Why the WiMax Deal Is A Disaster, Part II (Or, How Craig McCaw Snookered Eric Schmidt)
The more I learn about the $3.2 billion deal announced earlier this week to salvage Clearwire’s and Sprint’s WiMax businesses by merging them together, the more I am convinced that someone got snookered. And that someone was Google CEO Eric Schmidt. Maybe he just can’t say “No” to visionary billionaires like Clearwire chairman Craig McCaw. Or maybe McCaw got Intel CEO Paul Otellini to lean on his buddy Schmidt. Otellini himself pledged $1 billion of Intel’s money towards the venture because he has made a big bet at Intel on selling WiMax chips. He also happens to sit on Google’s board. I don’t know if any of the above happened or not.
What I do know is that Google came reluctantly to the table and that for a long time the deal was being blocked internally at Google for some very good reasons. The main reason is that WiMax as Clearwire is deploying it is not a very good replacement for mobile broadband services. It is, above all, a fixed wireless solution. What it replaces is wired broadband services to homes and offices delivered through cable and DSL. That is how Clearwire is selling it today.
But to get Google (and Comcast and Time Warner Cable) to put up the cash, Clearwire had to promise it would build out a richer mobile broadband service as well. This is why Google invested—to bring the broadband Internet to mobile devices (some of them hopefully running the Android operating system). And it is why Comcast and Time Warner Cable invested. They don’t need a replacement for cable broadband to people’s homes. They need a wireless offering to fend off AT&T’s and Verizon’s incursion into their television market. (It’s all about who has the better bundle). Everyone is enthralled with this idea of WiMax as a disruptive wireless mobile broadband alternative. Even Neal Cavuto couldn’t stop waxing about the wonderful wireless future that this deal represents.
I wish that it were true. But here are a few problems, in addition to the ones I laid out in my earlier post:
1. Clearwire and Sprint have not yet proven that WiMax is a viable business even for fixed wireless. Clearwire lost $727 million last year, nearly five times more than its total revenues. And it is projected to lose increasingly more over the next couple years during the expensive growth phase of its business. Moreover, the uptake of the service in the 50 or so cities where it is available has not been so great. That is because, unless you live in a rural area with no other broadband alternative, it is trying to solve a problem that doesn’t exist. At this point, most people in the U.S. can get broadband at their home just fine through cable or DSL.
2. WiMax hasn’t proven itself elsewhere either. Even in Korea, which has had WiMax for two years and is supposed to be a broadband paradise, consumers are not clamoring for WiMax. There are only about 150,000 WiMax subscribers in Korea, well below initial expectations.
3. Before you can turn Wimax into a mobile broadband service, you need mobile WiMax equipment. Cell phones, laptops, and other devices with WiMax chips in them are a long way away. Intel is ready to sell those chips, but device makers are not going to put them in their gadgets until enough consumers want them. And most consumers are going to wait for a WiMax network to show up that they can access both where they live and when they travel. So there’s a chicken and egg problem there.
4. Clearwire doesn’t know how to act like a mobile company. It doesn’t have a mobile business plan. It has a fixed wireless business plan. In order to make WiMax truly mobile, you need to build out a network dense enough to cover subscribers as they move from one place to another. That is simply not the case today, even in the markets where Clearwire operates.
5. Sprint is conflicted. To deal with roaming and coverage gaps, Clearwire would need to use Sprint’s 3G cellular network as a backup. That would require another chip in each device, which would make them more expensive than competing devices from AT&T or Verizon. Also, it would require Sprint opening up its 3G network to Clearwire and, by extension, Google. That’s not going to happen.
6. WiMax is not a global standard. Here in the U.S., WiMax is built on 2.5 GHz spectrum. Overseas, it is built on 3.5 GHz spectrum. That makes it harder for equipment manufacturers to achieve teh scale they need to make money from WiMax devices and network equipment.
7. McCaw may be a visionary, but sometimes he doesn’t see so clearly. Yes, he built what is now AT&T Wireless and sold it for $11.5 billion. But after that he also was responsible for Teledesic and XO Communications—two massive failures that cost investors billions of dollars. Clearwire was about to join those latter two before Schmidt & Co. came to the rescue.
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Schonfeld Talks About Clearwire/Sprint On Fox Business
Erick appeared on Fox Business last night to talk about the recent $3.2 billion WiMax deal between Sprint Nextel and Clearwire that’s expected to go through.
He tries to discuss the questionableness of the deal from a business standpoint despite the promises of WiMax as a technology. However, there’s clearly some frustration that Cavuto would rather talk about the future of mobile devices in general, and his daughter’s technology habits in particular, rather than analyze the viability of the deal.
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Why Google Invested in Clearwire
Google wants to usher in the world of wireless broadband so much that it is willing to spend vast sums to make it happen. It bid more than $4.6 billion in the recent FCC spectrum auctions (which it ended up not having to pay because it lost to Verizon), is backing the WiFi 2.0 initiative, and today it announced that it plunked down $500 million to shore up the new Clearwire-Sprint WiMax business.
Google is very clear about why it invested—to ensure that the resulting broadband network is as open as possible and accepts Android handsets and devices. It also sounds like Google may also be the default search engine on devices connected to the network.
This morning, it explains all of this on the Official Google Blog:
In addition to our $500 million contribution as part of the investment group, we will provide search and applications to the network’s users, and will work with Clearwire to offer additional services and applications. This will include jointly creating an open Internet protocol to work with mobile broadband devices (including Android-powered devices) and implementing other open network practices and policies.
