WiMAX IPOs Are on the Way

Wireless upstarts NextWave and Clearwire have both filed to go public. But Clearwire has a blueblood telecom pedigree

Let the WiMAX gold rush begin.

On Dec. 18 and 19, two wireless upstarts—NextWave and Clearwire—filed to go public with the Securities & Exchange Commission. Based on their S-1 forms, both companies hope to make their fortunes on WiMAX, a broadband-wireless technology expected to start making significant inroads in the telecom market next year. Market researcher Gartner Dataquest expects the North American WiMAX services market to swell from 30,000 connections in 2006 to 21.2 million by 2011.

What's the appeal of WiMAX? The wireless technology could provide consumers with a new source of high-speed broadband services, threatening to displace digital subscriber lines (DSL), cable modems, and today's slower cellular and Wi-Fi services. For WiMAX operators, product suppliers, and software vendors, the technology represents a huge opportunity to shake up the telecom market—one that Clearwire and NextWave are hoping investors will be quick to appreciate.

Strong Investor Appetite

But will investors snap up Clearwire and NextWave's offerings? The answer could differ by company, even though, at first glance, the two outfits appear to be very similar: Both are swimming in operating losses. (Appropriately, NextWave plans to trade under the symbol WAVE.) And both hope eventually to make their money, at least in part, from building out WiMAX networks.

The two companies also expect to go public in early 2007, capitalizing on a revival of the tech initial public offering market—the strongest it's been since year 2000, says IPO expert Tom Taulli (see BusinessWeek.com, 12/19/06, "IPOs: More Market Mojo in '07?"). On Sept. 21, wireless broadband gear maker Riverbed Technology (RVBD) priced above its expected range, and the company's shares have rallied 210% since, to $30.19, indicating strong investor appetite for wireless broadband-related stocks.

Yet Clearwire's shares, expected to be listed under symbol CLWR, might receive a different reception, and attract very different investors, than NextWave. One reason: Clearwire has A-list investors: chipmaker Intel (INTC) and cell phone manufacturer Motorola (MOT). It also has legendary telecom executive Craig McCaw at the helm. "There's a natural comfort that comes with the fact that Intel and Motorola are interested, and McCaw runs it," says Michael Mahoney, managing director at EGM Capital hedge funds in San Francisco. Years ago, McCaw cobbled together the U.S.'s first nationwide cellular empire, which he sold to old AT&T for $11.5 billion in 1994.

Spectrum Speculators?

How much Clearwire could raise in an IPO is yet unclear. Some estimates suggest the figure could be around $400 million (see BusinessWeek.com, 7/24/06, "A Wake-Up Call from Craig McCaw"). Clearwire, which originally planned to go public earlier this year but withdrew its application due to adverse IPO market conditions, already has 188,000 subscribers, up from 1,000 users in 2004. Its network is deployed in 34 markets in the U.S. and in certain locales abroad. And it has $1.25 billion in cash, equivalents, and short-term investments, according to documents filed with the SEC. Clearwire officials did not respond to requests for an interview.

NextWave is famed in its own right, but for different reasons. Until 1995, when he founded NextWave Telecom, CEO Allen Salmasi was a board member and chief strategic officer at wireless-technology powerhouse Qualcomm (QCOM). At the helm of NextWave Telecom, Salmasi purchased some wireless spectrum and attempted to build out a network based on Qualcomm technology.

But the company was forced into bankruptcy when it couldn't make payments on the spectrum. After some legal wrangling that reached the Supreme Court, the outfit finally sold its share of spectrum to carriers that included Verizon Wireless—and netted its investors a hefty profit. The transaction earned Salmasi and NextWave a reputation as spectrum speculators. "They are seen as opportunists in the industry," says Andrew Cole, president of telecom consultancy CSMG-Adventis.

