Sprint Bets the House on Clearwire

If the U.S. wireless communications market were a marathon, there would be two clear frontrunners: AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) . Sprint Nextel (NYSE: S  ) and T-Mobile would be about three miles back, trailing the pack. Yet Sprint continues to spend money as if it could still make a break and win the race.

I have a hard time finding where their confidence stems from. In the third quarter, Sprint lost another 801,000 post-paid subscribers (the most lucrative variety of customer in the wireless space), continuing a long running and disturbing trend. Hemorrhaging subscribers is not a good way to conduct a telecom business, especially when both of the companies you're trying to catch added subscribers in the same quarter you posted a loss. See the figures below:

Wireless Carrier

Total Subscribers as of 3Q 2009

Percent Increase from 3Q 2008

Verizon

89 Million

25.7%

AT&T

81.6 Million

8.9%

Sprint

48.3 Million

(4.6%)

T-Mobile

33.4 Million

4%

Source: Company filings. Verizon growth includes Alltel Wireless acquisition.

OK, so maybe Sprint's really six or seven miles back. Playing catch-up might be an easier proposition if Sprint had some significant advantage it could leverage, such as a strong handset lineup or a superior network. AT&T has demonstrated the subscriber-netting allure of a hot product with Apple's (Nasdaq: AAPL  ) iPhone. In fact, 64% of all new AT&T subscribers this past quarter came from iPhone activations. Verizon has made its superior wireless coverage well-known, and has backed it up with a broad range of exclusive phones from manufacturers such as LG, Research In Motion, and Samsung.

Enter Clearwire
Clearwire 
(Nasdaq: CLWR  ) is a wireless Internet provider whose main source of revenue has come from its "pre-WiMAX" network. The company has been aggressively building a true WiMAX network in urban areas that offers average download speeds ranging from three to six mbps. That project, like all next generation broadband networks, is enormously expensive to build. The cost is reflected in the company's financial statements. This past quarter, Clearwire took on an additional $1.56 billion in financing, adding to an already hefty debt load. Clearwire will continue to face large capital requirements moving forward as it attempts to build a nationwide 4G network.

One of the keys to network adoption will be delivering the advertised speed consistently across the coverage area. Recently, a WiMAX forum (of which Clearwire took part) successfully demonstrated roaming in Taiwan, a big step forward in proving WiMAX viability as a mobile 4G solution. WiMAX has intriguing potential, as users with increasingly powerful mobile devices could simply connect to the broadband network for all their data needs, such as voice, text messaging, and mobile email. Traditional revenue generation for Tier-1 providers such as AT&T and Verizon comes from text messaging and voice users on 2G networks. A successful WiMAX network that offers users the same or increased functionality for a simple data fee could leave the old model completely out of the loop.

Should AT&T and Verizon be sweating?
In 2008, Sprint acquired a 51% stake in Clearwire. In addition, Sprint combined its existing 4G WiMAX infrastructure with Clearwire, accelerating the network build-out. The partnership also allows Clearwire to use Sprint's 3G network for additional coverage in areas where WiMAX has not yet penetrated.

Sprint has not so quietly been funneling money into Clearwire, banking on WiMAX as their 4G solution moving forward. They are joined by an intriguing consortium of financial backers, including Google (Nasdaq: GOOG  ) and Intel (Nasdaq: INTC  ) . Both of those companies have a vested interested in seeing U.S. cities blanketed in wireless Internet, so be careful not to read their financing as a vetting of Clearwire as a business.

Clearwire added 44,000 net new subscribers in the third quarter, a paltry figure if it hopes to significantly increase revenue generation anytime soon. AT&T and Verizon have been quickly moving to build out their own 4G networks, based on the "long-term evolution" (LTE) technology that aims to dramatically increase the speeds of their existing 3G networks.

Sprint is hoping that it can beat everyone to the punch with its WiMAX initiative. While it has a lead now, Clearwire claims its WiMax network will cover 30 million users by the end of this year and 120 million by the end of 2010, that lead may be shrinking. Verizon recently announced it plans a nationwide 4G rollout next year that could cover 100 million people and effectively neutralize Sprint and Clearwire's aggressive first moves in the 4G market.

Sprint's officially on the clock. Unless Clearwire can increase the rate of subscriber adoption while building out a costly network, its all-in bet on WiMax might be too little, too late.

Fool contributor Hunter Pavela owns no companies listed above. Google is a Motley Fool Rule Breakers selection. Apple is a Motley Fool Stock Advisor pick. Intel and Sprint Nextel are Motley Fool Inside Value recommendations. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy is operates at 5G capacity.


Read/Post Comments (17) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 19, 2009, at 1:50 PM, mikecart1 wrote:

    Sprint will be the champ at the end of the war. Trust me.

