Clearwire recently announced the completion of the Sprint Nextel transaction and the formation of the new Clearwire Corporation. In addition, the company received $3.2 billion from Comcast, Intel, Time Warner Cable, Google and Bright House Networks. As expected, Clearwire emphasizes all the positive aspects of the deal, namely that it owns lots of spectrum, it is building an all-IP 'open' network, and it will use fourth generation (4G) mobile Wimax technology (IEEE 802.16e).
I'd love to see a nationwide 4G mobile network, but let's be clear about some of the challenges facing Clearwire.
Network build-out will be long and expensive
It will take years and a lot of cash to build out a nationwide mobile WiMAX network. Remember how long it took for Verizon and Sprint to deploy EV-DO‾ (And it is still not available everywhere.) Will Clearwire have enough capital for such a long-term investment‾ As the company stated on its conference call, 'a good portion' of the $3.2 billion it received will be devoted to network build-out. But $3.2 billion isn't a lot of money in the telecom world. According to the Verizon Q3 2008 Investor Report, Verizon spent $4.7 billion on its wireless network in just the first three quarters of 2008.
In addition, Verizon Wireless and AT&T are generating positive cash flow from wireless operations. According to the AT&T Q3 2008 Investor Report, AT&T generated $2.3 billion in wireless income in the quarter that ended on Sept. 30, 2008. On the other hand, Clearwire lost $166 million in Q3 this year, and Sprint lost $326 million. When will Clearwire generate positive cash flow‾ And how long will investors continue to pump money into the company‾
Device ecosystem will develop slowly
Clearwire needs to develop a broad ecosystem of affordable 'tri-mode' WiMAX devices (devices that support 1xRTT, EV-DO Rev A, and 802.16e). Why‾ When subscribers roam out of a WiMAX coverage area, the mobile device must remain connected using EV-DO service. When EV-DO service isn't available, the device must be able to use 1xRTT service (primarily to provide voice support). Therefore, Clearwire 4G devices must be backwards compatible to support 2G and 3G technology.
These tri-mode devices are useful on the Clearwire network mainly because most of the world uses GSM. From the point of view of a device manufacturer, this is a pretty small market. In contrast, there are more than 200 mobile service providers in more than 100 countries that operate third-generation GSM networks. That is a huge market. So a device manufacturer that designs a third-generation GSM device can sell that device to network operators around the world.
Device manufacturers follow the money. That is why there is a broad 3G device ecosystem of almost 1,000 3G GSM devices from almost 140 vendors. And conversely, that is why a WiMAX device ecosystem will emerge only after Clearwire demonstrates that it has broad coverage, a rapidly growing subscriber base, and the profitability for long-term viability.
Competitors will not stand still
When you listen to WiMAX advocates, you'd think that Clearwire has a three-year 'head start' on incumbent GSM network operators. After all, they say, Long Term Evolution (LTE) will not roll out until 2011. But wait a minute -- last time I checked, these GSM operators had more than 80% of the worldwide mobile cellular market (more than 2.5 billion subscribers), and they will continue to evolve their service in order to compete with WiMAX.
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