“Sprint considers changing direction”

Posted: 28 Feb 2011 08:57 PM PST

By MARK DAVIS

The Kansas City Star

Jacob Kepler

A Sprint smart phone such as the Evo Shift runs on one spectrum in WiMax territory, but switches to a 3G speed on another spectrum in places WiMax doesn't reach.

Sprint Nextel Corp. strengthened its hand by being first in the emerging 4G wireless market. It is now poised to become the first carrier to change its 4G strategy.

Millions of Sprint customers already carry devices — such as Evo and Epic cell phones — that run at "fourth-generation" speeds on the WiMax network built and operated by Clearwire Corp.

But Clearwire's financial strain has brought WiMax's expansion to a near halt and well short of complete coverage.

Meanwhile, Verizon and AT&T are closing ground on Sprint, pressing ahead with their own networks using a different 4G technology called Long Term Evolution, or LTE.

Even Clearwire has said it might turn to LTE once it garners funding to expand again.

Little wonder that Sprint executives are preparing a 4G strategy announcement sometime before midyear.

They need time because Sprint has many more options than it had a couple of years ago when the company threw in with Clearwire and WiMax.

"It's really wide open," said Jonathan Atkin of RBC Capital Markets. "A lot of investors are anxious to hear about the expansion of 4G coverage."

Sprint's choices include pumping more money into Clearwire — already 54 percent owned by Sprint — or working out some other way to expand its 4G network's coverage map.

Sprint may decide to start building its own 4G network — most likely using the LTE technology that is destined to become the dominant form as both of its larger rivals' LTE networks grow.

And an unconfirmed report last week linked Sprint with a prospective independent LTE network being planned by LightSquared Inc., a potential competitor of Clearwire.

Best guesses see LTE in Sprint's future — somehow.

Bob Azzi, Sprint's network senior vice president, wouldn't address the LightSquared report but said Sprint's options include any potential solution — as long as it includes the WiMax service that customers use now.

"From a network perspective it's WiMax and what else we do," Azzi said. "In every scenario … WiMax is there."

The same can be said about Clearwire.

Sprint needs access to Clearwire's vast amount of untapped wireless spectrum — the airwaves over which wireless service travels — to deliver the ever-growing amount of talk, texts, apps, Web links, streaming video and other data-packed signals that Sprint customers want.

Regardless of the strategy, it will continue Sprint's evolving patchwork of various wireless spectrums and technologies. And that means consumers, already faced with a steady stream of new handsets in the marketplace, will have to keep upgrading phones as the new strategy unfolds.

Evolutionary

Change comes quickly in the telecom industry. But it took Sprint years to capture a lead in the 4G world.

It struggled on its own until a breakthrough came in November 2008. Sprint teamed up with Clearwire, based in Kirkland, Wash., to build a 4G network using WiMax technology. LTE wasn't ready yet.

Sprint contributed the large chunk of wireless spectrum that Clearwire uses to carry 4G wireless traffic. Sprint and assorted others have pumped in billions of dollars.

The result is a 4G network that covers about 119 million potential customers, centered in major markets such as New York, Houston and Kansas City. A more robust network would cover 200 million, though even that would be short of the total population of 300 million.

Clearwire, however, is running short of money. A recent borrowing provided just enough to add coverage in some rural areas to boost WiMax's coverage to 130 million Americans.

Clearwire has no new markets planned for this year.

Verizon's 4G network on LTE technology already covers 38 markets and will reach 110 million potential customers by year-end. Bloggers expect any day to see Verizon's first 4G handset, the HTC Thunderbolt, hit store shelves.

AT&T is further behind, but it too is working on an LTE network.

Given that the two largest wireless carriers in the nation will be marketing LTE as 4G, Sprint's reliance on WiMax may have limits in the long run.

"For Sprint to be relevant, especially as the LTE message is introduced to the market, it has to have LTE as part of its solution," said Jennifer Fritzsche, an analyst with Wells Fargo Securities.

Sprint, strategically, is no longer confined to a WiMax life.

The company has embarked on a $4 billion to $5 billion upgrade of its own network of cellular towers, base stations and radio antennas. This "Network Vision" project will slash Sprint's operating costs.

More to the point: The upgraded network also will be LTE-capable.

