Quick Thoughts: Softbank, Sprint and Clearwire – Menage a Trois?

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–          A Softbank-Sprint-Clearwire combo makes sense for all parties involved, and could be a real competitive threat, particularly if more low frequency spectrum can be added later.

–          Clearwire plans a TD-LTE network, the same technology used for Softbank’s 76Mbps Japanese 4G service.  Softbank would gain leverage to drive device and equipment availability for the standard.

–          TD-LTE allows much faster downloads than VZ and T’s FDD-LTE, although the small cells required by Clearwire’s high frequency spectrum have limited coverage and indoor penetration.

–          Softbank could then be an aggressive bidder for the 700MHz licenses expected to be auctioned in 2014, closing the coverage and cost gap vs. VZ and T.

 

Last week, Germany’s Deutsche Telekom doubled down on the US wireless market with an announced deal to combine its T-Mobile USA business unit with MetroPCS, easing the spectrum crunch for 4G and allowing a lot of redundant costs to be cut away.  This week, the wireless news is coming from across the Pacific, with Sprint confirming that Japan’s Softbank has initiated negotiations to take a “substantial stake” in the embattled 3rd place US wireless carrier.  Following Softbank’s history, it should be clear that a “substantial stake” would almost certainly be a controlling stake, and that a further transaction to gain control of Sprint partner Clearwire could follow.  As such, investors have already bid up CLWR more than 50% anticipating such a scenario.

Given Sprint’s struggles to raise capital for deals of its own or even to accelerate its 4G deployment, Softbank has quite a bit of leverage to make this deal happen.  Indeed, after years of strategic blunders and misplayed bets, Softbank may be the last white knight Sprint will see for quite a while.  Yet, despite the blemishes, Sprint makes sense for Softbank.  Oddly enough, the key to the deal is Sprint’s stake and partnership with Clearwire.

Clearwire’s 15 year history wouldn’t suggest that it would be the key to anything.  Born as a spin out from Sierra Technologies with proprietary wireless broadband technology designed for low power unlicensed WiFi spectrum, the company cut a deal in 2001 for spectrum licenses at 2.5 to 2.7GHz in 100 cities, that had been originally allotted for “instructional television service” back in the 1960’s.  Craig McCaw swooped in to buy Clearwire in 2004, after the company had ditched its own proprietary solution and merged the company with NextNet, which had a better wireless broadband technology.  This technology was also ditched when Intel and Motorola took stakes in 2006, with the NextNet assets transferred to Motorola as part of the deal, and Clearwire became the poster child for an alternative 4G standard called WiMAX.

The WiMAX episode requires a bit of explication for the uninitiated.  The official 4G standards process, run by the International Telecommunications Union, was dominated by the entrenched 3G technology leaders.  Intel, Motorola and a few others decided to try their luck with the computer industry standards body IEEE, and established WiMAX based upon their own intellectual property.  As the ITU process dragged on, delayed by political maneuvering, WiMAX was fast-tracked to market.  Sprint, which held the 2.5GHz licenses not controlled by Clearwire, was on board, and the two companies formed a partnership to get WiMAX to market ahead of Verizon and AT&T, which were patiently waiting for the LTE 4G standard that would eventually be ratified by the ITU.  The plan: deploy WiMAX networks with huge performance advantages vs. the 3G technologies used by the market leaders, take enough market share to establish the new standard and get the critical mass necessary to draw other markets and manufacturers to the technology.

OOPS!  It took longer to get WiMAX to a commercially viable state than its technical backers had hoped.  Sprint, which had acquired idiosyncratic push to talk operator Nextel, had stretched its balance sheet and was hemorrhaging market share.  The WiMAX roll out, once begun, was slow, expensive and delivered poor coverage.  Support from handset manufacturers didn’t materialize – initially access was only through laptop cards, with a limited selection of handsets trickling in over time.  International carriers decided to pass on overtures from the WiMAX crowd, and waited for LTE.  Apple launched the iPhone with AT&T, further damping the relative attractiveness of WiMAX devices.  Enhancements to 3G networks brought speeds up to with shouting distance of WiMAX’s 3-4Mbps.  When Verizon launched its commercial LTE service in 2010 with up to 30Mbps speeds, WiMAX was done.

Along the way, Sprint had traded its 2.5GHz business for a 49% stake, leaving Clearwire with a white elephant network but also a 140-160MHz slice of spectrum in almost every market in the country.  To put it in perspective, AT&T and Verizon each have less than 110MHz on average, spread out over multiple bands and supporting multiple services.  While the high frequency of Clearwire’s licenses is a significant drawback – radio signals in the 700MHz band travel almost twice as far and penetrate walls far better than they do at 2.5GHz – the shear amount of spectrum allows for much higher speeds.  Thus, Clearwire has announced a “do over”.  It plans to build a network based on an official variant of LTE appropriate to their spectrum, assuming it can raise the money.

Unfortunately after the WiMAX debacle, that is a big if.  Sprint is ostensibly on board to offer Clearwire’s LTE service to its customers, but can hardly pitch in financially while it groans under the weight of $21B in debt and finagles a way to pay for its own LTE deployment in the patchwork of spectrum that it had acquired with Nextel.  Enter Softbank.

It just so happens that Softbank, Japan’s third largest wireless provider, has just launched its own LTE network in the same 2.5GHz band using the same TDD variant as Clearwire.  This network has been successful, delivering stunning 76Mbps download speeds to lucky Japanese customers but device support has been modest.  If Sprint and Clearwire could make the standard successful, the combination of American, Japanese and Chinese carriers using TD-LTE at 2.5GHz would establish an ample market for device makers and equipment suppliers alike.

Considering the backstory, all three players in this three-way dance have ample motivation to make a deal work, and the resulting combination would be a far stronger competitive force.  The network could roll out faster and the device selection could be far more attractive.  Superior download speeds and system capacity would be a clear competitive calling card.  Indeed, Softbank has already announced plans to bump its Japanese service to 110Mbps next year, and the recent ratification of LTE-Advanced offers support for speeds as high as 1Gbps to fixed locations in the next few years.  A Softbank/Sprint/Clearwire combo could also be an aggressive bidder for 700MHz spectrum in the incentive auctions planned by the FCC for as early as 2014, allowing the carrier to add broad coverage to its speed and capacity advantage.

With Sprint and T-Mobile each with a deal on the table that could dramatically improve their competitive position, the past week has been unequivocally bad for Verizon and AT&T, both of which could be forced to compete more aggressively on price and data limits to avoid customer churn and share loss.  Perhaps there is hope for the American wireless consumer yet.

For our full research notes, please visit our published research site.

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