Is ‘Wholesale-Only’ the Only Solution for Clearwire?

4G WiMAX service provider Clearwire (Nasdaq:CLWR) has been seeking funding sources since last fall, attempting to 1) sell excess spectrum or 2) issue additional debt, or 3) raise investment from a third party.  Recently we read that among those who originally kicked the tires at Clearwire’s spectrum auction, only T-Mobile remains interested.  But T-Mobile has also reportedly had talks with LightSquared and at the same time is investing in an upgrade to its HSPA+ network which it believes buys it time on the 4G front.  In other words, T-Mobile isn’t desperate.

Meanwhile, though it was able to raise $1.3 billion in a bond offering in December, The Wall Street Journal reported on February 10 that Clearwire is considering abandoning its retail strategy and adopting a wholesale-only model, a model which just happens to be supported by Sprint (NYSE:S).  Sprint has apparently long groused at the competition Clearwire’s retail service adds to the marketplace, diluting Sprint’s competitive positioning versus Verizon’s (NYSE:VZ) and MetroPCS’ (NYSE:PCS) LTE launches.  The Journal report indicated that such a move would “open the door for additional Sprint investment.”

In its fourth quarter earnings conference call that same day, Sprint ceo Dan Hesse made it clear that the company has explored options for 4G other than relying on Clearwire’s network—and if The Journal’s report is accurate, Clearwire may be caving in to the pressure.  Sprint is implementing a massive network overhaul, dubbed Network Vision, which will consolidate its CDMA and iDEN networks into a single system, eliminating thousands of cell sites and freeing up spectrum for future use, probably with LTE technology.

Hesse said, “We expect that Network Vision will provide us with additional flexibility to potentially use our own spectrum and network assets to provide additional 4G capacity or use other spectrum that may be available to us in the future over our network to create further 4G capacity. If Clearwire utilizes our modernized network, there could be significant economic benefits for both companies.”

But what we heard goes more like this:  “If Clearwire cooperates with us (and stops competing with us in the marketplace), we can help them out with that pesky lack of capital problem.  But if they don’t, we’ll drop them like a hot potato.”

It could be that Clearwire will do both—sell excess spectrum, presumably to T-Mobile, and drop the retail strategy in order to placate 54% (but non-controlling) owner Sprint.  But with T-Mobile taking its own sweet time to figure out its own best strategy, it appears Clearwire may be forced to do Sprint’s bidding.

4G Offerings Will Further Dampen Wired Broadband Growth

Time was the term “cord-cutter” referred to the nearly 30% of Americans who have cancelled their landline voice service, relying solely on their wireless phone for voice communication.  In response to this trend, for a decade or more, ILECs and RLECs nationwide have invested in broadband and video technology, looking to build communications bundles that will create “stickier” customers and generate incremental revenue as an offset to the decline in landline voice accounts.

More recently, we hear “cord-cutting” associated with those consumers who are cancelling their subscription video services, opting instead to rely on “over-the-top” (OTT) video solutions like those offered by Hulu and Netflix.  Admittedly, most of the research indicates that the actual number of video cord-cutters remains low, but the trend has both the cable and ILEC industries worried—and, we think, for good reason.  Generational differences in the habits of younger consumers are sure to perpetuate video cord-cutting, and the Great Recession may have accelerated the shift. (For more on generational segmentation, refer to our Mindshare article in the September, 2010 issue of The ILEC Advisor).  But with 4G wireless service now a reality in dozens of cities nationwide, and based on the data we’ve collected regarding price and speeds, we’re now concerned that broadband access will be the next communications industry segment to be associated with the dreaded “cord-cutter” label.

