Sprint board changes open door to partnerships
When three Sprint executives resigned from Clearwire’s board, they left it short of directors, direction, and cash, but not potential partners. We consider the opportunities and risks for Clearwire, Sprint, and T-Mobile as they consider their next steps.
Sprint’s move to avoid anti-trust issues invites a potential three-way
Dan Hesse, Keith Cowan, and Steven Elfman, all officers of Sprint Nextel, departed the Clearwire board of directors last week. Ostensibly acting out of an “abundance of caution” to avoid unspecified anti-trust problems, their move might represent a step toward a possible investment in Clearwire by Sprint’s competitor T-Mobile, a move that has been widely rumored recently.
Clearwire’s future financial stability and market progress depend on it getting an influx of cash. Its cable TV investors have demurred, leaving Sprint holding the bag.
Sprint faces its own resource demands and struggles to maintain its own market relevance. As a result, it may ultimately find its ability to help somewhat limited. Additionally, some senior managers at Sprint seem to have been frustrated by its inability to dictate the timing and priorities for Clearwire’s rollout of 4G in the US.
T-Mobile, which has not announced a strategy for 4G and is currently relying on HSPA+ as a medium-term stopgap, could benefit from an investment in Clearwire and the use of its network. However, that would set up a conflict of interest among the Sprint directors at Clearwire if they still held a majority of seats. Sprint’s reduced representation on the board means that any objection to T-Mobile on Sprint’s part will no longer stand in the way of a deal.
Joining forces at Clearwire would also give the third and fourth largest mobile carriers in the US a chance to work together. That experience might help them decide if they should move forward with a much-rumored merger.
A deal with Clearwire may not be T-Mobile’s best move
Even though Sprint’s reduced presence on Clearwire’s board enables a T-Mobile deal, that might not be in its best interests. Clearwire (and by extension Sprint) has led “4G” deployment in the US with its Wimax rollout, but the company’s technology roadmap remains unclear. Meanwhile, T-Mobile clearly favors LTE as a 4G technology in its global operations and it should carefully consider taking a different path in the US.
On one hand, Clearwire is already testing LTE and has left the door open to a future technology migration. That uncertainty should give pause to T-Mobile’s management until more clarity emerges. It has a little time for consideration while its HSPA+ rollout allows it to compete in the short term with early 4G offerings. Of course, a T-Mobile investment might accelerate the shift from Wimax to LTE at Clearwire, which could increase the conflict of interest for Sprint, which has already rolled out WiMAX-based devices.
On the other hand, T-Mobile might choose another partner for LTE, including well-funded startup Lightsquared, which will adopt a wholesale-only strategy as it builds its LTE network. A network-sharing deal might accelerate its current rollout plans, help distribute the cost and risk of investment, and offer T-Mobile a stake in the US wholesale mobile market for the first time. However, Lightsquared’s prospects are also vague and T-Mobile might be reluctant to gamble on its eventual success.
The clock is ticking for Clearwire
Time is not on Clearwire’s side at this point. MetroPCS recently became the first US operator to launch LTE services, albeit on a fairly small scale. At CTIA next week, Verizon Wireless will flesh out its LTE rollout plans, with a launch likely to come in the next few months. Additionally, Clearwire’s funding sources are starting to dry up, pressuring it to ramp up growth that can fund continued expansion.
We question Clearwire’s future potential as an independent company. Sprint effectively outsourced the capex required to build its 4G network when it spun its WiMAX investments into Clearwire, which improved its own reported financials. However, Sprint’s increasing need to control the pace and timing of 4G rollouts, associated technology choices, and the imperative to capture any profits that eventually accrue will increase the pressure to acquire Clearwire in its entirety.