A time to choose, a time to kill

Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 9:30 am by timfarrar

It looks to me ever more likely in the wake of the AT&T/T-Mobile deal that Sprint will soon have to choose to back either Clearwire or LightSquared, but not both. LightSquared is doing its best to talk up the idea that Clearwire’s customers are going to jump ship, having announced a deal with Best Buy with a “trial” of its LTE service starting in the first quarter of 2012, and now suggesting that it is “in discussions” with Time Warner Cable for a major deal, despite that company’s “not very impressive” results with Clearwire and TWC stating that it is “trying to spend not too much money while we are [exploring whether packaging wireless data with our wireline offerings is something that consumers want]“.

Neither of the deals that LightSquared has announced this week will generate very much revenue (I estimate a few tens of millions of dollars per year at best from Leap and rather less than that from Best Buy) and so most people are looking towards a LightSquared network sharing agreement with Sprint to show how LightSquared will move forward. This is hardly surprising given that the previous MoU with Nokia Siemens Networks appears to have fallen apart, and there is still no news about a partnership with MetroPCS on the 2GHz MSS spectrum.

Before the AT&T/T-Mobile deal it seemed that Sprint would try and have it both ways, continuing to work with Clearwire, and hoping that a spectrum sale or investment from T-Mobile would solve Clearwire’s funding challenges, while signing a network sharing agreement with LightSquared to offset some of its network upgrade costs and allow it to play Clearwire off against LightSquared when it came to negotiating wholesale bandwidth pricing.

However, it now looks more likely that Sprint will have to choose between Clearwire and LightSquared, because the two companies are competing for the same diminished pool of potential deals, and as Strategy Analytics asserts “there are probably too many 4G wholesale networks going after too few large wholesale customers”.

Despite the problems that Clearwire is facing, it has spent at least $5B so far on rolling out a network, mostly using other people’s money, and has a commercial network covering 120M people with capacity that can be sold today. From that perspective alone, it would be much less of a risk for Sprint to choose Clearwire over LightSquared. As Walter Piecyk of BTIG put it with regard to the “talks” between LightSquared and TWC: “Signing a roaming deal with LightSquared is kind of like planning a trip that goes over the bridge to nowhere. There is currently no network to use, there are material interference issues to resolve and then there is the small detail of coming up with $14 billion of cash. Good luck.”

Given these challenges, a decision by Sprint that provided LightSquared with a path to move forward would cast its already difficult relationship with Clearwire in an even more negative light. Similarly, if Sprint decides to back Clearwire as its primary provider of 4G service, it is hard to see why Sprint would expose itself to having to put up even more investment if Clearwire’s future revenue growth is impacted by competition from LightSquared. Given that AT&T has used the availability of both Clearwire and LightSquared’s networks to support its assertion that the mobile broadband market is highly competitive, the AT&T/T-Mobile merger might also be less likely to be approved, if one or other of Clearwire and LightSquared was to fail in the near term. As a result, I think that whichever choice Sprint makes could be fatal for the company it leaves on the sidelines, and ironically Sprint might even benefit from that outcome.

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