Today's reincarnation, NextWave Wireless, is a spin-off of that original company, created with a portion of the spectrum sale proceeds. Once again Salmasi is trying to cobble together a wholesale network, selling capacity to carrier partners, who will resell the service under their own brand. This time around, though, NextWave hopes to be more involved in all aspects of the business. "We are not in the business of speculating on spectrum," Roy Berger, NextWave's chief marketing officer, tells BusinessWeek.com. "We develop wireless technology."

Intermediate Step

Still, his company's reputation as a spectrum flipper persists. Analysts believe the stock could attract a different kind of investor. In fact, NextWave's Nasdaq listing may simply be an intermediate step to being acquired by a larger player, such as a telco, satellite, or cable company, or even search giant Google (GOOG), which might use a WiMAX network as an alternative way to distributing its content, say analysts. What's more, NextWave doesn't expect to raise much—possibly, any—money from this public offering, as it only involves a resale of shares by people who received NextWave's warrants issued back in July.

NextWave's WiMAX chips, meanwhile, are still being developed and no commercial product has been announced. And it has yet to conduct its first WiMAX service market trial. Some analysts doubt whether the company has the resources to get the service off the ground nationwide. While deploying WiMAX costs less than construction of some other wireless networks, Sprint Nextel (S), for instance, plans to spend some $2 billion in the next two years on its WiMAX effort.

NextWave only has $222 million in cash, equivalents, and short-term investments, according to its filing. Yet its network build-out costs could run higher than Sprint's. Unlike the latter, which is able to reuse its existing cell sites for the new deployment, NextWave might have to start from scratch. Leasing and building out cell sites accounts for more than half of a typical network's cost. NextWave plans to find partners to jointly build out the network and share the costs, but it's made no announcements so far.

Mish-Mash of Different Bands

Meanwhile, NextWave's network build-out might be further complicated by the fact that the company's main asset, wireless spectrum used for sending cell phone calls and data—NextWave won a bid for a chunk of spectrum in the Federal Communication Commission's Auction 66 earlier this year—is a mish-mash of different bands. Using different frequencies, this spectrum might require more complex—and more expensive—equipment to deploy, a problem Clearwire might encounter as well, says Sharon Armbrust, an analyst with JupiterResearch. This spectrum also might take a while to deploy, as the airwaves purchased in Auction 66, for example, may have to be cleared of existing tenants.

Some analysts also question whether NextWave has enough spectrum to deploy a nationwide WiMAX network. While the company has as much as 40Mhz of spectrum in certain areas, its holdings in other markets hover closer to 10Mhz. Compare that with Sprint, which averages 80Mhz to 85Mhz of spectrum per market. "The minimum you need to have for a true broadband experience is 60Mhz," says Ali Tabassi, Sprint Nextel's vice-president of technology development.

That's because WiMAX networks are expected to not only allow for wireless calls but also for bandwidth-thirsty wireless-video viewing and music downloads. While Clearwire doesn't own as much spectrum as Sprint, it claims to hold the nation's second-largest chunk of valuable 2.5Ghz spectrum used for WiMAX.

Clearwire and NextWave appear to be on par in one area: losses. NextWave's subsidiary, PacketVideo, already provides mobile device software to Verizon Wireless, and is seeing steady revenue growth. Yet neither company is in the black: For the nine months ended Sept. 30, NextWave reported a $65.5 million loss on $22 million in sales. In the same period, Clearwire says it lost $192 million on $76.4 million in revenues. And both companies claim they may require lots more investment, to hire employees and acquire more spectrum, to ramp up the business.

On the plus side, NextWave's capital requirements, thanks to its partner strategy, could end up being lower than Clearwire's. Additionally, instead of competing directly with giant service-providers such as Sprint, as Clearwire currently does, NextWave hopes its approach will turn some of today's telecom industry giants into its customers, says Berger.

And if Clearwire's IPO goes well, NextWave's public debut will be met with more enthusiasm, says Taulli. "If Clearwire has a good IPO, then you have a benchmark to work from," he says.

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