Granted it’s the early days for the latest generation of mobile wireless services, but following an exhaustive survey of major 4G services now available and a comparison of prices and data speeds with wired broadband solutions, we’ve come to the sad conclusion that, while wireless can never (never say never?) be a complete Internet access substitute (due, for now, to spectrum constraints), broadband cord-cutting is likely to become an increasing reality.  It will begin to happen over the next couple of years in major markets where Sprint/Clearwire, Verizon, MetroPCS and others have already launched 4G, and, over time, it could happen in all but the most rural markets nationwide.  AT&T, which hasn’t even launched a 4G offering yet, reported more than 7.8m ‘connected device’ subscribers at the end of the third quarter, and Clearwire had 2.8m at that time and projects 4m subscribers by year-end—up from initial 2010 guidance of just 2m.

We’re not suggesting that a majority of broadband Internet subscribers will cut the cord tomorrow and opt for a 4G solution instead, but considering that wired broadband penetration gains have not accelerated for two years now, we think the advent of 4G wireless options will simply further retard growth.  That combined with the Net Neutrality rules the FCC is voting on today (12/21), which have more relaxed regulations for wireless providers (this is why Verizon’s lawyers and lobbyists make the big bucks!), will make wireless broadband a force to be contended with in coming years.

Wired broadband penetration has been creeping higher quarter by quarter, but for the public ILECs that we track, the growth has been modest.  In 3Q10, broadband penetration of ILEC access lines rose 111 basis points, to 31.4%.  But if you consider that the number of voice lines has been falling each quarter, the “growth” is really minimal.  Cable broadband penetration (calculated as broadband connections/ basic cable subscribers) rose 171 basis points, to 74.4% over the same period.  Here too, the denominator is shrinking, overstating somewhat the increase in overall broadband customers.  The public cable companies have lost more than half a million subscribers in each of the past two quarters.

      At the end of the day, consumers will evaluate the value proposition offered by wireless broadband providers, and go where they get the most bang for their buck.  Data speeds matter, but the new wireless offerings appear to stack up reasonably well with all but the fiber-based offerings like FiOS—and we believe there may already be more homes passed nationwide by 4G offerings than by fiber-to-the-home services.

Furthermore, the price/ value propositions are compelling.  At the low end, a Clearwire Base Home service can be had for $35/ month and the average WiMax speeds are competitive with DSL—for which the average ILEC was generating $70 or more per broadband sub per month based on a study of monthly ARPU we conducted last spring. 

Broadband cable revenue is generally lower per user—in the $40-$50 range—and the speeds are competitive with WiMax.  Simple lethargy and attachment to those subscription video services will prevent those customers from changing provider rapidly, but in the long run those seeking to replace their $80/ month video package with Netflix’ $9/ month streaming option may opt to end the relationship with their cable provider.  We don’t believe this happens quickly, but Clearwire’s rapid subscriber growth demonstrates a certain amount of pent-up demand.  Ironically, cable providers Time Warner and Comcast are partners in Clearwire and are bringing some of that wireless broadband subscriber growth to the company. 

LTE speeds are even stronger than DSL or cable, but the price points are generally higher and metered pricing is likely to become a bigger factor as these new networks are loaded up.  Will the consumers place a premium on mobility?  Some will; early adopters and road warriors with their tablet devices will be the first to try the new services; over time those of us who’ve gotten used to tapping 3G networks via our smartphones will decide it’s time for a faster connection.

The device selection for LTE networks remains limited, and somewhat expensive, but as with everything, those prices will fall.  Verizon, which launched its LTE network on December 5, 2010 with just two USB modem options, will have LTE handsets in volume by the middle of next year.

And let’s not forget about “Apps.”  The major wireless carriers are taking a proactive interest in attracting developers to create the type of applications that have fueled the iPhone’s popularity.  With data speeds averaging between 5 Mbps and 12 Mbps, some pretty cool apps are possible over the LTE network. (I tested my data speeds online while writing this article and found that I’m working with a dismal 1 Mbps download speed and 250 kbps upload speed—and I still manage to view the Youtube videos my mother emails regularly!)

As mentioned above, spectrum issues are the most obvious constraint to wireless carriers as their 4G networks load up, but we don’t underestimate the ability of the industry’s suppliers to engineer more and more capacity out of limited airwaves.  At the same time, the FCC is planning to auction more spectrum and some carriers—Clearwire most notably—have excess capacity and are looking to sell off some chunks in order to raise cash.

