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Clearwire's Bubble Bursts

The air went out of Clearwire LLC (Nasdaq: CLWR) quickly, as shares fell 9.42 percent to $22.30 the day after the firm's much-hyped IPO.

The outlook had been strong for the Kirkland, Wash., operator. The IPO price per share was set at $25 -- the top end of its range -- and the underwriters added another 4 million shares to the 20 million initially offered in prospectus. (See Clearwire's Cash Craving and Clearwire Wants $480M in IPO.)

The stock opened at $27.25 on the Nasdaq yesterday but was down by the end of the day and hit $24.63 in after-hours trading.

Stock specialist John Fitzgibbon Jr., publisher of IPOscoop.com , says the extra shares might have been part of the offering's undoing.

"Its simple supply and demand," he tells Unstrung. "There were just too many shares out there."

There are also concerns about what it will take to make Clearwire's wireless broadband business profitable. In its IPO filings, the proto-WiMax provider reported 2006 net losses of $284 million on revenues of $100 million, compared to losses of $140 million and revenues of $33 million in 2005.

"One of the attractions of Clearwire is the soaring revenue, but they're paying out two or three dollars for every one dollar of revenue," Fitzgibbon says. "This looks like one of those dotcom bubble-era companies."

Before getting $600 million in the IPO, Clearwire had raised more than $1.2 billion from key backers including Intel Corp. (Nasdaq: INTC) and Motorola Inc. (NYSE: MOT). But Clearwire has already said it may need more investments to complete its plans to roll out fixed and mobile WiMax.

"How much cash do they have? Something like $1 billion," says Roger Entner, VP of wireless telecom at Ovum Ltd. . "That looks like a lot to you or me, but they need $5 billion to $10 billion to do something interesting with wireless."

So far, investors have ponied up extra cash because Clearwire is the latest venture of Craig McCaw, the man who created the first national cellphone network in the U.S. and sold it to AT&T Inc. (NYSE: T) in the mid-90s. (See McCaw Clears the Wires.)

"Craig McCaw probably has the best name in wireless investment." comments Entner. "There are a lot of people, who, if Craig McCaw turned up at their door blind and asked for money, they'd give it to him." [Ed. note: And if he turned up deaf? or, heaven forbid, leprous?]

But McCaw has had some serious flameouts, most notably XO Communications Inc. (in its earlier incarnation) and Teledesic.

"He's also had strikeouts," notes Entner. "And, if you'll pardon me for saying so, this one looks like a strikeout."

— Dan Jones, Site Editor, Unstrung

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DanJones 12/5/2012 | 3:12:14 PM
re: Clearwire's Bubble Bursts Fine.

Still holds that AMR has been continually tweaked for GSM and is far more efficient than what is currently manadated for WiMax. I guess that could change over time.

DJ
paolo.franzoi 12/5/2012 | 3:12:23 PM
re: Clearwire's Bubble Bursts
All the compression codecs used in all the voice technologies are exactly the same. Any efficiency differential is in the encapsulation method for transport and the amount of bandwidth for the signaling. But 711, 726, 723, and 729 are indpendent of the transport mechanism.

seven
DanJones 12/5/2012 | 3:12:25 PM
re: Clearwire's Bubble Bursts "VoIP over WiMax is likely to be as disruptive to cellular as VoIP over WiFi."

It's possible, I think its a little too early to say and I suspect it may not be as disruptive as some people predict.

Here's why:

WiFi runs in unlicensed spectrum. Anybody can run a hotspot and get a best effort Skype connection. Sure, its flaky but its also free or near as dammit.

WiMax largely runs in licensed spectrum owned by carriers or wannabe carriers. Its a precious commodity. They aren't going to let you use it for free. Remember Clearwire has already been found blocking some VOIP users. I don't expect Sprint Nextel be any different. Particularly as the VOIP codecs for WiMax aren't anywhere near as compact as the codecs on GSM and CDMA.

Here's what I expect when Sprint or CLWR go live with mobile WiMax.

Somewhere between $40-60 for wireless data services over mobile WiMax. Premium VOIP service on top. I know the fixed service from Clearwire is $20 a month but its far easier to do a fixed service and they will want to recoup some money.

