Cable operators, facing threats from fiber optic carriers,
are looking to secure their future with mobile broadband.

Cable operators can’t afford another Sprint Pivot, a failed joint venture that was supposed to integrate Sprint’s wireless services with cable services.

Digital Voice, TV, Data, WirelessCable’s market opportunity is virtually nonexistent. Most consumers who want fixed phone and Internet are already connected, and about 80 percent of Americans already pay for their television service.

To make matters worse, cable companies face stiff competition from rival bundles on AT&T and Verizon Communications’ respective fiber optic networks, which essentially provide customers with cable’s same service: data, television and digital voice.
And to mention the obvious, carriers can toss in wireless for a killer quad play bundle.

So cable’s multiple systems operators (MSOs) are pinning their hopes for the future on mobile WiMAX. If they are successful, mobile broadband could give them the ability to topple carriers’ monopoly on wireless data and voice by allowing MSOs to offer an in-house quad play bundle for the first time.
But to be successful, they have to move forward – and fast.

“Competition for the triple play consumer has become a zero sum game,” says Larry Hettick, who has been covering VoIP for 10 years and is the principal analyst of digital home at research firm Current Analysis. “We look at mobile broadband as the first driver for wireless services because mobile data is a growing market … Voice will just be an application over mobile broadband, just an app on the device.”

Larry Hettick
Hettick: Competition for the triple play consumer has become a zero sum game.

Hettick says MSOs face a serious threat as carriers like AT&T and Verizon expand fiber optic networks. To secure their future, they need to move into a growth area: mobile broadband. This poses its own difficulties. “[MSOs] have the option to use Clearwire or build their own networks on spectrum that they own, which is a long-term solution fraught with peril,” Hettick says.

Cable companies have moved forward by investing heavily in Clearwire, a mobile broadband startup which is majority-owned by Sprint. In December, Comcast, Intel, Time Warner Cable, Google and Bright House Networks invested $3.2 billion into the company, and Sprint handed over control of its WiMAX assets, which were marketed as the Xohm network.

The plan: to launch a nationwide mobile broadband network. So far, Clearwire’s WiMAX mobile broadband network has been deployed in Baltimore, Md., and Portland, Ore. Though the launch of the Portland network faced delays, the company is in 46 pre-WiMAX markets.

Clearwire plans to burn through $1.5 billion to $1.9 billion in 2009 to expand its network, which it says will cover 120 million people in 80 markets in 2010, a slightly lower prediction from last year’s forecast of 140 million. Though the company’s subscriber base is a modest 475,000, it grew 21 percent in 2008 from 394,000 last year. Also, the company recently replaced CEO Ben Wolff with former Vodafone exec Bill Morrow, citing Morrow’s extensive operating experience. Wolff will now serve as co-chairman with current Chairman Craig McCaw, focusing on strategy, finance and managing the relationships with Clearwire’s investment partners.

Still, the company admits that the ultimate timing for its buildout will be driven with market-by-market success and the availability of additional capital. “Even with the rapid pace of our targeted development, clearly a nationwide footprint will not emerge overnight,” Wolff told analysts in a March conference call.

Last May, Wolff said the company could need an additional $2 billion to $2.3 billion to get the company’s financials out of the red and stay on track with its goal of reaching nearly half the U.S. population by the end of 2010.

Despite Clearwire’s optimistic forecast, some warning signs about the viability of the MSO/Clearwire partnership have emerged.

Shares of Clearwire have fallen more than 40 percent in the past three months to about $17, below the $20 per share price its joint venture partners paid. The drop triggered a contractual clause that granted some investors more shares, giving Google alone an extra 4.4 million shares.

The plunge in the company’s stock price also has forced investors to take hefty impairment charges. Comcast, which invested $1.05 billion in Clearwire, took a $600 million charge in its fourth quarter. Intel, Google and Time Warner also took heavy hits. Intel had to write down about $1 billion from losses in its Clearwire assets. Google took an impairment of $1.09 billion on its stakes in Clearwire and AOL, and Time Warner Cable reported charges of $367 million.

Though the company’s assets nearly tripled in 2008 to $9.12 billion, Clearwire has continued to hemorrhage cash. High capital expenditures outpaced a 21 percent hike in subscribers and a 6 percent rise in ARPU, and the company lost $432.6 million in 2008 on sales of $20.49 million. Operating losses hit $493 million, more than double last year’s figure of $212 million.