We believe that the new network will provide wireless consumers with real choices for the software applications, content and handsets that they desire. Such freedom will mirror the openness principles underlying the Internet and enable users to get the most out of their wireless broadband experience. As we’ve supported open standards for spectrum and wireless handsets, we’re especially excited that Clearwire intends to build and maintain a network that will embrace important openness features. In particular, the network will: (1) expand advanced high speed wireless Internet access in the U.S., (2) allow consumers to utilize any lawful applications, content and devices without blocking, degrading or impairing Internet traffic and (3) engage in reasonable and competitively-neutral network management.
Google desperately wants access to future wireless broadband networks of all stripes and sizes,but it wants to avoid having to build and operate its own. Deals like this show that it is willing to pay to play. If Clearwire should ever go bust, though, that’s $500 million down the drain.
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$3.2 Billion WiMax Deal Goes Through. Take Cover.
The deal to combine Sprint Nextel’s and Clearwire’s fledgling WiMax businesses that was rumored last March is finally expected to go through. Comcast and Intel are supposed to put in $1 billion each; Time Warner, $550 million; Google, $500 million; and regional cable provider Bright House Networks, $100 million. The new company, which will be valued at $12 billion, will be run by Clearwire and take its name.
As I said before, this is a disaster waiting to happen. Sprint and Clearwire need the deal to try to salvage the billions they’ve already sunk into their money-losing WiMax networks. But putting more cooks into the kitchen with different WiMax aspirations is not going to help. Google wants more wireless broadband alternatives for its planned mobile apps and advertising. Whereas the cable companies want a way to compete against mobile phone operators encroaching on their turf. As I wrote last March:
WiMax is a promising technology and these are early days. But even an extra $3 billion won’t be enough. Building out a nationwide WiMax network could cost as much as $8 billion to $12 billion. And there could be more technical hiccups.
I can see why Google might throw its hat into the ring here—anything to promote more broadband wireless networks. But Comcast and Time Warner Cable should stay away. The logic behind the investment seems to be that the cable companies could use the WiMax network to counter the moves by Verizon and AT&T into their turf (with TV service over phone lines). It is being suggested that the cable companies would be able to launch their own white-label mobile phone and high-speed Internet services over WiMax.
Here’s where that logic breaks down: Verizon and AT&T have a huge head start and customer lock-in when it comes to cell phone service. WiMax mobile phones would take decades to chip away at that even if they do offer faster data speeds. Today, Clearwire is only offering at-home phone service, not mobile. As for broadband Internet and home phone services, Comcast and Time Warner already compete effectively against the phone companies today with their alternative services over cable.
I hope that I’m wrong and that this new consortium will bring cheap WiMax to us all. Because the technology is very promising. Unfortunately, the business is not.
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Why Cable And WiMax Shouldn’t Mix
WiMax is going nowhere fast but that is not stopping a consortium of cable and tech companies from considering a plan to invest $3 billion more into a proposed bailout-through-merger of Sprint Nextel’s WiMax business (known as Xohm) and Craig McCaw’s Clearwire. The consortium that is reportedly being put together would include Comcast ($1 billion), Intel ($1 billion), Time Warner Cable ($500 million), Bright House Networks and Google ($500 million).
This latest plan comes after Sprint Nextel’s disastrous $30 billion write-down last quarter of its Nextel acquisition, and is an attempt to salvage something out of that train wreck. It also comes after Intel recently balked at putting up $2 billion itself. Intel wants to sell WiMax chips and has already sunk $600 million into Clearwire. But even Intel has its limits.
WiMax is a promising technology and these are early days. But even an extra $3 billion won’t be enough. Building out a nationwide WiMax network could cost as much as $8 billion to $12 billion. And there could be more technical hiccups. (An Australian WiMax provider is already giving up).
Clearwire, which is already operating its broadband wireless service in parts of the country, lost $727 million last year, on revenues of $151 million. So far, it has raised at least $2.75 billions dollars through private investors ($900 million in 2006), an IPO ($600 million), and a $1.25 billion line of credit. As for Xohm, it has only soft launched with employees in three cities. Nevertheless, last year it cost Sprint Nextel $577 million in capital expenditures and operating expenses.
I can see why Google might throw its hat into the ring here—anything to promote more broadband wireless networks. But Comcast and Time Warner Cable should stay away. The logic behind the investment seems to be that the cable companies could use the WiMax network to counter the moves by Verizon and AT&T into their turf (with TV service over phone lines). It is being suggested that the cable companies would be able to launch their own white-label mobile phone and high-speed Internet services over WiMax , or use it to distribute their TV content to computers and new digital devices.
Here’s where that logic breaks down:
1. WiMax is more an alternative to fixed broadband Internet access than it is to mobile phone service. Verizon and AT&T have a huge head start and customer lock-in when it comes to cell phone service. WiMax mobile phones would take decades to chip away at that even if they do offer fater data speeds. Today, Clearwire is only offering at-home phone service, not mobile. As for broadband Internet and home phone services, Comcast and Time Warner already compete effectively against the phone companies today with their alternative services over cable.
2. It no longer makes sense to try to own all the pipes because pipes are becoming a commodity. Yet pipes are an expensive commodity. If the idea is to create a new way to stream TV and movies to people, the cable companies no longer have to build out the infrastructure themselves to do that. It would be much cheaper to let the WiMax business prove itself to be viable on its own and cut deals for distribution.
(Photo via Erik Charlton).
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