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IPOs

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

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...
Mark Sebastyn 12/5/2012 | 3:12:41 PM
re: Clearwire's Bubble Bursts Not sure if any of you have read the full report, but Yankee released forward projections on Wimax subs and equipment revenue. They claim (are you sitting down?) 28M subs in 2010-2011 (100x growth in 4 years), with $4B a year in capex (30% of optimistic revenue). This is insanity. The numbers don't work.

I am begging someone to explain exactly how Wimax is going to compete with the incumbents on a technology basis. If Wimax wins, it will be because the Wimax operators pursue a different business strategy than the incumbents - not because of technology. I think the winning idea would be an open data only network built on 3G+ and roaming if you leave an urban area.

http://www.nyquistcapital.com/...
light_geeking 12/5/2012 | 3:12:42 PM
re: Clearwire's Bubble Bursts Gabriel,
You make good observations about volume-based-pricing and vendor-financing, which I think may happen led by 3G-have-nots infrastructure vendors rather than incumbent and well-entrenched 3G infrastructure suppliers.

Another excellent point you raise is what is different in WiMAX to give it an appealing BOM, if any? One could argue that for data-oriented apps which have lenient delay constraints due to non support of real-time apps such as toll-quality packet voice could be cutting some slack in the infrastructure design, and hence could be cheaper to produce. Your insights if any on BOM costs are welcome.

About your question on whether an operator can derive benefit from added channel-width, my answer is yes, absolutely. An analogy that comes to mind is that have software/applications manufacturers been able to leverage faster CPU speeds and falling RAM prices. Affirmative. Another point of comparison here is that because there has to one or more operational scenarios where increased channel width has merit, otherwise why would 3GPP LTE sign up to it?

About your point on can Intel ship a laptop with WiMAX radio? I again think this is quite possible, especially for the fixed/nomadic mode. The big downside I see to that in the short term is battery power consumption, especially for a laptop form factor.

My take on Clearwire is that it will see the same exit strategy as McCaw Wireless (i.e. being bought out by other service provider). However, one thing different this time is the buyer may not have deep pockets, so that exit strategy may take some time to consumate.

Just my two cents.

-lg
twill009 12/5/2012 | 3:12:42 PM
re: Clearwire's Bubble Bursts I would not necessarily interpret the poor execution of an IPO as signaling a change in investors' appetite for long-term investing. If anything, the mere fact that profitless companies with no projection of profits (i.e., Vonage, Clearwire) can be floated on the public markets is a sign of investor complacency and high tolerance of risk. This is a highly speculative investment and is probably more appropriate for venture investors who understand that only 1 in 10 of their investments will survive. I doubt that any retail owners of CLWR have factored in the risk that the stock could go to zero.
Gabriel Brown 12/5/2012 | 3:12:43 PM
re: Clearwire's Bubble Bursts It seems unlikely that a WiMax base station is cheaper than a 3G Node B. There just isnGÇÖt the volume yet.

Volume will come and presumably thereGÇÖs forward-pricing and vendor finance on the table. But what is fundamentally different in the BOM costs of the two technologies? Probably there will be some differences in royalties and maybe NRE costs. Maybe the more open eco-system will help.

The core question is can an operator derive a business advantage from improved spectral efficiency and wider channel widths? (ThatGÇÖs assuming it has spectrum in the first place).

All 3G and WiMax operators are wrestling with this. Good luck to those who are trying.

Changing the subsidized-handset model could also be disruptive. If Intel really can ship a WiMax radio in every laptop (a la WiFi), then that would be something.

Clearwire is interesting for sure GÇô as much for the markets and applications it is after, as for the technology it is using.
light_geeking 12/5/2012 | 3:12:43 PM
re: Clearwire's Bubble Bursts sailboat, you make a good point about towers being in place. However, couple of comments about difference in opinion...to pitch in my two cents.

You mention that WiMAX does not have obscene royalties. If you can provide some real numbers between 3GPP/3GPP2 vs. WiMAX royalties it would be helpful instead of just having a gut feel. Remember, that Vonage has been in business for quite a few years and they got whacked recently (late in the game) for patent infringement. So I am keeping my fingers crossed about unobscene royalty comment you are making about WiMAX because the dust has not yet settled on that issue.

