Clearwire: The Highway for Mobile Internet Devices

On March 12, iSuppli released their forecast for Mobile Internet Devices, or MIDs, which are defined as any portable wireless internet connected device with a screen of at least 8 inches in diameter, and instant-or-always on functionality. There were around 54 million of these devices in 2007, largely smart phones.

New devices such as netbooks, ebook readers and handheld gaming devices are adding to the growth of this category. MIDs are projected to grow to 416 million units in 2012, a compounded annual growth rate of over 50%. MIDs are the cars that will drive on a broadband wireless internet highway, and there will be a monthly toll for gaining access to that highway.

Clearwire’s (CLWR) newly launched CLEAR broadband internet service varies in price depending on speed, but it’s probably reasonable to assume that average pricing will be around $40 per month and possibly more (current ARPU for pre-WiMax at Clearwire is $39). But let’s be conservative and cut the service fee in half to $20 a month. It’s probably too aggressive to assume that all 416 million of these new devices will require a separate subscription, so let’s say half of them share a subscription via a home WiFi portal or something similar. Even with all those haircuts, that’s still a global total available market (TAM) for wireless broadband services on the order of $50 billion per year by 2012. (And by the way, this TAM is based only on the devices that ship in 2012, and doesn’t even include all the MIDs that shipped in prior years.)

Sure, Clearwire’s WiMax will have competition, and the LTE (3GPP release 8) is bound to capture a good chunk of the emerging broadband wireless market. But the wireless market has always been shared by multiple players and multiple technologies. That’s why virtually all phones can roam onto competitors’ networks.

If nothing else, the market size shows that Clearwire doesn’t need to dominate the broadband wireless market to become a runaway success story. Clearwire’s stock closed Friday at $3.59 a share. The company hasn’t yet filed its 10-K, so the public databases still don’t reflect the company’s merger with Sprint’s (S) WiMax operations or the $3.2 billion strategic investment from Google (GOOG), Intel (INTC), and several cable TV operators. With around 694 million shares outstanding, the market cap is around $2.5 billion. Plus, the company has $3.1 billion in cash (including equivalents and short term investments) which is earmarked for network expansion as they target broadband wireless coverage of up to 120 million people by the end of 2010.

The stock has been rising steadily over the past week and is up 35% from recent lows. But it’s not too late: with the market cap of the company at less than 5% of the global 2012 TAM, and $3.1 billion in cash in the bank, this stock has plenty of upside.

Disclosure: long CLWR

Comments

[Vibhor Jain:]

$20/month * 200 million device = $5 billion market ... $5 billion ?

Mar 15 02:05 PM

[bthomas:]

The writer's estimate shows. 4 billion+/mo = 50 Billion/yr.

Mar 16 06:40 AM

[Daniel Bizo:]

This article is puzzling. Karen, if Clearwire is on the path towards financial success, then tell me, why Intel, Google, Comcast wrote almost fully off the value of their investments in the company? I don't really understand what kind of strategic investments you are talking about which are not reflected already. It recieved the infusions years ago.

Or why CLWR shook up the leadership recently? Or why they are telling they would need 2 billion more just to achive a cash neutral point? Or an order of magnitude bigger revenue for breaking even?

The viability of the business model for Clearwire is so broken on many levels. Big mobile carriers are easily financing the massive upgrades of their existing networks from their current huge revenue streams, which CLWR doesn't have, so they can afford more aggressive roll outs while bearing any temporary operational losses associated whith the new or enhanced services.

Carriers also have a huge advantage in scale of opex economics, more efficient capex through lower prices from their supplires, in marketing, like in reaching their customers, brand recognition, customer services.

So, with that kind of handicap, Clearwire has to have some kind of advantage in order to be a reasonable effort. Finding market niches, having superior technology, or both.

