Who Needs Wires?

Sprint Corp. (NYSE: S) and Clearwire LLC (Nasdaq: CLWR) recently created a media storm, when they announced that they are resurrecting a venture they had called off last November. But what does this mean for owners and distributors of digital content?

The problem with the initial venture was that the WiMax technology at issue is still not entirely proven and the companies were not able to fund development. Enter a cast of cable operators – Comcast Corp. (Nasdaq: CMCSA, CMCSK), Time Warner Inc. (NYSE: TWX), and Bright House Networks – along with Google (Nasdaq: GOOG) and Intel Corp. (Nasdaq: INTC), and $3.2 billion later the funding problem disappears.

WiMax can support faster speeds across longer distances than WiFi, and could be used as a fixed-line replacement technology for rural or otherwise hard to reach areas. But it can also support mobile services, which will help the cable operators fill a hole in their service portfolio.

While that doesn't in itself prove the technology is ready for prime time, it does mean that some very big players are going to be trying very hard to make it work. Each member of the consortium has something to gain here:

  • Sprint is losing ground to AT&T Inc. (NYSE: T) and Verizon Wireless and needs a new offensive strategy.
  • The cable operators need a mobile component to compete with the big incumbents in the long term. Pivot, their recent venture with Sprint, was just called off.
  • Intel is one of the early champions of WiMax technology and has invested significantly in developing WiMax chipsets and standards. It needs the technology to succeed for its investment to pay off.
  • Google is just being Google and looking for new ways to reach consumers where it can influence the development of new advertising formats and extend its search dominance. The company has already announced plans to expand its relationship with Sprint and offer Google's mobile search, maps, and YouTube Inc. to Sprint handsets this summer.

Other providers are also investing heavily in wireless. Certainly dominant U.S. telcos AT&T and Verizon are developing their next-generation wireless networks. But Cox Communications Inc. , the No. 3 cable operator in the U.S., also purchased wireless spectrum in the recent 700Mhz auction, signaling its plans to roll out high-speed wireless data services. And Cablevision Systems Corp. (NYSE: CVC) just announced it was setting up a free WiFi network for subscribers of its Optimum online cable modem service.

Service providers are demonstrating that mobility is an important element of their overall customer strategy. While substantial revenue will probably take a few years to appear, the development of a robust delivery network, efforts toward developing flat-rate data plans, and growing efforts in developing a viable advertising ecosystem for mobile media are important and encouraging signs of increasing momentum.

There is a fast-emerging opportunity for owners and distributors of content to leverage the mobile channel, but it's worth remembering the lessons from the dot-com boom a few years ago. Mobile media behaviors are still largely unknown, and are unlikely to be exactly like the TV or even the online environment. Mobile content must be geared toward mobile consumption, which will be bite-sized and very purpose-driven. In addition, revenues are likely to be limited for the foreseeable future so costs must be tightly controlled. Large production and development budgets for specialized content are not viable yet.

And last but most important, the business models still need to be identified. Advertising is almost certainly the key, but we are still trying to identify the right format. Search advertising for the 30-second commercial has yet to be discovered in the mobile world.

— Aditya Kishore, Senior Analyst, Heavy Reading
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