Clearwire’s Mexican adventure back on, as LightSquared mulls IPO

(Apr 20 2011) LTE , WiMAX

1. by Caroline Gabriel, Research Director, Rethink Technology Research

   The world has come full circle, and Intel is once again backing a wholesale mobile broadband network that could change the rules of engagement in a slow-to-change telecoms economy. But this time, it is supporting LTE, the technology it once hoped to pip to the post with an alternative under its own direction, WiMAX. The new project is in Mexico, where Clearwire and local operator MVS Comunicaciones are resurrecting a partnership that foundered a year ago amid license problems.

   The two operators will also work with Alestra, AT&T’s Mexican joint venture, and with Intel’s support, plan to create a wholesale network in MVS’s 2.5GHz spectrum using TD-LTE, and pursuing a similar business model to that of Clearwire in the US.

   Alestra would be the first customer and could have an ‘anchor tenant’ position similar to Sprint’s in Clearwire, depending how the shareholdings work out. However, according to Bloomberg, foreign operators are also interested in taking stakes, notably KDDI and SKT, both of which have TDD mobile broadband activities at home.

   MVS says the group will invest an initial $1.2bn in the new network - $400m from each operator - although the plan still needs to be approved by Mexico’s Finance Ministry and telecom regulator Cofetel.

   If it gets the green light, this project will finally end the disputes over MVS’s substantial holdings (190MHz) in 2.5GHz, which it acquired as an MMDS operator providing broadcast services. As in the US, MMDS license conditions were changed to allow two-way mobile data, in a bid to stimulate broadband availability and new services in a market with limited competition to incumbent Telmex. MVS was seen, in the middle of the last decade, as a flagwaver for the new broadband wireless business models, adopting pre-WiMAX technology at an early stage in some urban markets. However, it did not build out sufficiently broadly to satisfy the regulator that it was making good use of the newly valuable spectrum, and Cofetel, under pressure from other operators with their eyes on the frequencies, decided last March not to renew the regional licenses as they expire (at various points between 2011 and 2018) and to consider reclaiming them early for re-auction.

   That appeared to scupper a previously announced deal to create a WiMAX network in partnership with Clearwire, which would also bring roaming agreements with the US operator and with other 2.5GHz holders such as Inukshuk in Canada. However, the new partnership and the higher profile of Intel this time around should save MVS’s license and, as in Russia, cellcos and broadcasters will have the opportunity to offer 4G services within a short timescale via wholesale deals, while they wait to secure their own licenses or build their own networks in future. The system will also allow non-spectrum holders to enter the Mexican market with new offerings.

   Jose Antonio Abad, CEO of the new consortium, said it had switched from WiMAX, which it had planned to use when the Clearwire/MVS partnership was first mooted in 2009, to LTE to get greater economies of scale and roaming opportunities. He said services could start in some markets within six months. Clearwire’s network runs WiMAX though the carrier has also been trialling LTE and mixed-platform systems for the future. The change of technology suggests this is primarily a move by Intel to strengthen Clearwire, in which it is a significant investor, and to influence mobile broadband device strategy in a high growth territory, as it has done with carrier alliances in countries like South Africa. In the past it has engaged in ventures like this to extend WiMAX’ reach, but does not have the same control or strategic interest in LTE – though it will be aiming to get all kinds of devices based on its chips onto the new LTE networks.

   MVS is a provider of television, radio, publishing and broadband services and is the majority partner in Dish Mexico. Its existing 2.5GHz networks in Mexico City, Guadalajara, Monterrey, Toluca and Mexicali offer business, consumer and VoIP services, some direct but many via MVNOs and leasing partners such as Alestra and ISP Ego.

   Also in Mexico, broadcaster Grupo Televisa announced a deal that will see it taking a 50% stake in Iusacell, the number three operator in the country. This would see Televisa aligning with TV rival Azteca - like Iusacell, controlled by businessman Ricardo Salinas Pliego. The combination is a quad play challenge to Carlos Slim’s America Movil/Telmex.

   Clearwire may be changing technology track south of the border, but in the US its transition to TD-LTE remains unconfirmed and gradual. Recently, that has been a factor in the WiMAX venture losing the spotlight to wholesale 4G rival LightSquared, especially when the latter signed its own deal with a flagship Clearwire partner, Best Buy. However, despite the deep uncertainties over Clearwire’s relationship with lead investor Sprint, the older wholesaler is still showing signs of progress. Its own Best Buy service started running last week and Clearwire announced its first traditional wireless MVNO that isn’t Sprint, in the shape of Locus Communications, a prepaid reseller of GSM and CDMA services and calling cards. This firm will launch a prepaid mobile broadband service in Clearwire’s footprint of nearly 120m people. The deal has wider potential benefits for Clearwire as Locus has distribution agreements with 70,000 retailers across the country, many in the 70-odd cities Clearwire covers, so Locus has a powerful ability to market its 4G offering to a broad base.

   Such ups and downs suggest that there is room for two wholesale providers, but neither will have a smooth ride. LightSquared has its own challenges, notably funding questions and the ongoing concerns about potential interference with GPS. The former may be addressed by an early IPO (initial public offering), according to reports from news agency Reuters. These say the firm has been discussing its business plan with analysts and institutional investors.

   The company’s network is under construction and will go live in some markets in the third quarter, supporting a range of MVNOs and other partners. Several have already been announced, including Leap Wireless and Best Buy, and there are rumors that LightSquared could also form part of Sprint’s increasingly complex 4G strategy, as it looks to plan for the potential AT&T/T-Mobile merger.

   LightSquared is not commenting on reports that it has held meetings with potential backers in New York, and is preparing a roadshow on the west coast too. But an IPO plan, though ambitious at such an early stage – and with the AT&T/TMo plans threatening to strengthen the power of the big two telcos – would answer persistent questions over a possible funding gap between aggressive build-out plans and revenue ramp-up.

   LightSquared is conducting trials of its hybrid terrestrial/satellite system in Baltimore, Denver, Las Vegas and Phoenix, with commercial launches planned by the third quarter. It has pledged to cover 100m POPs by the end of 2012, 145m by the end of 2013 and 260m by the end of 2015, and so far this program has been mainly funded by chief backer Harbinger Capital.

   CEO Sanjiv Ahuja said last week that LightSquared was already in talks with over 60 potential partners, including retailers, operators, ISPs and vendors, and he claimed “15 of those are at a stage where we are negotiating contracts with our customers”.

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