Clearwire: Taking WiMAX to the Street

Analysts predict a strong IPO for Craig McCaw's latest venture, but revenues remain highly speculative. Will its mobile WiMAX push do the trick?

On Mar. 6, Clearwire, the company headed by wireless pioneer Craig McCaw, is expected to sell shares in what could be one of the most talked about—and sought-after—tech initial public offerings of the year. The Kirkland (Wash.) company, which provides services through the wireless broadband technology known as WiMAX, plans to offer up to 23 million shares, at $23 to $25 each.

When it debuts, the stock may fetch more, says Scott Sweet, managing partner at consultancy The shares are likely to debut at $25 to $27, fetching Clearwire as much as $621 million, compared with the $513 million the company initially expected, Sweet estimates. "There's enormous demand," despite a recent equity slump that analysts believe could roil IPO markets, Sweet says. "Unless the market absolutely crumbles, Clearwire is ready to go," he adds.

Trusted Pioneer

Part of the optimism is based on the track record of McCaw, who more than a decade ago stitched together the first nationwide cellular empire, and then sold it to AT&T (T) for $11.5 billion in 1994. McCaw is hoping to re-create such successes with Clearwire, which has amassed the second-largest chunk of the airwaves best suited to WiMAX services after Sprint Nextel (S). In February, the company shelled out $300 million for an additional swath of that prime spectrum from AT&T. "McCaw knows what he is doing," says Philip Solis, principal analyst in mobile broadband with consultancy ABI Research. "Spectrum is the most valuable asset in wireless."

Another feather in Clearwire's cap: powerhouse partner-investors including chipmaker Intel (INTC) and wireless giant Motorola (MOT). These and other shareholders have wagered $1.1 billion on the business. And they won't be passive investors: Intel, together with McCaw, will control 77% of the company after the IPO, down from 84% today. Motorola is a supplier of equipment to Clearwire, and Intel, which in 2008 will introduce a chip that lets notebooks access both WiMAX and Wi-Fi networks, is co-developing products with Clearwire. Clearwire and Intel also plan to co-brand a mobile WiMAX service at some point down the road.

For now, Clearwire focuses on what's known as fixed WiMAX, which provides high-speed Internet access in fixed locations—say, a home or an office building—rather than over a mobile phone or a device used in a train or car. Consultancy Parks Associates expects 4 million Americans to use wireless broadband technologies like WiMAX for Web access by 2010.

The Road to Mobile

The trouble is, there isn't much money in fixed WiMAX beyond rural areas where DSL and cable broadband aren't offered. In other, big markets, WiMAX will simply become a third broadband alternative, putting price pressure on the mainstream flavors of Internet access, says Andrei Jezierski, a founder of telecom venture capital consultancy i2 Partners in New York. So while providing fixed WiMAX can be a viable business, it can never be a spectacularly high-growth or profitable one.

That's why Clearwire aspires to deploy mobile WiMAX, a technology that would allow for download speeds of 1 to 2 megabits per second for users on the go (that compares with a maximum speed of 700 kilobits per second for today's newest cellular network). Demand for mobile WiMAX is expected to be robust. In a trial conducted by Sprint in North Carolina a few years back, users flocked to the service and were willing to pay a premium for it. "The real opportunity will be with mobile WiMAX," says Dan Locke, an analyst with consultancy Pyramid Research. "DSL and cable will continue to dominate fixed broadband."

Here's where investing in Clearwire becomes something of a gamble. Clearwire hasn't begun to build a mobile WiMAX network. Some deployments could come as early as the end of this year.

But Clearwire's mobile WiMAX subscriber ramp might be relatively slow: Pyramid expects that only 5.1 million people will be using mobile WiMAX worldwide by 2010. At the end of 2006, Clearwire had 206,200 fixed WiMAX customers, and it expects to have as many as 400,000 subscribers worldwide by the end of this year.

High-Risk Investment

Then there are the financial questions. In 2006, about one-third of Clearwire's $100 million in sales came from network equipment—a business sold to Motorola last summer. That makes Clearwire's future revenues highly unpredictable. "It's a strong speculative story with a strong risk reward," says Sweet.

Speculative is the operative word. Clearwire had $284 million in losses in 2006, and it expects to burn through $800 million this year. Clearwire expects to stay in the red for at least the next five years, and it has amassed $756 million in long-term debt.

Then there's the question of competition. Though Clearwire will offer higher throughput and more mobility than some rivals, it will still be competing against citywide Wi-Fi and next-generation cellular networks from Verizon Wireless, the mobile-phone company owned by Verizon (VZ) and Vodafone (VOD), Cingular/AT&T, Sprint Nextel, and T-Mobile, owned by Deutsche Telekom (DT).

WiMAX Rivals

That says nothing of the rivalry facing Clearwire in the WiMAX arena. Sprint promises to deploy mobile WiMAX in two markets by yearend and in 35 markets by the end of 2008. A slew of startups may have enough spectrum to jump into providing WiMAX services. One potential rival: NextWave Wireless (WAVE), which owns, directly or through a joint venture, lots of spectrum in the U.S. and Germany. Another is Xanadoo, already providing fixed WiMAX service in the Midwest. Finally, there's Aloha Partners, a company holding spectrum it intends to use either for providing mobile-TV services or a WiMAX offering (see, 8/30/06, "Hiwire's High-Wire Act").

Not everything McCaw touches turns to gold. Despite his involvement, XO Communications filed for bankruptcy in 2002. That same year, McCaw abandoned his dream of blanketing the globe with a satellite network that would provide phone and Web service. The company raised about $1 billion from investors, including Microsoft (MSFT) Chairman Bill Gates, but never launched a single satellite.

For its part, to fend off rivals while building out its mobile WiMAX network, Clearwire will likely need to raise more money—diluting ownership of its IPO investors. While having a fixed WiMAX network and related sites should help reduce rollout costs, the mobile WiMAX network could still cost billions. Sprint Nextel, for instance, expects to spend $3 billion on its WiMAX rollout in the next three years (see, 12/27/06, "Sprint's Secret to Cost Cutting: WiMAX").

Setting the Stage for a Sale?

Of course, Clearwire could become an attractive acquisition target for Sprint, which could benefit from the addition of Clearwire's spectrum and its expertise in fixed WiMAX. Sprint already plans to work with Clearwire to ensure the companies' respective networks don't interfere with one another. And because they own spectrum in different markets, Sprint doesn't expect to see much services overlap, says Don Stroberg, vice-president for mobile broadband strategy at Sprint. He declined to comment on the acquisition rumors.

An IPO could make such an acquisition easier by, in effect, establishing a going price for Clearwire. The company's chief executive, Benjamin Wolff, knows dealmaking well, previously having worked as a mergers-and-acquisitions lawyer with clients including Intel. Whatever the long-term outcome, analysts say there's scope for growth in the near term. McCaw & Co. hope investors will buy into that potential, risks notwithstanding.

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