Network Vision wasn't a decision to turn to LTE, but it adds options to Sprint's long-term plans.

"It's the Network Vision technology architecture that gives us the options and gives us the flexibility and the cost structure that allows us to continue to evolve our 4G story," Azzi said of Sprint's network upgrade.

WiMax

Evo and Epic owners can stop sweating. Although their phones can't run on LTE, WiMax isn't disappearing anytime soon.

Even if Sprint and Clearwire decide that LTE is the next direction for 4G, neither has any reason to slink away from the billions invested in WiMax.

And, despite all the LTE talk around Sprint these days, WiMax might still be the direction its 4G aim takes.

"It could just continue to be WiMax. Absolutely," Azzi said.

Others, however, raise doubts about an all-WiMax announcement when Sprint lays out its plan for further 4G expansion. They start with the sometimes tense relations between Sprint and Clearwire.

As with any relationship, money has become a problem.

The two companies have negotiated for months over the amount that Sprint pays Clearwire so Sprint's 4G subscribers can use Clearwire's WiMax network. They've agreed to seek arbitration if negotiations fail.

For its part, Clearwire said a resolution seemed near that would deliver more of these wholesale revenues from Sprint.

Clearwire spokesman Mike DiGioia said relations with Sprint were healthy and strong.

The bigger money issue lies in the billions needed to extend WiMax coverage throughout the nation.

Sprint could invest still more money in Clearwire — taking the quickest path to wider 4G coverage — and essentially keep with its strategy so far.

But don't count on it, says analyst Brett Feldman with Deutsche Bank.

Feldman said Sprint's overriding focus in forming its new 4G strategy is likely to be on getting the most 4G bang for its buck. Shipping billions of dollars to Clearwire might offer the least bang.

For Sprint, Feldman said, "The worst-case scenario is the current scenario."

Part of the rift between the two has been Clearwire's efforts to sell 4G wireless services to retail consumers under its own Clear brand. This amounts to wasted dollars as far as Sprint is concerned, but Sprint doesn't control Clearwire or its capital spending plans.

Late last year, Clearwire stalled its retail expansion amid a cash squeeze, but more recently it has said its retail ambitions haven't ended.

Sprint might consider buying a bigger stake in Clearwire, enough to control the company's decisions. But that would drain scarce dollars — leaving less money for expanding the 4G footprint — and potentially violate agreements with Sprint's lenders.

Among the options Azzi sees is what he called a "joint build" that would require a business arrangement in which Sprint builds on Clearwire's behalf.

And Sprint's strategy almost certainly will involve Clearwire.

Right now, half of Sprint's customers own smart phones and more than two-thirds of its new customers and existing customers getting upgrades choose smart phones. Smart-phone users eat up lots of wireless capacity.

And Clearwire holds those vast amounts of wireless capacity, or spectrum, that Sprint contributed to the cause.

Conversely, Sprint is easily Clearwire's biggest WiMax network customer.

"They're still joined at the hip," said Craig Moffett, who follows Sprint for Sanford C. Bernstein & Co.

Regardless of how the companies resolve their financial differences, they wouldn't have to expand with WiMax technology. They could turn to LTE technology to build 4G coverage beyond WiMax's current footprint.

Technology exists to make 4G phones that speak WiMax and LTE — though the phones don't exist yet.

How it works

Cell phones already are smarter than customers think.

Manufacturers pack them — or at least the microchips inside them — with the capacity to operate on various wireless carriers' networks. They know it's cheaper to make and sell a few chips that fit everyone's needs than to make a different chip for every situation.

Phones also need multiple powers.

For example, when a Sprint Evo runs at 4G speed it operates on WiMax technology over Clearwire's wireless spectrum, or radio frequency, of 2,500 megahertz.

In cities that Clearwire's 4G network doesn't reach, the same Evo phone switches automatically to 3G speed on CDMA technology over Sprint's 1,900-megahertz spectrum. Different technology, different spectrum, same phone.

Other companies program their phones to use their technology over their wireless spectrum frequencies.

But whenever a cell phone can't reach its intended network, it will roam onto another carrier's wireless network — which means it needs to speak the language of that carrier's technology and operate at its spectrum frequency.