  • Report this Comment On November 19, 2009, at 2:41 PM, LBwireless wrote:

    Can you say iPhone? Neither AT&T nor Verizon have the spectrum at present to compete with CLWR, even if LTE were ready, which it is not. AT&T has demonstrated that without getting out of 3G mode! Just the spectrum holdings of CLWR are worth many billions more on breakup than share market value reflects. Many investors have not yet fathomed that spectrum is a huge value driver, and far trumps any "traditional" evaluation of CLWR by income! That makes CLWR hugely underpriced.

  • Report this Comment On November 19, 2009, at 4:09 PM, SFighterpilot wrote:

    I think it is important to consider that Sprint is now concentrating on subscribers which can and more likely will pay their bills and not so much on the "What's Up" folks.

  • Report this Comment On November 19, 2009, at 6:43 PM, Networker50 wrote:

    Sprint's network is on par with or better then Verizon. ATT's network is sub par and only has the iPhone going for it. 4G is the future of wireless and Sprint is the first in that space. LTE is not ready as another poster stated. Sprint finally has a good lineup of phones and appears to be gaining some momentum going into the fourth quarter. It is doubtful Verizon will be on target for the LTE rollout just as it was not on target for 3G rollout. Once Sprint finally puts to rest the customer service issue I see no reason why it would not get back on the growth track.

  • Report this Comment On November 19, 2009, at 11:32 PM, Rushster wrote:

    @mikecart1-put down the crack pipe buddy!

    @LBwireless-Verizon has more spectrum than any other carrier by far. They have both bands of A & B in 850mhz nationwide (after the Alltel acquisition), 1900mhz nationwide, and now the majority of 700mhz nationwide. The 2.5Ghz spectrum that Clearwire owns has no where near the penetration needed to cover a national network.

    @SFighterpilot-Sprint is indeed NOT concentrating on "high value" customers. Their focus is on the pre-paid market which makes no where near as much as the more valuable post-paid customers. How about explaining why they haven't been net+ in customer adds in over 2yrs????

    @Networker50-Name ONE reputable publication that has Sprint anywhere near the top in ANY category, least of all the best Network?

    You all need to go back to your Sprextel sales store & sell some damn phones, Sprint fanboys!!!!

  • Report this Comment On November 19, 2009, at 11:52 PM, Momentum21 wrote:

    @Rush - this is not a discussion about who is the best now...Its investment value baby...where are things going and who has the most to lose or gain?

    Sprint just needs to avoid the freight train of their own debt and maybe they are too valuable to get tossed under their disappointing past.

    Sprint + T-Mobile = New Game perhaps?

    Right place at the Right Time with 4G?

    If it was obvious they wouldn't be back and forth at 3.85...but that's what makes it fun.

    From my view Sprint has the most to gain in this battle.

  • Report this Comment On November 20, 2009, at 8:45 AM, steveballmer wrote:

    i USE sPRINT! ATT AND THAT WHOLE IpHONe THING IS evil!

    http://fakesteveballmer.blogspot.com

  • Report this Comment On November 20, 2009, at 8:45 AM, steveballmer wrote:

    i USE sPRINT! ATT AND THAT WHOLE IpHONe THING IS evil!

    http://fakesteveballmer.blogspot.com

  • Report this Comment On November 20, 2009, at 11:05 AM, THEcoletrain wrote:

    Sorry guys, while rushter is a little animated in his remarks he is largely correct. I am also a little surprised to see no one has mentioned contracts yet. If Sprint, can in fact, put up a decent 4G network even an entire year before before Verizon and AT&T's they still have to deal with the fact that Verizon and At&T's clients will not run to Sprint for the simple fact of their existing contracts, not to mention the lineup of phones and customer service they offer.

  • Report this Comment On November 20, 2009, at 11:45 AM, LBwireless wrote:

    Rushter - You misunderstand what Verizon has for spectrum. They have a lot of fully utilized spectrum plus some 700 MHz. They can't just overnight ditch their galaxy of 2G & 3G users to accommodate 4G. Unfortunately, in the urban 4G game, 700 MHz is much inferior because cells can nor be packed as densely, and penetration plays havoc with fementocell deployment. Range is better, but that is only an advantage for thin data circuits as in rural areas. So 2600 MHz is the real beachfront! Not so if your business case is for rural 4G, but there ain't no real shekels there.

  • Report this Comment On November 20, 2009, at 1:51 PM, rmma wrote:

    A couple of points worth mentioning about Wimax are that it's an open standard and was designed from the ground up around an IP core. I subscribed about a year ago just to check it out while they were testing their network in Chicago. Now that Clear has gone live, speeds at home are consistently faster than my AT&T DSL. Surprisingly, my mobile connection is even faster (I have a strong signal at home) and roaming seems fine, at least based on my observation that streaming media downloads without a hiccup while driving around Chicago with a laptop. Whether or not Wimax is better technology than LTE, it works and I'm hoping Wimax takes hold if for no other reason than the open standard aspect.