Clearwire’s shelf life “is quite limited,” says Jeff Heynen, who covers broadband and video for research firm Infonetics. Still, he says, MSOs’ long-term viability rests on getting into a growth market and they must push forward despite the challenges ahead: “The whole broadcast paradigm is going by the wayside …They have to go to 4G.”

Not only will MSOs and Clearwire have to build out a network, they’ll have to reshape themselves from cable operators to carriers. That challenge has prompted questions as to whether the partnership between cable operators and Clearwire will be free from the problems that plagued Sprint Pivot.

“The cable operators are going to have a very hard time culturally convincing subscribers that they are a legitimate wireless provider … They tried it with Pivot and nobody bought it. If they follow that same model and have the same amount of control they had through Pivot, it’s just not going to work,” Heynen says.

Cable operators’ choice to go with WiMAX is in an even more precarious position after Verizon Wireless announced it was moving forward with LTE for its mobile broadband network, which should go live by the end of the year.

Also, MSOs are not completely united behind WiMAX. Digital cable provider Cox Communications decided to go with LTE for its 4G wireless build, despite partnering with WiMAX-backer Sprint in the short term to get its wireless offerings off the ground.

In a nod to the challenges it faces, Clearwire announced in a December conference call that LTE could be a possible alternative technology because of its increasing popularity and technical similarities to WiMAX. “Notwithstanding our enthusiasm for mobile WiMAX, we can’t ignore the fact that many operators around the world are talking about deploying another 4G technology known as long-term evolution or LTE,” Wolff in the December conference call.

“Mobile WiMAX and LTE have a lot in common. Far more in common, in fact, than either of these technologies have with today’s 2G and 3G technologies. This means that our vendors will be able to deliver network infrastructure equipment to us that will enable us to operate both mobile WiMAX and LTE technologies if we decide that it makes sense to do so several years from now when LTE becomes commercially available.”

Clearwire does have a head start on its LTE competitors, but that hasn’t been enough to shake off skeptics. “Their challenge is that they have a new technology that doesn’t have economies of scale and they’re trying to roll out a service,” says Ian Fogg, analyst with Forrester Research.

Clearwire’s startup status puts it in a “difficult market position,” Fogg says. “From a mobility play, the wireless guys are in a better place.”

Imagining the 4G Future with Clearwire’s Scott Richardson

Picture family data plans, personal hot spots and the different economics of data.

Envision a future where instead of getting a family plan for voice, you get a family plan for data that fulfills all your connectivity needs. “I really think with this next generation network deployment, that’s where we’re headed,” says Scott Richardson, senior vice president and chief strategy officer at mobile WiMAX-backer Clearwire.

Scott Richardson
Richardson: The economics of data and voice are upside down.

Richardson envisions a future where many different devices are connected to one service plan, a future where laptops, handsets and other devices work off a single 4G network. “It’s extending the usage model of Wi-Fi, it’s enhancing the data,” he says.

The company is working on VoIP over its 4G network and plans to roll out WiMAX devices that are backwards-compatible with Sprint’s nationwide 3G network. Along with partners, it is creating cable modem alternatives for the home and WiMAX-only air cards in the form of USB dongles and device modems; WiMAX is embedded in 26 different laptop models available in the United States.

Clearwire isn’t concerned with consumer data consumption and can offer massive data plans at lower costs, a benefit of its 4G network that is reflected in its long-term business plans.

Down the line, Richardson says that people will be their own antenna thanks to a mobile WiMAX modem that can be plugged into an accessory, creating a Wi-Fi hot spot around a single person: “It looks like you’re connecting to a hot spot, but it just happens to be on you.”

Clearwire says it is working with vendors in Taiwan and China to create the cable modem alternative currently being sold in the company’s Baltimore and Portland markets. It is also partnering with Samsung on air cards and with companies in Japan and Korea on after-market WiMAX-enabled products. There also appears to be broader support for infrastructure capable of compatibility with both WiMAX and LTE. Nokia Siemens Network has released its eco-friendly Flexi base station, which can be changed from WiMAX to LTE with a simple software upgrade.

At the end of the day, Richardson says the service has an edge on affordability because Clearwire is prepared for the lower price points and profit margins of the data business. “The economics of data and voice are upside down. Laptop cards are using a lot more data and the service fees are lower. That’s the real challenge for the current cellular world,” Richardson says. “We’re coming at this with a completely different cost structure in mind than the traditional cellular business.”