Since CLWR goes after the mass market, it is not a niche, it is a head to head battle. Nor does it have superior technology. Not any more. It tried to be a first mover with the advanced data-centric WiMAX, and started in 2004, when mobile broadband was still in its infancy, but we are in 2009 now, and the enhanced 3G networks are catching up, providing "goodn enough" services, so WiMAX is nothing "killer breakgthrough", while the pre-4G/Super3G LTE-rollouts are beginning next year, with evolved LTE, real 4G around 2012, which will make WiMAX completely pointless.

WiMAX is a low-volume technology, having 2,7 million subscibers worldwide according to Maravedis, while LTE-precedessor networks have hundreds of millions data subscriptions. This makes WiMAX equipment offerings narrower, pricier, with less ongoing R&D. LTE is the natural evolution of 3G networks.

CLWR should completely change direction and avoid engaging with other carriers, and find some real market niches, like providing broadband coverage in rural areas, with the possibility of using WiMAX only for backhaul, while using Wi-Fi or wire for access delivery. Oh, what Sprint did is offloading a "toxic" business and technology.

To sum up, I don't see CLWR being in a strong position, or neccessarily in any competitive position by 2012.

Mar 16 07:02 AM

[Karen Mulvany:]

You do a great job summarizing market concerns about Clearwire. Let me see if I can address them.

1. First, Intel, Comcast and others -- including Google, Time Warner Cable, and Brighthouse - completed their investment in Clearwire at $17 a share in Dec 08 when the stock was trading at $7 a share (and the stock market was collapsing.) They quickly wrote off a large portion of their investment because GAAP (generally accepted accounting principles) require them to carry a strategic investment on their balance sheets at the lower of cost or market. So, the writedown does not reflect what the strategic investors actually think the company is worth; it reflects where the stock has traded down to. Clearly the strategic investors think the stock was worth a lot more than where it is trading today. Personally I find it remarkable that the deal held together in such extraordinarily turbulent times, and I view it as an indication of the strategic investor's confidence in the company.

2. The most recent round of strategic investment occured in December 2008 and Clearwire has not yet filed its 10-K for the year ending 12/08. So the public databases which rely on SEC filings for their numbers -- check out Yahoo Finance for an example -- have not yet been updated to reflect the capital structure of the new Clearwire, including the $3.2 billion cash infusion. Check the company's Q4 press release to see the reported numbers.

3. Clearwire's management change has been painted as a negative by some members of the press, but clearly Bill Morrow, the new CEO, has great credentials having been CEO Vodaphone's cellular buisnesses in the UK, Europe and Japan, as well as Pacific Gas and Electric. Surely a guy like this has some choices available to him, and he chose Clearwire. In my mind, I see this as another validation of the company's prospects from somebody who is industry savy and has surely done his homework. The former CEO is staying on, also a good sign. It's not bad news when a strong CEO is added to the team.

4. The amount of capital and revenue they need to get to cash flow breakeven is a function of the pace of network expansion (that they choose) and time. Over time (around 2 years), Clearwire has already demonstrated its ability to turn cash flow b/e in individual markets with a precursor service offering. What drags down profitability and cash flow for the company as a whole is the depreciation for the overall network, which in the early stages as they have more cities in the construction phase than they have in service, will be relatively high. Over time, as more of the construction phase cities turn into service phase cities, the depreciation charges will be covered by revenue and produce cash flow and profits. This is not bad, it's just how these business models work -- as anyone who was around for the original cellualr rollout will remember (yes, I'm that old).

5. No argument that the existing mobile wireless companies can afford to pay for the 4G rollout. So can Clearwire. It takes capital, not profits. Having been in my past both a sell side analyst and an investment banker that worked with cellular companies, I believe this company will have no problem raising additional capital next year, especially if the economy flatlines. By then Clearwire will have proven the economic model for initial WiMax markets and nobody will disagree that the mobile broadband services market is going to be a high growth story, regardless of the economic trendline. As for the pace of rollout, Clearwire is targeting coverage of up to 120 million people by the end of 2010, which is more aggressive than the LTE rollout (although, as you note, behind their original forecasts made a number of years ago).