Secondly you mention that WiMAX gear should cost less than building out the cellular network. Any side-by-side comparison on this topic is welcome. Remember that even if in theory the base station cost may be lower, the reach (e.g. miles from the tower to the subscriber station) is also lower in WiMAX compared to 3G cellular, so more base stations are needed to provide equivalent coverage.

Thirdly you talk about subsidy of WiMAX cellphones. Reality of today is that 802.16e (the mobile version of WiMAX) is still in the process of being brought to market, especially the handsets. If you know of any commercial mobility enabled WiMAX handsets that are available, you are welcome to share that info as well. My understanding is that Clearwire is more going after the wireless DSL market (fixed and nomadic WiMAX) instead of mobile WiMAX (at least currently). So the subsidy economics will most likely follow DSL modem subsidy model rather than cellphone subsidy model.

Fourthly, you mention that an alternative to incumbents is welcome. Amen to that. Too much consolidation has taken place in the service provider market in US. Time to widen the number of players. So I agree about alternatives.

-lg

materialgirl 12/5/2012 | 3:12:43 PM
re: Clearwire's Bubble Bursts The markets are not the place for long-term funding right now, as AMD is finding out. So is LVLT, as their constant metro empire building is alienating investors.
In addition, we are in the early days of a debt market melt-down, led by the collapse of the sub-prime market. Until this disaster plays out, stocks are going nowhere.
That said, CLWR surely has a spot, as sailboat said, due to the costly walled gardens our RBOCs are (slowly) building in cherry-picked neighborhoods. Even if you are redlined, you can get this, which will be lots of people.
Finally, INTC wants this to work. They have skin in the game and $10B on their balance sheet. The money is there even if it will be a long, unpopular, slog.
^Eagle^ 12/5/2012 | 3:12:44 PM
re: Clearwire's Bubble Bursts I think it funny that Clearwire is being pounded so hard over the losses and stock price in the trade press.

a little perspective is in order. Remember, Cellular One / McCaw Cellular lost a LOT of money in it's early days.. red ink everywhere. At a few points the stock was downgraded to junk status. Raising money was difficult and McCaw Cellular finally had to resort to getting cash from junk bond underwriters at relatively high interest rates.

in theory, building out Clearwire should cost less than building out the cellular network. WiMax gear should cost less than cell site equipment. WiMax does not have obscene royalties that need to be paid to license holders... and the trail has already been blazed for all the rf antenna sites that have to be leased to deploy the infrastructure. In the early days of cellular... there were no ready made sites excepting the 1-2 FM towers in each region. so towers and lots of power infrastructure had to be built. Now with that tower network in place... and with the "Tower" business turning into a sub-contracting firms, Clearwire should be able to leverage that ready made network.

also subscriber gear will not need to be so heavily subsidized as early cell phones were. Remember GTE mobilnet (verizon) and McCaw and all the others under wrote the cost of phones so consumers paid only a small fraction of the cost of gear. Wimax should have less of that subsidy required.

Clearwire has issues, yes. But lets not overhype them.

Bigger question is will the financial markets recognize the value and support it via investment dollars. OR has our equities market lost all it's long term view. Any kind of a play like Clearwire takes years to work out.

I for one would like to see them succeed so I have a good alternative to being captive to Cingular and Verizon for wireless data. A good strong alternative to local loop would be most welcome. Especially with Verizon & ATT/SBC likely to take a walled garden approach to their broadband offerings much like Cable MSO's do.

Finally, one last point. McCaw is not known ONLY for the early success in cellular. Lots of folks forget that his father was one of the key starters of the cable tv industry! That is where the early family fortune came from. So there is generational credibility backing him.

I think there are lots of issues with Clearwire. McCaw him self is notoriously egotistical. But don't count him out just yet. Cellular was in much worse shape financially at the same time in it's evolution than clearwire is today.

sailboat
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