TD-LTE devices, licensing issues and H Block integration weigh on Sprint's purchase of Clearwire

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Sprint Nextel's (NYSE:S) $2.2 billion deal to buy Clearwire (NASDAQ:CLWR) now has the stamp of approval from Clearwire's board, but a range of issues and obstacles continue to block Sprint's long-term wireless vision.

First, Sprint's proposed purchase of Clearwire is likely to face resistance from Verizon Wireless (NYSE:VZ) and AT&T Mobility (NYSE:T). Analysts I've spoken with said that while the larger carriers would likely not try to block such a deal, they would use it to press their case that the FCC should not differentiate between spectrum above and below 1 GHz.

If Sprint's purchase of Clearwire is approved, Sprint will get access to Clearwire's vast reserves of 2.5 GHz spectrum: 160 MHz of spectrum on average in the top 100 markets. Sprint will likely discontinue the Clearwire brand, take on the company's wholesale customers as its own and gradually move them away from mobile WiMAX and onto LTE.

However, Clearwire's spectrum is not entirely as free and clear as it seems. As Tolaga Research analyst Phil Marshall explained to me, a portion of Clearwire's spectrum is associated with Educational Broadcasting Services (EBS) licensing terms. "It implies that some of the spectrum is less than ideal in terms of longevity," Marshall said.

Alongside the licensing issues, Sprint will also have to deal with how best to deploy TD-LTE network technology on Clearwire's spectrum. Sprint executives indicated the carrier still intends to offload its FDD-LTE traffic onto a TD-LTE network on Clearwire's spectrum. Several analysts told me that, with Softbank's financial backing, Sprint could use LTE Advanced-enabled carrier aggregation to assemble 40 MHz channels capable of producing speeds four to five times what Verizon and AT&T currently offer and continue unlimited data offerings. Softbank CEO Masayoshi Son has said he wants to boost data speeds in the U.S. market and shake up competition for Verizon and AT&T

That sounds great on paper, but in practice it's more complicated. As independent wireless analyst William Ho noted, such a plan would likely need to wait until 2014 to get off the ground. Clearwire's current plan to deploy 2,000 TD-LTE base stations in 2013 is most likely set, and vendors would need time to ramp up production of equipment for any expansion of Clearwire's deployment.

"If Sprint wants to go beyond [Clearwire's initial TD-LTE markets] they are going to have to look at spending money to build out a national footprint," Ho said, adding that it would be likely be a costly endeavor. Sprint CFO Joe Euteneuer said that Clearwire's TD-LTE build for next year will add an "incremental" amount to Sprint's overall capital expenditure budget for 2013, but he did not provide long-term details. Sprint CEO Dan Hesse said Sprint will likely not rapidly expand Clearwire's network deployment until 2014.

During the conference call, Hesse said that when the two companies combine, the number of cell sites they own will be somewhere below the 53,000 sites they have between them, but that it should not be assumed that all of Clearwire's 15,000 sites will be decommissioned. On the contrary, Hesse said that the companies are going to "figure out what the optimal number of sites is, and what the optimal design is." 

Hesse also said that the main factor limiting how quickly Clearwire's TD-LTE network will be ramped up is device availability. Marshall said support for both FDD-LTE and TD-LTE could put additional strain on device battery life. Ho noted China Mobile continues to support the TD-LTE ecosystem, but it's unclear exactly how much effort Sprint will put into building out its own TD-LTE network.

Further complicating matters is that Sprint plans to bid next year to buy the 1900 MHz PCS H Block, which it would pair with its G Block to build a nationwide 2x10 MHz FDD-LTE network. TMF Associates analyst Tim Farrar thinks the price tag for that will come to at least $1 billion.  

The lure of Clearwire's spectrum was clearly too tempting though. It will give Sprint a massive infusion of network capacity and the ability to offer a differentiated LTE service for years to come. Hesse said that the spectrum will mean Sprint will have three frequencies for the future to deploy LTE: 800 MHz iDEN spectrum (which is being refarmed), 1900 MHz and 2.5 GHz.

"They might be in a position to leverage all of that," Medley Global Advisors analyst Jeffrey Silva said. "You have to caveat it with saying they would have to be very aggressive. It's still a very, very difficult market to make large steps in."

Sprint buying Clearwire is a big step in its long-term plans. But in the end, it is only one very complicated step. --Phil