The bottom line?  We think it’s still a long time coming—especially in rural markets—but we think the ILEC industry would be ill-advised to discount the long-term ability of next-generation wireless broadband offerings to cut into its revenue growth.  Those investing in fiber networks will benefit from the explosion in backhaul needs, but DSL growth potential is unquestionably limited if you look out beyond the next decade.  And while fiber-based services will compete favorably with wireless broadband, particularly in the enterprise market, not all markets will provide a satisfactory ROI on fiber deployments.

Las Vegas and Dallas are First to Get Commercial LTE Service

Dallas-based MetroPCS Communications (NYSE: PCS) announced September 21, 2010 that it had launched commercial 4G LTE service in Las Vegas, Nev., making it the first wireless carrier to offer LTE service in the United States and on September 29, 2010, the company added Dallas to its list of up and running LTE markets.  PCS also announced the world’s first commercially available 4G LTE handset, the Samsung Craft™.  PCS said that it would expand LTE service into its other markets throughout the rest of the year and in the first half of 2011, and that additional devices would also become available next year.  In Las Vegas, the LTE service covers “most” of PCS’ existing network. 

“The Internet is going mobile, and we are placing the true power of the Internet directly in our customers’ hands, when and where they need it. By offering affordable, predictable and flexible 4G services on a no-contract basis, MetroPCS delivers immediate benefits to our customers and is positioned to meet their evolving needs well into the future,” said Roger D. Linquist, president, ceo and chairman.  “We are delivering a 4G LTE service that is unmatched in value and positions MetroPCS as a full-service broadband wireless provider – a giant step for our business.” 

Service plans, which offer voice, text and 4G web access, start at $55 per month (including taxes and regulatory fees).  A $60 per month plan also includes 4G video-on-demand service.  New applications include MetroSTUDIO, a social networking and instant messaging aggregation application and a voice-activated GPS feature with turn-by-turn directions.  MetroSTUDIO is an on-demand multimedia content source, which includes access to full-track downloads, ringtones and ring-back tones, and premium video content from NBC Universal, Black Entertainment Television (BET) and Univision. 

MetroPCS is offering the Samsung Craft in Las Vegas metropolitan area stores and online for $299, after $50 instant rebate, plus tax.  The handset offers rich color and clarity designed for viewing video, a 2GB microSD card preloaded with Paramount Pictures’ movie “Star Trek”, touch screen, slide out keyboard, camera and WiFi capabilities. 

“We continue to see our customers use mobile data services, and the majority of them rely on their handset as their primary access to the Web,” said Tom Keys, PCS coo. “Our 4G service, the Samsung Craft and applications like MetroSTUDIO deliver exactly what our customers demand: more of the entertainment they love, a desktop-like Web experience and the ability to do more and share more of their content such as text, photos and videos with friends and family.” 

MetroPCS’ Las Vegas 4G LTE network, which was built through a partnership with Samsung, will cover the majority of MetroPCS’ existing CDMA network footprint in Las Vegas.