6. Having said that, I believe the flaw in the LTE vs. WiMax debate is the presumption that one or the other will fail. History would suggest that mutliple technologies and service providers will succeed in large, growth markets, which the broadband market clearly is (as detailed above.) Clearwire's biggest advantages are 1) time to market 2) being a new entrant with pricing flexibility (no need to protect legacy revenue streams, especially in voice) 3) a laser focus on data with voice as a "piggyback" to the data stream 4) deep and broad spectrum and 5) the Intel sponsorship of WiMax which can deliver cheaper handsests and MIBs. But that's not to say LTE won't succeed -- of course it will. So will Clearwire. This is a huge market.

7. Lastly, on Sprint, I think they did a very clever thing. They offloaded their WiMax business which required a dedicated focus, took a majority interest in a new company which has the spectrum holdings and the management team to succeed, but structured their investment so that they don't have to consolidate the P&L for the time being. They can convert their stock to consolidate the P&L at a later date. All the other strategic investors except Google adopted the same approach.

In summary, you make a lot of good points about risks in the Clearwire rollout, and the stregth of the incumbent players who will be deploying LTE. But the risks relative to the rewards and the inherent value in the balance sheet remain extraordinarily compelling in my view.

On Mar 16 07:02 AM Daniel Bizo wrote:

> This article is puzzling. Karen, if Clearwire is on the path towards
> financial success, then tell me, why Intel, Google, Comcast wrote
> almost fully off the value of their investments in the company? I
> don't really understand what kind of strategic investments you are
> talking about which are not reflected already. It recieved the infusions
> years ago.
>
> Or why CLWR shook up the leadership recently? Or why they are telling
> they would need 2 billion more just to achive a cash neutral point?
> Or an order of magnitude bigger revenue for breaking even?
>
> The viability of the business model for Clearwire is so broken on
> many levels. Big mobile carriers are easily financing the massive
> upgrades of their existing networks from their current huge revenue
> streams, which CLWR doesn't have, so they can afford more aggressive
> roll outs while bearing any temporary operational losses associated
> whith the new or enhanced services.
>
> Carriers also have a huge advantage in scale of opex economics, more
> efficient capex through lower prices from their supplires, in marketing,
> like in reaching their customers, brand recognition, customer services.
>
>
> So, with that kind of handicap, Clearwire has to have some kind of
> advantage in order to be a reasonable effort. Finding market niches,
> having superior technology, or both.
>
> Since CLWR goes after the mass market, it is not a niche, it is a
> head to head battle. Nor does it have superior technology. Not any
> more. It tried to be a first mover with the advanced data-centric
> WiMAX, and started in 2004, when mobile broadband was still in its
> infancy, but we are in 2009 now, and the enhanced 3G networks are
> catching up, providing "goodn enough" services, so WiMAX is nothing
> "killer breakgthrough", while the pre-4G/Super3G LTE-rollouts are
> beginning next year, with evolved LTE, real 4G around 2012, which
> will make WiMAX completely pointless.
>
> WiMAX is a low-volume technology, having 2,7 million subscibers worldwide
> according to Maravedis, while LTE-precedessor networks have hundreds
> of millions data subscriptions. This makes WiMAX equipment offerings
> narrower, pricier, with less ongoing R&D. LTE is the natural
> evolution of 3G networks.
>
> CLWR should completely change direction and avoid engaging with other
> carriers, and find some real market niches, like providing broadband
> coverage in rural areas, with the possibility of using WiMAX only
> for backhaul, while using Wi-Fi or wire for access delivery. Oh,
> what Sprint did is offloading a "toxic" business and technology.
>
>
> To sum up, I don't see CLWR being in a strong position, or neccessarily
> in any competitive position by 2012.

