Recent WiMAX events should put incumbents on guard

By Paul Lambert

A large ecosystem and economies of scale alone create and sustain successful mass-market technologies. The heavy-hitters in the US technology and media industries that recently rallied behind WiMAX will be hoping they have done enough to ensure that they are on the winning side of this adage. And in Europe, Intel’s winning of a license to offer WiMAX services at 2.6GHz in Sweden, along with upcoming 2.6GHz auctions across Europe this year, should make incumbent mobile operators alert to the potential threat from new business models.

The prospects for WiMAX looked decidedly bleak at the CTIA event in March, where a convincing range of devices was noticeably absent amid funding and rollout woes for Sprint Nextel.

But the technology has since received several lifelines. Sprint Nextel announced last week that mobile WiMAX had met its criteria for commercial acceptance. And after months of on-off negotiations, Sprint Nextel and wireless ISP Clearwire recently to form a new joint venture that will combine the companies’ WiMAX assets in the US to create a nationwide network. Additional investment will be provided by three leading US cable companies – Comcast, Time Warner and Bright House – and by Intel and Google.

Having the cable operators as partners could help increase WiMAX adoption and economies of scale as the joint venture tries to exploit a small time-to-market advantage over LTE. In a conference call, Sprint CEO Dan Hesse said the rollout of WiMAX would place it “two years ahead of the competition,” meaning operators rolling out LTE.

The joint venture expects its 2.5GHz mobile WiMAX network to cover an area of the US with a population of 120-140 million by end-2010, which would enable it to serve many of the top 200 US markets.

However, Hesse also said the JV agreement doesn’t bar Sprint from investigating “other 4G options,” which could be taken to mean that Sprint might yet consider LTE as a 4G option for its CDMA network.

Sprint and Clearwire created their new WiMAX company in a bid to create a nationwide WiMAX ecosystem. The deal is valued at US$14.5 billion, based on an investment price of US$20 per share.

Sprint will pool all of its 2.5GHz spectrum and all WiMAX assets into a subsidiary of the new company, called Clearwire, of which Sprint will own 51%. Existing Clearwire shareholders will own 27% of the new company, to which Clearwire will contribute all of its 2.5GHz-spectrum assets.

Comcast will invest US$1.05 billion in the deal; Intel Capital will invest US$1 billion, in addition to its previous investments made in Clearwire; Time Warner Cable will invest US$550 million; Google will invest US$500 million; and Bright House Networks will invest US$100 million, for an aggregate total of US$3.2 billion.

The deal also sees the creation of major new wireless companies.

The new Clearwire will enter into 3G-wholesale agreements with Sprint, becoming a bundled provider of Sprint’s wireless voice and data services. Comcast, Time Warner Cable and Bright House Networks will also enter into wholesale agreements with the new Clearwire, becoming 4G providers of the new Clearwire’s mobile WiMAX service.

Sprint and Clearwire also announced commercial agreements with the strategic investors. Intel will embed WiMAX chips into its Intel Centrino 2 processor and will market the Clearwire WiMAX service with its performance notebook PCs.

Google will partner with the new Clearwire to develop Internet services, advertising services and applications for mobile WiMAX devices. In addition, Google will be the search provider and a preferred provider of other applications for the new Clearwire’s retail products.

Google will also partner with the new Clearwire on an open-Internet business protocol for mobile broadband devices. The future voice and data devices that the new Clearwire provides to its retail customers will be compatible with Google’s Android operating-system software.

Google and Intel each have options to enter into 3G and 4G wholesale agreements with Clearwire and Sprint, respectively, but have no current plans to do so.

Earlier this year, Sprint postponed the launch of its Xohm WiMAX service from April until later in the year. It is now expected to wait until the summer to launch the service, in what is being seen as another blow to the beleaguered operator’s plans to offer WiMAX services.

Sprint says that soft launches in Chicago and the Washington, DC/Baltimore area are progressing well.

For its US$500 million investment, Google earns the opportunity to help the new Clearwire develop Internet services, advertising services and applications for mobile WiMAX devices, and Google will be the operator’s search provider and a preferred provider of other applications. Google and Clearwire pledge to work on an open-Internet business protocol for mobile broadband devices, and the operator will support Google’s Android operating system in its retail voice and data products.

In a separate pact, Google will become the default provider of web- and local-search services for Sprint’s CDMA network. Sprint also intends to load several Google services, such as Google Maps for mobile, Gmail and YouTube, on some handsets and provide more-direct access to other Google services.

It’s reasonable to expect that the long-awaited “Google phone” will finally be launched as a WiMAX device, potentially with cellular chipsets included.

Mobile operators should be braced for new entrants in the wireless-broadband space that are already major brands. They will be offering a whole new business model that will bundle content with fixed-line broadband and telephony – each areas in which cellcos are traditionally weak. Cellcos’ traditional voice offerings could be left looking rather thin by comparison.

As such, the coming together of major players in the US media and telecoms sectors will, for the first time, create an alternative to the cellcos’ traditional way of doing business: tying customers in for long periods of time in return for access to a mobile voice and data network via a single device.

As far as voice is concerned, this model has been an abiding one and will prove to be difficult to dislodge, because it is simple to understand and offers a compellingly simple proposition.

But for data, the prospect might prove to be very different. Operators are only beginning to sell large amounts of data via USB dongles and embedded chipsets, each via the voice subscription model. There is a chance for Intel and other consumer-electronics companies to introduce different pricing models and severely disrupt mobile operators’ data-growth plans.

Recent events in the US and the 2.6GHz auctions in Europe this year should put incumbent cellcos on their guard to defend against the incoming wave of WiMAX-based services and business models.