Sprint's Azzi said it wouldn't be costly to start offering phones that run at 4G speeds on WiMax and LTE, should Sprint end up using LTE technology along with Clearwire's WiMax network.

Adding LTE to the mix may become Sprint's most important strategic move. Several analysts argue that staying with just WiMax would tend to isolate Sprint from companies that make the handsets that attract customers.

"Sprint really is going to put itself on an island if it continues down the WiMax path," said William Power, with Robert W. Baird & Co.

Road to LTE

LTE may be a likely destination for Sprint, but the path to get there offers many forks.

Clearwire already is testing LTE technology in the Phoenix market. And the company reports it wouldn't face great costs to start using LTE.

Clearwire still wouldn't have to abandon its current WiMax coverage because it has ample spectrum to operate complementary LTE and WiMax networks side by side.

And Clearwire probably is feeling pressure to take up LTE.

Consider that unconfirmed report last week about Sprint potentially allowing LightSquared to build its LTE network over Sprint's web of towers and base stations.

Moffett said the report feels more like a negotiating tactic by Sprint than a genuine effort to tap LightSquared, which would be after essentially the same wholesale 4G service buyers as Clearwire.

"It's incredibly awkward, to say the least, to imagine Sprint participating in a joint venture, or even a wholesaling relationship, with LightSquared while they remain the primary investor in Clearwire," Moffett said.

Sprint also could decide to build LTE coverage on its own network.

Azzi said such a move would be likely to involve Sprint's 1,900-megahertz spectrum, which it currently uses for its 3G service using CDMA technology. As more Sprint customers turn to 4G service, more 1,900-meg spectrum would become available for LTE, he said.

Sprint already plans to reuse the 800-megahertz spectrum it gained in the Nextel merger. It currently carries the diminishing traffic of Sprint's Nextel customer base, leaving idle capacity that Sprint plans to tap to improve and enhance its 3G service.

This shift also will open up more 1,900-megahertz spectrum for LTE 4G traffic, Azzi said.

But Azzi still sees this choice as an addition to using WiMax 4G technology, not as a replacement for it.

Analysts acknowledge they can't guess what Sprint's strategy will be, adding that Sprint's management probably hasn't settled on an option yet.

"Choices are good," said Timm Bechter, who follows Sprint at Waddell & Reed Financial in Overland Park. "Options have value."

Key elements of Sprint's wireless services

There are two components to wireless service, spectrum and technology. Sprint's current services combine several of each.

SPECTRUMThis is the frequency at which wireless signals operate. Companies prefer lower-frequency spectrum because it carries signals farther and is better at penetrating walls and reaching over hills to avoid dead spots — both of which mean fewer cellular towers.

There are three spectrum wavelengths at Sprint's disposal.

1,900 megahertz: This is the backbone of Sprint's nationwide 3G wireless service most customers use. It's even used by the 4G Evo and Epic phones when they're not in a 4G-ready market.

800 megahertz: Sprint gained this spectrum when it bought Nextel Partners in 2005. An exodus of those customers has opened this spectrum for Sprint's plans to use it for improving and enhancing its 3G service.

2,500 megahertz: Clearwire Corp. owns this vast amount of spectrum because Sprint contributed it when two companies joined forces to build a 4G WiMax network.

TECHNOLOGYCompanies have several choices when deciding how to generate and receive the wireless signals that deliver the talk, text, streaming video and other services customers want.

CDMA (code division multiple access) is the technology Sprint's 3G phones run on. It's also inside Sprint's 4G phones so they can work in markets that don't have 4G service yet.

iDEN (integrated digital enhanced network) ran on the Nextel Partners network that Sprint gained in the companies' 2005 merger. It will ultimately shut down as Sprint upgrades its towers, antennas and stations over the next few years.

WiMax (worldwide interoperability for microwave access) runs at faster speeds for 4G service. This was the technology ready when Sprint and Clearwire set out to build a 4G network ahead of Sprint's rivals.

LTE (long term evolution) is another 4G-fast technology and the one chosen by Verizon and AT&T. Many expect Sprint's next 4G strategy will include LTE technology in addition to WiMax.

To reach Mark Davis, call 816-234-4372 or send e-mail to mdavis@kcstar.com. | Mark Davis, mdavis@kcstar.com

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