-- DJ
materialgirl 12/5/2012 | 3:12:28 PM
re: Clearwire's Bubble Bursts VoIP over WiMax is likely to be as disruptive to cellular as VoIP over WiFi. This means that early users are disregarded as fringe, using the technology in new "crummy" ways, like waiting to get to a hot spot to talk or SMS. But watch these fringe users, they started using PCs and the Internet a while back. As mobile data use grows, you need to stay put anyway, or run into something.
DanJones 12/5/2012 | 3:12:34 PM
re: Clearwire's Bubble Bursts I'll be curious to see how many mobile WiMax markets actually get lit up in 2008. Both Sprint and Clearwire are talking about launching networks but Wave 1 mobile WiMax products haven't even been certified interoperable by the WiMax Forum yet. Sprint says it will use Wave 2 BTW.

I could see some schedules slipping.

To me the big adavantage that Sprint has over Clearwire is its existing CDMA network. As long as they can get good numbers of dual-mode CDMA/WiMax devices onto the market then they can ensure some modicum of voice quality and a way for customers to roam if they move off the WiMax.

Clearwire -- unless they cut a deal with another carrier -- doesn't have this yet and will probably just offer Skype or some other best effort VOIP service. I'll be curious to see how well VOIP works over WiMax.

Dan Jones
materialgirl 12/5/2012 | 3:12:35 PM
re: Clearwire's Bubble Bursts Good point, alchemy. I wonder where that leaves CLWR.
alchemy 12/5/2012 | 3:12:37 PM
re: Clearwire's Bubble Bursts materialgirl writes:
I agree that any spectral difference only lasts until you get to the tower. From then on, backhaul costs have to be the same, with backhaul probably 40% of the CCPU. That means the real business plan has to be WiMax-plus. The plus is the disintermediating all-IP play.

You have to stop and consider the Sprint alliance with the MSOs. A Time-Warner or a Comcast will have no interest in allowing AT&T or Verizon to backhaul on their networks since the MSOs view them as competitors. That is not the case with Sprint. The cable HFC plant is stuffed full of dark fiber targeted at node splits and commercial over metro Ethernet. There's no reason why Sprint and the MSOs can't cooperate and fix some of that backhaul cost. The WiMAX architecture uses tunnels to get from the ASN Gateway to the Base Station. There's no reason they can't use the MSO IP network to transport the tunnel.
twill009 12/5/2012 | 3:12:39 PM
re: Clearwire's Bubble Bursts I think there is a widely held misconception about Intel's role in Clearwire. Intel is not going to play the sugardaddy to CLWR and provide infinite capital and cheap BOM. Quite the contrary. The IPO itself is a signal that Intel is not willing to further bankroll the business and wants others (i.e., the public) to pick up the slack. Similarly, the communications component business unit within Intel is not interested in subsidizing Intel Capital's follies. They have enough problems already.

In addition to the intellectual property questions about OFDM, there are legitimate questions about WiMAX's spectral efficiency and how well it holds up in real world conditions. LMDS, MMDS anyone?
materialgirl 12/5/2012 | 3:12:39 PM
re: Clearwire's Bubble Bursts Der Jakewk:
Don't forget Sprint's WiMax plans. They plan to go big in 08, capping their CDMA networks in the process. They claim they would not have gone this route without a 10x price efficiency advantage. I am sure this is on their web page.

I agree that any spectral difference only lasts until you get to the tower. From then on, backhaul costs have to be the same, with backhaul probably 40% of the CCPU. That means the real business plan has to be WiMax-plus. The plus is the disintermediating all-IP play.
Jakewk 12/5/2012 | 3:12:40 PM
re: Clearwire's Bubble Bursts Gabriel,
Considering that Intel and Motorola are major investors, the BOM costs may be better than anticipated. (Although this raises interesting questions about their strategy of being both an investor and a vendor.)
Additionally, I think the previous poster's discussion of leveraging existing cell tower investments is a major consideration as well.
However, you nailed it when you asked: "can an operator derive a business advantage from improved spectral efficiency and wider channel widths?"
More simply: does WiMAX represent enough of a technology evolution to disrupt existing telecommunication service providers? I imagine that the "open architecture" term is code for "you can use Skype over our IP connection". In other words, is ClearWire's fundamental strategy to displace existing CSPs by delivering the IP pipe on a ubiquitous basis? Existing CSPs are paranoid about letting other parties into their services stack. Either way it will be an interesting dynamic to watch play out...
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