Other 4G Developments: PCS may have been first to market, but Verizon Wireless (VzW) will be hitting LTE hard within the next couple of months—the company expects to launch 25-30 markets by year-end, covering 100m POPs. VzW will be promoting laptop cards initially, with handsets slated to arrive in 2011……Clearwire (Nasdaq:CLWR), which expects to cover 120m POPs with its WiMAX 4G network by yearend, is considering funding options, including “the possibility of issuing additional debt and, or selling a small portion of our assets, which may include spectrum that is not critical to our business plan.”……T-Mobile (Pink Sheets:DTEGY) is one of the carriers in talks with Clearwire, presumably as a possible buyer of spectrum.  T-Mobile, which does not have a fully-formed 4G strategy (due to its dearth of spectrum), has been focused on upgrading its network to HSPA+ and has embraced “dual cell” technology, which is expected to maximize spectral efficiency and offer “4G-like” speeds.  DT ceo Rene Obermann said in August, “We’ll get a fourth-generation wireless network either by buying spectrum or re-farming existing spectrum, or potentially leasing spectrum together with others.  I don’t think we’ll trail others in the next two years.”……AT&T Mobility will launch commercial LTE by mid-2011, and will cover between 70-75m POPs by the end of next year, according to comments made at a recent Bank of America Merrill Lynch conference.  AT&T Operations ceo John Stankey said the company is working with Ericsson and Alcatel-Lucent to get the network ready for launch, and is currently conducting LTE trials in Baltimore and Dallas.  Stankey said the company is spending $700m on LTE this year, and “will go far beyond that” in 2011.  He also pointed to a backlog in network equipment as a recent impediment to the company’s network upgrade efforts……Upstart LightSquared recently announced that it has secured commitments for a $750m loan from UBS.  Korean wireless carrier SK Telecom is also said to be considering an investment in the hybrid satellite/LTE venture.  LightSquared is backed by hedge fund Harbinger Capital Partners and has a wholesale business model planned for operators that lack the spectrum and/or financial means of deploying their own network.  The company has signed a $7b infrastructure contract with Nokia Siemens Networks.

The Race is On…But Will First to Market Win?

It’s virtually impossible, if you’re involved with the telecommunications industry, to avoid the 4G/ LTE/ WiMax/ … hype these days—we empty our inbox of dozens of emails daily, with headlines related to new market launches, new equipment orders and vendor contracts, new trial stages, and new business models.  Everywhere we turn, it seems, another carrier is announcing a 4G market launch or trial…then there’s industry behemoth AT&T taking a seemingly more calculated approach, planning a $19b spend on its network upgrades, but holding off on market trials until next year. 

Only time will tell whether the first-to-market advantage pays off for early (Betamax) initiators like Clearwire/ Sprint and Verizon Wireless (VzW)—or if AT&T’s VHS approach, with an eye toward comprehensive integration of its wired and wireless networks, will prevail in the long run.  Fact is, the most obvious beneficiaries at this stage of the war are the arms dealers… 

Ericsson said recently that its North American LTE shipments were a major factor in its dramatic North American revenue growth in the second quarter.  The Swedish infrastructure vendor is supplying system equipment to both VzW and MetroPCS, which both intend to launch LTE this year.  Cfo Jan Frykhammjar said that sales of its multi-radio platform, the RBS 6000, have picked up all over the world as operators deploying new or upgrading old 3G footprints take advantage of the base station’s next-generation software defined radio capabilities. Those base stations can technically support LTE networks in the future, and Ericsson is also using the platform to support numerous LTE trials around the world.  Frykhammjar noted that the RBS 6000 is being installed here in high volumes as U.S. operators jump ahead of the rest of the world in the 4G race.  Ericsson reported a 128% year-over-year and 37% quarter-over-quarter increase in revenue in North America in the latest quarter.  Meanwhile, rival Nokia Siemens Networks announced a short time ago that it has a $7b network management deal with LightSquared… 

Which is the new name for SkyTerra, a hybrid satellite/terrestrial provider planning an LTE deployment and a wholesale (anyone remember NextWave?) business model geared towards cable companies or small cellular concerns eager to bring a 4G wireless offering to market sooner rather than later, and/ or wanting to use their own brand names.  LightSquared announced its new name July 20, 2010, adding that “Companies reselling LightSquared service would be allowed under FCC regulations to offer a terrestrial-only service or an integrated terrestrial/satellite service in which VoIP calls and data sessions could be handed off between the terrestrial network and satellite.”  The company also noted that satellite-only service would be available in Canada and Mexico. 