Mar 16 10:45 AM

[djakel:]

bizo - Your first paragraph shows your opinion is worthless. The investments were not made years ago. The $3.2 billion from Intel, Comcast, Google, et. al. was committed in April 2008 but not invested until December of 2008. Get the facts before you comment, pal.

Mar 16 03:27 PM

[Daniel Bizo:]

Djakel, shame on me I didn't check my facts, and mistaken those money with some other money. No excuses. However, this is doesn't change my logic at all, it doesn't make the strategy more sound, it only means that Clearwire has more money to burn, and boy it will do it. I still very much maintain that offloading mobile broadband to a standalone business AND compete head to head with mobile carriers is plain stupid, and I maintain that the perceived advantage Clearwire/WiMAX had back in 2004-2006 is very much disappeared, or will disappear in 1 years.

Mar 20 04:47 AM

[Daniel Bizo:]

Karen, thank you for pointing out some important facts, I am sorry for being too sloppy to make a quick background check of my mistaken knowledge.

I am not trying to make it an LTE or WiMAX question, however, I fail to see how WiMAX remains important for the majority of its supporters, and I am thinking about Intel and Google particularly. Intel's core business is very clear: selling highly differentiated silicon estate, and that is microprocessors. The logic behind WiMAX has never been that it become a successful financial invetsment for Intel, or sell WiMAX chips. I was to stimulate demand for mobile computing devices, and for Intel's mobile processors through that. With WCDMA and CDMA2000 networks flourishing around the world, and over 200 million with over 100% growth in 2008 YoY, and projected CAGR 30%+ through 2013.

For Intel, there is really no strategic point in WiMAX any more. Mobile broadband is here anyway, without WiMAX. I expect Intel to cut back or completely seize investments in WiMAX, and might turn R&D to LTE. It's only politics and face saving now, and not business interests.

The same goes for Google and other media companies, the difference is, that they have even less motivation for WiMAX, they only need decent mobile broadband services for highly personalized and location based contents and services.

I am not suggesting risks. I am suggesting the majority of the opportunities for WiMAX are not there any more. They are passed and missed. I am suggesting that integrated communication packages are the future, and not standalone services. I highly doubt that with Sprint in the background, Clearwire will be allowed to offer multi-play service packages. I am suggesting economies of scale and opex efficiency is king.

Of course, I may be mistaken, and Clearwire will become a huge financial success. I just don't see it coming.

On Mar 16 10:45 AM Karen Mulvany wrote:

