Retail strategy at heart of Sprint Nextel-Clearwire tension

The cumbaya relationship between Sprint Nextel Corp. (S) and Clearwire Corp. (CLWR) may be only skin deep as the two operators seem to have different views on how much emphasis Clearwire has on expanding its WiMAX network.
During a session yesterday at the Bank of America-Merrill Lynch Media, Communications & Entertainment Conference, Sprint Nextel’s CFO Bob Brust noted the carrier was more interested in Clearwire focusing its efforts on bolstering network coverage and its wholesale operations than on its Clear-branded retail strategy.
“The original plan was for rapid deployment of network and with 120 million pops covered by the end of the year that has gone well,” Brust said. “We would like them to get to the next tranche of that and so money that is going to other than that is not in the interest of building out the network. Retail is a tough place. We’ve got a lot of retail competition out there. And for them to jump into that might not be the easiest thing in the world. That’s a long putt and it’s expensive to get into retail in a big way. The best way to get to 4G is to build out the 4G network, and that might be the source of the disagreement.”
Sprint Nextel, which currently controls around 55% of Clearwire, is reliant on the roll out of the WiMAX network for its “4G” service that has been central to its recent advertising campaign and inside of a pair of recent handset launches, the HTC Corp. Evo 4G and Samsung Electronics Co. Ltd. Epic 4G. The “4G” service could become even more important for Sprint Nextel as rival Verizon Wireless has said it plans to begin offering its LTE-based services covering approximately 100 million pops by the end of the year, on its way to covering its entire network by 2013.
Clearwire, meanwhile, continues to roll out Clear-branded products that show the company is not letting off the gas when it comes to its retail strategy. The company has said it plans to have Clear-branded smart phones available later this year.
Clearwire recently added Best Buy Co. Inc. and Cbeyond to its wholesale plans that already included initial investors Sprint Nextel, Comcast Corp. and Time Warner Inc.
Clearwire’s CEO Bill Morrow noted during last year’s 4G World event in Chicago that the carrier was not married to having a retail strategy, but that at the time it was happy with its Clear-branded services.
The carrier noted that its second quarter customer growth was dominated by customers added through its wholesale partnerships that accounted for 595,000 net subscriber additions, while its direct additions through its Clear service totaled 127,000 net additions. At the end of the quarter direct customers accounted for 940,000 subscribers of its total base while wholesale customers numbered 752,000 subscribers.
Clearwire noted that its strong wholesale growth included customers that were living outside of markets where it offers WiMAX services and that it was receiving “nominal” revenues from their use of Sprint Nextel’s 3G network. The carrier added that currently just over half of its wholesale customer base resided outside of its WiMAX markets.
This discrepency has lead to the carrier’s direct customer base contributing 88% of its subscriber revenues. The carrier reported that revenues had nearly doubled year-over-year to $122.5 million during the second quarter, with average revenue per user from its direct customer base rising more than 5% to $41.58.
Question of money
As for funding its continued build out, Clearwire looks to be exploring its options.
The Wall Street Journal recently reported that Clearwire was in talks to either sell spectrum or lease capacity to T-Mobile USA Inc., which does not currently control enough spectrum to roll out 4G services. The story indicated that Clearwire could need as much as $4 billion to fund network expansion from its planned 120 million pops to around 200 million pops covered.
Clearwire’s management has also said it was looking at possibly selling off some of its spectrum holdings in order to help fund future expansion.
“A lot is just rumors,” Brust said when asked about Clearwire’s financing plans. “They could get money elsewhere and we could go on our own, but this would be the most inefficient move. If that happens you should put us both in a room and blow up that room. … I think they can get money, it’s up to them how they want to do it and how much they need.”
Brust noted that Sprint Nextel was more than happy to discuss those funding options with Clearwire, but that it was up to Clearwire to figure out what it wants to do. However, any additional cash infusion by Sprint Nextel could further marginalize Clearwire’s other investors.
“It seems to me that we would be the easiest and cheapest as it would be a form of equity infusion,” Brust explained. “The other partners don’t know what they would do because if we come in and they don’t our ownership stake would go up. I think at the end of the day that is what will happen, but don’t know yet. They haven’t told us what they need, but they will run out of cash down the road and they will need to refinance. I just don’t know what they will ask for. … I can’t imagine we won’t get it worked out. It’s just a matter of Bill morrow and Dan Hesse and the boards getting together. We have three members on the board and they are always talking. … I suspect I will get the call this fall sometime.”
And if that call does come, Brust said Sprint Nextel was more than ready to increase its stake, or even take control of Clearwire.
“The best thing over time is to have more control over Clearwire, but that is hard to do,” Brust noted. “The way the governances are written makes that hard. We will probably increase equity over the next several years; maybe take control once that gets higher. But, the best thing to do is to just keep it going.”
Further complicating the matter for Clearwire is Harbinger Capital Partners’ recent LightSquared announcement, that calls for the company to begin deploying an LTE-based network in 2011. LightSquared has said it plans to lease capacity on its network to partners interested in offering LTE services.
One-third of towers set to go
Brust also touched on Sprint Nextel’s plans for streamlining the carrier’s network operation, including reducing its cell tower count and updating its network technologies.
Brust said the carrier currently had some 66,000 cell towers in service supporting Sprint Nextel’s CDMA, iDEN and WiMAX operations, a number the carrier was looking to pare by some 20,000 towers going forward.
When asked if it was worth the network impact of turning off one-third of its towers for the estimated $350 million per year in savings (20,000 cell sites x $1,500 per site p
er month for leasing costs x 12 months) Brust said the carrier expected to garner
larger savings as the remaining sites would be doing more and cheaper to run based on the carrier’s network upgrade plans.
As part of those plans, Sprint Nextel said it has six vendors in the final phases of preparing network plans for the operator. While Brust did not mention any specific technology upgrade path, a Sprint Nextel executive recently said the carrier was planning on using LTE technology as part of its network evolution. While this would initially add yet another network layer onto the carrier’s already complex network architecture, the plan would be to eventually migrate its customer base to the LTE network that would then allow it to shutter its legacy operations.
“Network modernization could take three years,” Brust explained. “It’s a one strike thing. If we do this right we will do well, If not, it can go bad.”
Competitive position
As for the current competitive market, Brust said the carrier was stabilizing operations and that the carrier continued to see operational benefits from its prepaid expansion. Sprint Nextel, which has lost more than 7.3 million postpaid customers and nearly 4.6 million total customers over the past two years, has become increasingly reliant on its prepaid operations to counter falling postpaid numbers.
“A real crazy attack from AT&T or Verizon would hurt us, whether it’s price or whatever,” Brust explained. “Fortunately that hasn’t happened and I hope it doesn’t happen. The fixes we have put in are starting to happen. Better customer service, better devices.”
As for its continued reliance on prepaid, Brust indicated that Sprint Nextel was comfortable with its position. That position includes a number of operating brands that all derive service using the carrier’s CDMA and iDEN network.
Brust indicated that the carrier’s network advantage would give it a financial leg up on the competition.
“They are all going up on our network,” Brust said about the carrier’s own offerings. “People have to be going under us on price, but it has to be hurting them as they are going through another network.”