Sprint sets out new $5bn network plan, mixed messages about Clearwire

(Dec 15 2010) Mobile Broadband

1. Story by Caroline Gabriel. 

   Sprint has finally announced details of its network modernization and consolidation plan, which was, until recently, expected to be led by Huawei. However, Chinese suppliers were excluded, reportedly under pressure from government authorities, and the key vendors will be Ericsson, Alcatel-Lucent and Samsung. The program will take three to five years and up to $5bn to complete and will see the final demise of the iDEN network Sprint gained as its dubious dowry from the Nextel merger.

   The Sprint Network Vision blueprint will center on flexible base stations that can support multiple technologies and bands, including its current 800 MHz and 1.9 GHz bands, and the 2.5 GHz 4G band, used by its joint venture Clearwire. Sprint will begin rolling out the new hardware in 2011 with each of the three suppliers working in different regions.

   The contract is a big win for Samsung, which has failed to make much impact on the 3G infrastructure market except in its home country, and reportedly will not have a flexible base station fully ready until next year. However, it had promised that its leadership in WiMAX would also put it in a strong position in LTE, and the ability to cross over Sprint’s and Clearwire’s networks will have helped gained the Korean company a position in the program. Ericsson, which manages Sprint’s networks, and ALU, which is an incumbent CDMA supplier, are unsurprising choices. Motorola, which makes the iDEN technology, is an obvious loser, and its networks arm (soon to be sold, minus iDEN, to Nokia Siemens) is reported to be losing share within the Clearwire account to Huawei.

   Sprint said Network Vision was designed to improve data rates and quality; provide better in-building coverage; and allow for flexible migration between technologies and 4G expansion. It will also bring significant energy savings, which will reduce Sprint’s carbon footprint and be one element in estimated savings of $10bn to $11bn over a seven-year period. Other factors in that cost reduction will be the iDEN closedown (35% to 40% of the savings), plus efficiencies in backhaul and capex, and a reduction in the number of cell sites to lease and manage.

   Although iDEN is doomed at last, phase-out will not start until 2013, by which time Sprint will have launched next generation, broadband versions of the key Nextel application, push-to-talk. Sprint will be able to refarm its 800 MHz spectrum to enhance its 1.9 GHz footprint, a key element of the strategy to improve rural coverage and in-building penetration.

   The plan raised unanswered questions about how the Clearwire joint venture, with its plentiful 2.5 GHz spectrum, fits into Network Vision. Sprint CEO Dan Hesse has insisted that Clearwire, and WiMAX, remain the way forward for its 4G strategy, though LTE could be introduced at a future stage - either if Clearwire introduces TD-LTE as well as WiMAX, or if Sprint runs FD-LTE in some of its own frequencies.

   There will presumably be considerable provision for hand-off and integration between Sprint’s new, flexible CDMA network and Clearwire, especially if the carrier ever gets its way and takes full control of the WiMAX venture. Sprint has reportedly pressurized Clearwire to defocus on its own-branded Clear services, which have been more disruptive in their business models than Sprint’s own and could be competitive with Sprint4G. It got its way, to some extent, recently when financial shortfalls forced Clearwire to pull back, at least temporarily, from Clear offerings. Hesse said in a conference that the situation was complicated, and he denied objecting to the JV’s retail approach, or that Sprint had the power to change this. “It’s not necessarily competing. There’s no reason you can’t be in both businesses,” he said. “But I think the real issue is what a company considers its core business.” He claimed he would be in favour of a rumored wholesale deal with T-Mobile USA, despite its being a competitor to Sprint, and added: “We don’t control the board and don’t control the company, so even though our economic ownership of the company is 54%, we don’t have, if you will, voting control over these kinds of issues.”

   However, in an interview with Walt Mossberg at the All Things D event in San Francisco, he admitted that his company’s bet on WiMAX had not given it as big a headstart over LTE as he had hoped. “It was less than we thought because it prodded Verizon to build its 4G network,” Hesse explained.

   The TMo deal has not materialized yet, whatever Sprint’s views, and the firm may still go with wholesale LTE venture LightSquared, which will start rolling out its 4G/satellite network next year. Clearwire did announce plans to raise new funding last week, but it will gain at least $1.1bn by selling debt, a less attractive route than the hoped-for strategic investment deal with a carrier. And it will almost certainly need to find additional sources of financing to keep up with Verizon.

   Clearwire, which recently went live in Los Angeles and other markets, to cross the 100m POPs barrier, has a significant headstart on Verizon Wireless, which turns on its LTE networks in some markets this weekend. However, the deep pockets of the larger operator give it the ability to narrow the gap, making Clearwire’s funding requirements urgent. The current arrangement is less attractive than a TMo deal because, despite potential conflicts with Sprint, this would have brought new revenues and another marketing engine to compete with Verizon’s. However, any source of funding is welcome to the US, whose consumers are benefiting from having a choice of 4G offerings - and from the way that Clearwire’s disruptive activities have spurred the incumbent telcos into action on mobile broadband.

   The new financing will consist of over $1.1bn of new debt offerings, which will come in three tranches - one offer of $175m in first priority senior secured notes due in 2015; $500m of second priority secured notes due in 2017; and $500m of exchangeable notes due in 2040. The figure could be closer to $1.7bn in the end, since Sprint has gained the rights to participate with a $585m infusion of its own. Sprint has not confirmed it will exercise this right, but is likely to want to inject more cash to keep its stake over 50%.

   Jamie Townsend, partner at investment research firm TownHall Research, commented in a note: “Certainly, any funding for Clearwire is better than no funding, since without funding, the company would have been crippled financially. At the same time, this solution appears to be the least attractive of the many that we have considered.  With a maximum of less than $2bn anticipated in this raise, the company remains well short of its longer term funding needs and will likely have to further curtail some of its 2011 build-out plans. Additionally, we believe this approach represents a funding of last resort after the company has been unable to piece together a non-public financing that might have included T-Mobile as a new partner and distributor. With this funding, the company may have done little about investor long term funding concerns, other than to kick the can down the road.”

   Townsend reflected the frustrations of many supporters of a viable US alternative to Verizon and AT&T - the difficulty for a firm with a really different approach to compete with those companies’ deep pockets and structural advantages. He continued: “We remain enamored with the business opportunity for Clearwire in 2011, and expect the company, with Sprint’s help, to exceed investor expectations relative to subscriber growth and revenues. Profitability will likely remain very elusive in 2011, but if the company is able to maintain its goal of cities becoming profitable up to 18 months after going live, there should be some substantial financial progress made during the year.”

   Another of Clearwire’s funding options is to sell off some of its huge spectrum horde, and the firm is about halfway to doing that, according to CFO Erik Prusch. He told a UBS event that Clearwire was still looking for outside investors and also planning to auction off “the spectrum we don’t plan on using any time soon … We’re rounding second and heading to third in terms of the spectrum auction. There are a lot of parties interested in the spectrum.” The operator may sell to multiple companies, rather than just one operator, and is thought to be expecting up to $2bn in proceeds.

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