> You do a great job summarizing market concerns about Clearwire. Let
> me see if I can address them.
>
> 1. First, Intel, Comcast and others -- including Google, Time Warner
> Cable, and Brighthouse - completed their investment in Clearwire
> at $17 a share in Dec 08 when the stock was trading at $7 a share
> (and the stock market was collapsing.) They quickly wrote off a large
> portion of their investment because GAAP (generally accepted accounting
> principles) require them to carry a strategic investment on their
> balance sheets at the lower of cost or market. So, the writedown
> does not reflect what the strategic investors actually think the
> company is worth; it reflects where the stock has traded down to.
> Clearly the strategic investors think the stock was worth a lot more
> than where it is trading today. Personally I find it remarkable that
> the deal held together in such extraordinarily turbulent times, and
> I view it as an indication of the strategic investor's confidence
> in the company.
>
> 2. The most recent round of strategic investment occured in December
> 2008 and Clearwire has not yet filed its 10-K for the year ending
> 12/08. So the public databases which rely on SEC filings for their
> numbers -- check out Yahoo Finance for an example -- have not yet
> been updated to reflect the capital structure of the new Clearwire,
> including the $3.2 billion cash infusion. Check the company's Q4
> press release to see the reported numbers.
>
> 3. Clearwire's management change has been painted as a negative by
> some members of the press, but clearly Bill Morrow, the new CEO,
> has great credentials having been CEO Vodaphone's cellular buisnesses
> in the UK, Europe and Japan, as well as Pacific Gas and Electric.
> Surely a guy like this has some choices available to him, and he
> chose Clearwire. In my mind, I see this as another validation of
> the company's prospects from somebody who is industry savy and has
> surely done his homework. The former CEO is staying on, also a good
> sign. It's not bad news when a strong CEO is added to the team.<br/>
>
> 4. The amount of capital and revenue they need to get to cash flow
> breakeven is a function of the pace of network expansion (that they
> choose) and time. Over time (around 2 years), Clearwire has already
> demonstrated its ability to turn cash flow b/e in individual markets
> with a precursor service offering. What drags down profitability
> and cash flow for the company as a whole is the depreciation for
> the overall network, which in the early stages as they have more
> cities in the construction phase than they have in service, will
> be relatively high. Over time, as more of the construction phase
> cities turn into service phase cities, the depreciation charges will
> be covered by revenue and produce cash flow and profits. This is
> not bad, it's just how these business models work -- as anyone who
> was around for the original cellualr rollout will remember (yes,
> I'm that old).
>
> 5. No argument that the existing mobile wireless companies can afford
> to pay for the 4G rollout. So can Clearwire. It takes capital, not
> profits. Having been in my past both a sell side analyst and an investment
> banker that worked with cellular companies, I believe this company
> will have no problem raising additional capital next year, especially
> if the economy flatlines. By then Clearwire will have proven the
> economic model for initial WiMax markets and nobody will disagree
> that the mobile broadband services market is going to be a high growth
> story, regardless of the economic trendline. As for the pace of rollout,
> Clearwire is targeting coverage of up to 120 million people by the
> end of 2010, which is more aggressive than the LTE rollout (although,
> as you note, behind their original forecasts made a number of years
> ago).
>
> 6. Having said that, I believe the flaw in the LTE vs. WiMax debate
> is the presumption that one or the other will fail. History would
> suggest that mutliple technologies and service providers will succeed
> in large, growth markets, which the broadband market clearly is (as
> detailed above.) Clearwire's biggest advantages are 1) time to market
> 2) being a new entrant with pricing flexibility (no need to protect
> legacy revenue streams, especially in voice) 3) a laser focus on
> data with voice as a "piggyback" to the data stream 4) deep and broad
> spectrum and 5) the Intel sponsorship of WiMax which can deliver
> cheaper handsests and MIBs. But that's not to say LTE won't succeed
> -- of course it will. So will Clearwire. This is a huge market.
>
>
> 7. Lastly, on Sprint, I think they did a very clever thing. They
> offloaded their WiMax business which required a dedicated focus,
> took a majority interest in a new company which has the spectrum
> holdings and the management team to succeed, but structured their
> investment so that they don't have to consolidate the P&amp;L for
> the time being. They can convert their stock to consolidate the P&amp;L
> at a later date. All the other strategic investors except Google
> adopted the same approach.
>
> In summary, you make a lot of good points about risks in the Clearwire
> rollout, and the stregth of the incumbent players who will be deploying
> LTE. But the risks relative to the rewards and the inherent value
> in the balance sheet remain extraordinarily compelling in my view.
>
>
> On Mar 16 07:02 AM Daniel Bizo wrote:

Mar 20 05:25 AM

[Karen Mulvany:]

Daniel, you and I actually agree that Intel is not interested in WiMax for any other reason than to sell processor chips. For many years Intel has targeted "adjacencies" -- silicon that is adjacent to the core processor -- and their strategy has not been to make money on adjacencies, but to add value to the processor at little to zero cost to their customers. Over the years, Intel has deployed this strategy with various ethernet implementations and wireless as well, notably WiFi, which they single-handedly shoehorned into worldwide adoption. I believe it is Intel's long term strategy to offer WiMax connectivity at little to no cost with a processor purchase. Intel will certainly support other wireless technologies, but the cost to OEMs will be higher. Why? The alternative wireless approaches are burdened with proprietary IP (intellectual property) -- meaning some company is at least getting a royalty and jacking up the price of wireless connectivity. WiMax's lack of IP "overhead" was a core strategic reason for Intel's support.

