billion in the new company, which is valued at $14.5 billion.
Dan Hesse, Sprint's CEO and Ben Wolff, Clearwire's CEO and the CEO of the new joint venture, hosted a conference call Wednesday morning to provide details of the transaction and explain why combining the companies is a good idea.
According to the executives, the companies believe the deal is a win-win for them both. And in many ways, that appears to be the case. Sprint, which has steadily been losing customers after its failed 2005 merger with Nextel, is in no position to spend the capital it would take to build a new 4G network. And Clearwire, which hasn't been profitable since it went public a year ago, doesn't have the spectrum assets or resources to build a competitive 4G network on its own that will rival networks being planned by bigger wireless operators, such as AT&T and Verizon Wireless.
Together with the help of the cable companies, Google, and Intel--Sprint and Clearwire can build the network and still get their new service up and running at least two years before rivals AT&T and Verizon Wireless are able to build similar networks using a technology called LTE.
"As we looked forward it became evident that our assets along with our business priorities lined up with Clearwire's," Dan Hesse, Sprint's CEO said on the call.
As part of the deal, Sprint plans to lease capacity on the new 4G network and offer the service under its own brand as an MVNO or a mobile virtual network operator. This will allow it to sell both its 3G wireless service as well as a faster 4G service.
But in exchange for getting access to a 4G network on the cheap, Sprint will have to give up its coveted 2.5G wireless spectrum asset for a 51 percent stake in the new company. Still, Hesse said it is worth it.
"Because we are an early investor, the economics are favorable," he said. "And it brings us 4G without having to spend the (capital expenditure) we'd have to spend if we built it on our own. We looked at it holistically and decided it makes sense to shareholders."
Also as part of the deal, Clearwire will be able to resell Sprint's 3G service along with the new 4G service. And the cable companies, Comcast, Time Warner, and Bright House, will be able to resell Sprint's 3G service as well as Clearwire's 4G service under their own brands as an MVNO.
Comcast and Time Warner Cable had already developed a joint venture with Sprint to develop a wireless service they could bundle with their existing broadband, home phone, and TV offerings. But the so-called Pivot venture fell apart when it became evident that it was too difficult to integrate services. The cable operators also realized that simply reselling wireless service added little value to their strategy.
"The economics and structure of this deal are completely different than the Pivot joint venture," Tom Nagel, executive vice president of Comcast's wireless division said in an interview. "We will be the provider of the new service and own that customer relationship, which means we can integrate the wireless service into our existing service. And we will also be able to integrate the 4G piece of the network into our services."
Sprint's Hesse and Clearwire's Wolff said that the deal also offered operational efficiencies for each company. For example, Clearwire will lease space on Sprint's existing cell towers to build the network below market rates. It will also be able to use Sprint's long distance fiber network to transport the 4G wireless traffic throughout the country. In exchange for that, Sprint will have access to Clearwire's wireless backhaul network. This high-speed wireless network can be used to more efficiently aggregate Sprint's existing cellular traffic onto its own long distance fiber network for transport around the country.
As for the build out, the companies are each continuing as previously planned. Eventually, the companies expect the network to include some 120 million to 140 million points of presence or POPs. Wolff said that Clearwire has about 30 million POPs in development right now. And Sprint expects to have 15 million POPs built by the end of the year.
Wolff added that he expects the network construction to accelerate in 2009 and 2010, with much of the build-out happening in 2010.
"This is one of the largest and fastest network build out plans ever done," Wolff said. "It is a massive undertaking. Our current capital will get us to a 110 million POPs by mid-2010."
He said the company could either slow or accelerate the construction plan depending on whether it raises more capital.
Initially, the company will focus its network build on thoroughly covering the top 100 markets, he added. But Wolff said Sprint's 3G footprint, which will augment the 4G network, will have a wider footprint for some time.
As for the cost of the new service, Wolff wouldn't talk specifics, but he said the efficiencies already inherent in the WiMax technology would provide four times the performance at one time the cost, which means that on a per-bit basis, the service will cost less to deliver than 3G. What that means in terms of pricing for consumers is still unknown. Today's 3G PC-card wireless broadband services for laptops are priced around $60 a month and are believed to be too high for most consumers.
"We are focused on the value proposition of WiMax," he said. "And we have the ability to compress pricing if we need to in order to attract customers. We will have to see how it goes. But the economics are attractive."