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Sprint Wins In WiMax Deal, But Risks Still Loom

The nation's No. 3 wireless carrier retained majority ownership in the wireless broadband network while spreading the financial risk across a diverse set of partners.
Vowing to "transform the wireless communications landscape," Sprint Nextel and Clearwire, along with a group of partner companies and investors, today delivered a major step forward for the development of wireless broadband in the United States. How it will actually get built, and benefit the companies involved and mobile users, remains to be seen.

Having seen previous attempts to combine their costly and competing efforts to build out a nationwide WiMax network fall apart over technology compatibility and financial issues, Sprint and Clearwire finally arrived at a deal to create a new company, called Clearwire, that will combine the companies' spectrum assets and build out a unified network over the next two to three years. Benjamin Wolff, the CEO of Clearwire who will retain that title under the new ownership structure, said the company will reach 120 million to 140 million people by 2010, and 200 million shortly thereafter.

Sprint, which has said it would spend around $5 billion to build its WiMax system, will own 51% of the new entity. Clearwire will have 27%. A group of companies that includes Intel Capital, Google, Time Warner, Comcast, and Bright House Networks, plus investment fund Trilogy Equity Partners, will invest a combined $3.2 billion in the new venture.

The first clear winner in the complicated arrangement is Sprint CEO Dan Hesse, who took over the company at the end of last year, succeeding Gary Forsee, a WiMax champion who resigned under pressure in October. Many industry analysts foresaw Hesse shuttering or spinning off Xohm, Sprint's wireless broadband unit. Instead, he has engineered a deal wherein Sprint's assets (spectrum holdings, technology, and expertise) are valued at $7.4 billion and the nation's No. 3 wireless carrier retains majority ownership while spreading the risk across a diverse set of partners.

The Sprint-Clearwire partnership, said Hesse in the conference call on Wednesday announcing the transaction, "gives us the largest spectrum position of any company in America."

WiMax, Sprint and Clearwire executives stressed repeatedly, has a two- to three-year advantage over competing technologies, specifically the so-called "4G" cellular networking system known as Long Term Evolution, or LTE. Nevertheless, several major international carriers, including Vodafone, have called for LTE to become the de facto standard for wireless broadband going forward. At the CTIA Wireless show in Las Vegas last month, Vodafone CEO Arun Sarin, one of the most influential figures in the industry, called on carriers and infrastructure providers to unite behind LTE.

"We need to look at LTE as an all-encompassing standard," Sarin said.

That now appears unlikely. And Sprint, which has struggled with declining subscriber numbers and a plunging share price in the last year, has a potential new revenue stream that could give it leadership status in the emerging 4G market.

"What this really does is allow us to partner with great companies, get some additional capital, and take some risk out of what by nature is a variable business as we grow and build out this new network," said Atish Gude, Sprint's senior VP of mobile broadband operations.

For Wolff and Clearwire, the deal presents at once a lifeline and a dominant position in the U.S. wireless broadband market. While the Kirkland, Wash.-based company retains only 27% ownership of the new entity, it will be called Clearwire and headed by Wolff. Founded by wireless pioneer Craig McCaw, Clearwire has seen its market cap plunge by one-third since going public in March 2007. The company, which lost $727 million in 2007, has launched service in 50 markets across the United States but faced an uphill climb to find enough capital to build out a true nationwide service on its own.

Indeed, executives from both Sprint and Clearwire acknowledged this morning that more fund raising, to the tune of more than $2 billion, will still be needed to bring the WiMax vision to reality.

The wild card in this deck, inevitably, is Google. The search giant is investing just $500 million in the venture -- pocket change for a company with a market cap of $181.4 billion -- but it has landed a central role in providing search and other applications and services for users of the new Clearwire network. While Sprint and Clearwire executives are adamant that the WiMax network will be open to devices and applications from any provider, it's clear that Google will effectively be the default option for search and many other features from the new service, giving it a new advertising channel as it seeks to migrate its dominance of the desktop Internet to the mobile Web.

The new Clearwire, acknowledges Gude, "gives Google special rights as part of their unique role in the partnership."

Shares in both Sprint and Clearwire are up sharply this week, after news of the deal first appeared in The Wall Street Journal.