Satellite Deals Send Clearwire into Orbit

Shares soared Thursday after the company struck agreements to offer its high-speed Internet service through DirecTV and EchoStar

For relative newcomer Clearwire Corp. (CLWR), two new distribution deals with leading satellite television providers are just what it needs to attract more subscribers and further validate its business model.

The agreements with DirecTV (DTV) and EchoStar Communications (DISH), announced June 14 but due to launch later this year, will enable both satellite companies to offer Clearwire's high-speed Internet service to their customers, and, in exchange, will allow Clearwire to offer the video services of one or both satellite companies to its customers. If all goes according to plan, each of the three companies will be able to offer high-speed Internet, video and voice in all current and future Clearwire markets.

The distribution agreements give DirecTV and EchoStar access to Clearwire's wireless high-speed network, enabling them to market a bundle including Clearwire's Internet services to their residential customers. DirecTV and EchoStar will also be able to sell Clearwire's branded services separately. In turn, Clearwire will be able to sell DirecTV and EchoStar satellite video services.

The ability to offer Internet service into as part of a video package is something of a coup for Clearwire at a time when U.S. consumers are increasingly looking to combine their telephone, video and Internet services in cost-saving packages. The Kirkland, Wash., company was founded in October, 2003, and launched its first market less than three years ago.

The partnership "gives the company a national brand name and nationwide distribution network, which we expect will lead to a significant reduction in cost per gross add for Clearwire over time," Stifel, Nicolaus & Co. said in a research note. The bundling of Internet services with video should help accelerate Clearwire's subscriber growth, it added.

DirecTV has more than 16 million U.S. customers, for whom one of the draws is an abundance of sports programming, including NFL Sunday Ticket and MLB Extra Innings. EchoStar has 13.4 million customers and offers a range of international channels in the U.S.

Although the companies didn't reveal the economic terms of the deals, Stifel, Nicolaus said it's likely they will share some of the marketing costs and that Clearwire will be the main beneficiary of the economic gains generated by new broadband subscribers.

Clearwire shares shot up 22.0% to $24.25 as investors digested the news.

Clearwire has said it expects to have between 375,000 and 400,000 subscribers and market coverage extending to 16 million to 18 million people by the end of 2007.

Some market observers believe it will be a few years, however, before Clearwire can fully capture the benefits of the satellite partnerships, as it needs to build out its coverage area first. It currently offers service in 39 U.S. markets that cover roughly 9.9 million people in more than 420 municipalities in 13 states. Clearwire also serves about 1.2 million customers in Ireland and Belgium

When it reported its first-quarter results last month, Clearwire said it could regulate the pace of expansion into new markets to manage its cash burn but expressed confidence that "it would need only $1.6 billion incremental financing to fund its U.S. buildout," according to a research note from Jefferies & Co. on May 9. Jefferies predicted the company would tap the debt markets in the near future.

In an earlier research note in May, Stifel, Nicolaus estimated Clearwire would generate $150.7 million in revenue and post a net loss before interest, taxes, depreciation and amortization of $274 million this year.

Stifel, Nicolaus does investment banking with Clearwire and Jefferies & Co. co-managed the company's initial public offering in March, 2006.