This is the "trojan horse" element (in the classical sense, not the viral sense) of the Clearwire story. It's dramatically different from any existing phone-centric market today. Nobody would buy a mobile phone without wireless connectivity because it has no useful purpose without the service. This is not true of laptops. The trojan horse strategy is to sell the laptop on its own merits with connectivity thrown in for free. When you look at the traditional wireless players, growth is concentrated in the smartphone sector where the equipment subsidy cost per user is high, up to $375 per user in the case of the iPhone. This is why existing mobile service carriers must obtain a long-term contract to subsidize the cost of the phone. What will the marginal WiMax connectivity cost be? Ultimately, zero, or close to it.

Half of all mobile PCs in 2008 shipped with WiFi connectivity, and the adoption of WiFi has spilled over into the smartphone market. Most phones are multiband already, and the number of bands that each will support is expected to increase, not decrease, in the future. Intel's support for WiMax will, I believe, ensure that one of the supported bands will be WiMax. But even if you forget about the smartphone market, the market for connecting laptops and netbooks offers plenty of opportunity for Clearwire.




On Mar 20 05:25 AM Daniel Bizo wrote:

> Karen, thank you for pointing out some important facts, I am sorry
> for being too sloppy to make a quick background check of my mistaken
> knowledge.
>
> I am not trying to make it an LTE or WiMAX question, however, I fail
> to see how WiMAX remains important for the majority of its supporters,
> and I am thinking about Intel and Google particularly. Intel's core
> business is very clear: selling highly differentiated silicon estate,
> and that is microprocessors. The logic behind WiMAX has never been
> that it become a successful financial invetsment for Intel, or sell
> WiMAX chips. I was to stimulate demand for mobile computing devices,
> and for Intel's mobile processors through that. With WCDMA and CDMA2000
> networks flourishing around the world, and over 200 million with
> over 100% growth in 2008 YoY, and projected CAGR 30%+ through 2013.
>
>
> For Intel, there is really no strategic point in WiMAX any more.
> Mobile broadband is here anyway, without WiMAX. I expect Intel to
> cut back or completely seize investments in WiMAX, and might turn
> R&amp;D to LTE. It's only politics and face saving now, and not business
> interests.
>
> The same goes for Google and other media companies, the difference
> is, that they have even less motivation for WiMAX, they only need
> decent mobile broadband services for highly personalized and location
> based contents and services.
>
> I am not suggesting risks. I am suggesting the majority of the opportunities
> for WiMAX are not there any more. They are passed and missed. I am
> suggesting that integrated communication packages are the future,
> and not standalone services. I highly doubt that with Sprint in the
> background, Clearwire will be allowed to offer multi-play service
> packages. I am suggesting economies of scale and opex efficiency
> is king.
>
> Of course, I may be mistaken, and Clearwire will become a huge financial
> success. I just don't see it coming.
>
> On Mar 16 10:45 AM Karen Mulvany wrote:

Mar 25 11:25 AM

[cubicleslave:]

I am a clear WiMax subscriber in Portland, Oregon, and I love the service to bits. I get great coverage everywhere in the city. I'm consistently getting 5Mbps downlink, 500kbps uplink, which is good enough for video streaming (a la youtube). The only thing I'm wishing for now is something that will fit in my pocket and still be able to run Skype, preferably a Windows XP Pro operating system. Once that happens, I'll drop-kick my cell phone into the dumpster. Maybe that is what the major cellular companies are afraid of? Have they been behind-the-scenes, arm-twisting the device makers to pull their WiMax offerings out of the USA? I've noticed that such devices were revealed in prototype a couple of years ago at several trade shows, such as the Mobile World Congress. Yet nothing's on the market today!

May 01 01:16 PM