LightSquared calls its planned network model the "first truly open and net-neutral wireless network," which it said would spur the development of new types of wireless devices, applications and services.   The service will become available in the second half of next year on a wholesale basis in four markets:  Baltimore, Denver, Phoenix and Las Vegas.  LightSquared said that its national rollout will expand service to at least 100m people by the end of 2012, 145m by the end of 2013, and to 92% of the U.S. population by the end of 2015.  LightSquared also announced it has obtained additional debt and equity financing up to $1.75b. 

LightSquared may think its wholesale model will be particularly suitable for rural market players, but it isn’t the only operator looking for 4G business opportunities beyond the city limits.  Wireless Internet Service Provider (WISP) consolidator KeyOn Communications announced July 22, 2010 that it has deployed a 4G wireless network in the town of Pahrump in Southern Nevada, about 60 miles outside of Las Vegas.  Working with Alvarion Ltd. as its infrastructure supplier, KeyOn has employed WiMAX technology and unlicensed 3.65 GHz spectrum for its system.  KeyOn is planning to overlay the technology across its recently acquired WISP territories.   “There is a great demand for broadband services throughout the U.S. especially in rural and underserved areas. We are excited to partner with KeyOn to bring new 4G services to Pahrump, Nevada,” said Eran Gorev, president and ceo of Alvarion. “Our industry leading solution provides an optimized business case at 3.65 GHz frequency band while enabling quality broadband services.”  KeyOn has deployed Alvarion’s BreezeMAX Extreme gear providing coverage to over 15,000 households in Pahrump.  KeyOn has already begun marketing the services to its customers, augmenting its product service that currently includes fixed wireless data and satellite video services. In connection with this deployment, KeyOn is offering VoIP services on the 3.65 GHz WiMAX platform to provide an integrated voice and data solution to its customers.  KeyOn has applied for $374m in the second round of the Broadband Initiatives Program under the Rural Utilities Service and the Department of Agriculture. 

Meanwhile, Clearwire backer Comcast announced July 13 that it was adding ten more High-Speed 2go markets across the eastern U.S.  High-Speed 2go bundles 4G/3G wireless service provided by Clearwire/Sprint with one of Comcast’s landline offerings—Internet, phone or video, and starts at $54.99 a month, providing “the fastest wired and wireless Internet in the nation” by combining 4G and 12 Mb/s landline data service.  “This launch gives customers the best of worlds—the fastest fast at home and on the go as a natural extension of our super fast wired high-speed Internet,” said Rick Lang, senior vp of marketing and sales for Comcast’s Eastern Division.  Comcast is currently selling two different data cards and wireless service plans in the new wireless markets, which include Baltimore, Richmond, Washington D.C. and the Pennsylvania markets of Harrisburg, York, Scranton, Reading, Lancaster, State College and Lebanon. These include High-Speed 2go Nationwide, which is a 3G-only offering and High-Speed 2go Nationwide Preferred which includes metro 4G service as well as nationwide 3G service. Comcast first launched its High-Speed 2go offering in Portland, Oregon last year. Since then, the company has rolled out several additional markets, including Philadelphia, Seattle, Houston and Boston. 

Speaking of Clearwire/ Sprint, the latter’s ceo Dan Hesse acknowledged recently that the company is considering LTE technology for future 4G deployment.  He noted that the company has a wealth of spectrum and declined to comment on rumors that an LTE migration would pave the way for a Sprint/ T-Mobile marriage as the third and fourth largest U.S. carriers struggle to compete with VzW and AT&T.

Finally, Clearwire said July 1, 2010 that it has launched 4G service in seven new markets: Eugene, Ore., Merced and Visalia, Calif., Yakima and Tri-Cities, Wash., and Rochester and Syracuse in upstate New York. The launches brought Clearwire’s total deployment to 44 locations across the U.S., covering 51m people. 

Meanwhile, VzW said in late June that it had completed its 4G testing in Boston and Seattle, and that “friendly user trials” will now be done in five unnamed cities.  VzW reported that the average download speeds during the Boston trials ranged between 5 and 12 Mbps, and average upload speeds were in the 2 to 5 Mbps range.