14 May 2008—This month’s most surprising merger story isn’t the one that failed (Microsoft-Yahoo); it’s the one that succeeded, against all odds. Sprint-Nextel, the No. 3 U.S. cellular company, merged itsnascent fourth-generation network, called Xohm, with that of Clearwire, a small wireless carrier in the Pacific Northwest.
The new entity, which will be majority owned by Sprint but called Clearwire, joins two entities that rely on the same technology but haven’t agreed on much else; a planned joint operating agreement fell apart last autumn. It’s as if a couple who couldn’t agree where to spend a vacation decided to get married instead. At least the happy couple will have a nice honeymoon, with a US $3.2 billion dowry given jointly by Intel, Google, three cable companies, and an investment firm (see sidebar ”Clearwire: A Potent Cocktail”).
The deal should put to rest many of Wall Street’s concerns about Sprint’s ambitious plan to cover the nation with WiMax, a form of wireless broadband that’s based on the IEEE 802.16 standard and which offers mobile data speeds of 2 to 4 megabits per second. Back in October, shareholders forced the resignation of CEO Gary Forsee, in part due to poor subscriber retention but also because of the investment needed to build the Xohm network. Forsee planned to spend $3 billion to cover 70 million people in the nation’s largest cities by the end of 2008. (The earlier Sprint-Clearwire operating agreement would have added another 30 million people.)
The dowry should free the new Clearwire from many of Xohm’s financial troubles. It also resolves questions about an open-ended plan that would have let cable operators to use Sprint’s network to sell a cellular service to their existing customers. Back in 2006, Sprint had forged an agreement in principle with the four leading U.S. cable providers: Comcast, Time Warner, Cox, and Advance/Newhouse. At the time, they were responding to moves by the major telephone companies to build video services that could compete with the meat and potatoes of the cable business—the delivery of television programming. Since then, Verizon and AT&T, by far the United States’ largest telcos, have begun to sell what analysts call, with tongue-in-cheek, the ”four-play” of television, broadband, residential telephony, and cellular telephony.
The new deal includes three of the cable companies involved in the 2006 agreement (Bright House Networks is owned by Advance/Newhouse). Cox, which took advantage of the recent 700-megahertz auction to add to some existing wireless spectrum holdings, seems to have decided to go it alone.
Besides selling the four-play, any of the three participating cable companies could simply resell Clearwire’s service under its own name, creating what is known as a ”mobile virtual network operator,” or MVNO. Sprint already sells its current voice service to a number of MVNOs, including Virgin Mobile and Qwest, the lone incumbent telco in the United States without a cellular service of its own. A cableco MVNO could create a certain amount of confusion for customers, who would be able to buy the same wireless service directly from the new Clearwire. But the Clearwire deal also opens the door to more than just mobile telephony.