  • Report this Comment On November 20, 2009, at 2:32 PM, Rushster wrote:

    @LBwireless-I still beg to differ. 700mhz not only has a range advantage, it also has a penetration advantage for in-building coverage, which has been a bane of existence for the PCS (1900mhz) as well as 2.5Ghz freq's. With 700mhz you don't need in-building/femtocell sites since coverage isn't an issue. The amount of 700mhz they purchased is more than enought to cover the nation. Once the migration of customers takes place, they'll be able to use the existing CMDA spectrum (850mhz, A & B bands in many markets) as well as PCS (1900mhz) spectrum as well for LTE.

    @rmma-LTE is an open standard as well...as a matter of fact I believe the 4G standard (not quite officially written yet) will mandate all technologies be open standard. Also, current EVDO Rev. A as well as UMTS is consistently faster than DSL so Clear really has no advantage there. IF (and that's a big IF) they come out with some type of REAL mobile device (I'm referring to a smartphone type device with voice, not just a laptop enabled WiMax card) then maybe we can revisit how much competition they'll be to the established carriers.

  • Report this Comment On November 20, 2009, at 2:34 PM, mikecart1 wrote:

    @ Rushster - Sorry bro but your statements hold 0 credibility. You have no CAPS profile and it is obvious you are against Sprint. Didn't hear the pin drop? Your walkie talkie didn't work? Didn't like the half time show?

    For some reason the profits I have in Sprint this year must not mean anything. Sprint is going places and you're not.

  • Report this Comment On November 20, 2009, at 3:32 PM, buynholdisdead wrote:

    Sprint is hopeless. This is not the first time they have spent alot of money and had no return. Can anybody say Ion. They spent over a billion, thats with a b and then finally found out that it would not work. Even though they got rid of that Ceo they continue to make poor management decisions. You can talk to their techs, not their salespeople, (if you can find one now because of the 4000 in layoffs they have had) and see just how they treat their customers. They need to change their whole corporate mentality. When they split off from "Embarq" they lost their cash cow where they could siphon off money to help build out their network and now they are on their own.

    I was looking at their stock when it was down around 2.00 and thinking that it would be a great price for a cellular stock but I couldnt pull the trigger because of their management. Instead I bought Verizon. Yea I could have made more money in the short term with S but I am in it for the long run. Vz has better customer service, better coverage, and I am betting they will continue with this lead. When it comes to management I give Vz an "A" and S a "F". Never put your long term money on poor management.

  • Report this Comment On November 20, 2009, at 3:42 PM, mikecart1 wrote:

    Yeah have fun with VZ's lousy return. The only thing you will be getting from VZ is their 6% dividend. Have fun. As a VZ customer I can vouch that they stink. They keep raising rates every month. Now to get internet on the phone you gotta pay a $30/month data fee. It used to be $5/month.

    And what is everyone here talking long term for like it's the only way to invest. What you all too lazy to stay on top of your investments? You all like to dump thousands and then sit on your butt and then come back in 10 years and be all voila I'm rich? Get serious. Proactive is where it's at. Passive investors get passive returns. You get out what you put in.

    And BTW, $1bil investment for Sprint is nothing. No need to remind us "with a b".

    Yeah I'm talkin' to you up there ^!

  • Report this Comment On November 20, 2009, at 5:21 PM, buynholdisdead wrote:

    Sprint is acting like they are a growth stock. No dividend at all. While they are loosing subscribers. I truly think they are a value trap. Their long term goal is riding on another company.

    Mikecart1 I understand you love Sprint but you havent posted one serious reason why. Give me some good reasons to own Sprint, instead of the empty calories you keep feeding me. I come on this board to learn and to make money, I could care less about who the company is. I am not trying to make friends with them I am trying to make money. So if you have something to say about Sprint that is productive and will shed some light on Sprint that is good besides trying to tell me a "1bil investestment for Sprint is nothing" then lets hear it. I know they think 1 billion lost is nothing but companies are here to make money, not lose it.

  • Report this Comment On November 21, 2009, at 3:41 PM, Rushster wrote:

    @mikecart1-here's just a few items to peruse that are all easily verified if you care to do some research (for someone that supposedly likes to make money, I would think you'd do some research on backgrounds of porous companies you invest in):

    -negative customer growth in over 2yrs

    -move towards pre-paid customers (much less ARPU as opposed to post-paid)

    -outsourced Network to Ericsson

    -numerous layoffs just within last year

    -rankings in every category at the bottom

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1048044, ~/Articles/ArticleHandler.aspx, 8/21/2014 6:51:53 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement