On the week of March 5, a service provider called Clearwire (CLWR) is going public on the NASDAQ with the assistance of Morgan Stanley, Merrill Lynch, J.P. Morgan Securities, Bear Sterns, and Wachovia Capital Markets. The excitement of the Clearwire IPO has less to do with their technology and the business accomplishments to date, rather more to do with who founded the company. The excitement around the Clearwire IPO has more to do with the founder and Chairman of Clearwire: Craig McCaw (pictured).
There is an interesting dichotomy in the social grouping of the people who have interest in Clearwire. In the first group we find the Internet Generation (i.e. born between 1986-1999) and in the second group with find Baby Boomer Generation (i.e. born between 1946-1964). Full disclosure I am a member of Generation X. Many months ago I posted a blog on the generation topic and social networking. You might be wondering what social generations have to do with the Clearwire IPO. Let us start with the first group the Internet Generation. If you have seen a Clearwire sales team in action, you are looking at a group of twenty-something age sales people. If you read the blogs of dedicated internet junkies, you will realize that the internet generation finds Clearwire great, more great, more cool, or they are not all that impressed, or have questions about the company and the WiMAX service offered by Clearwire.
In the second group with find the Baby Boomer Generation. We can put people like Jim Cramer and Craig McCaw, founder of Clearwire in this group. Here is a link to a web site that summarizes Cramer’s Mad Money shows on CNBC and Cramer’s thoughts on Clearwire. Why is this important? Reading Cramer’s thoughts on Clearwire and knowing that many of the bankers taking Clearwire public are Baby Boomers, tells me that they are betting on the reputation of Craig McCaw to make this company a winner. There is nothing wrong with that strategy, as one very successful Private Equity buyout executive once told me that the CEO is 75% of the decision to invest. But with that much attention being paid to Craig McCaw and Clearwire, we should know more about Craig. For the record, I have never met Craig.
Here is a link to an interesting read on the history of AT&T (NYSE:T) Wireless and their related interactions with Craig McCaw. I am not going to take the time to type the history of wireless industry and McCaw Cellular Communications/Cellular One/AT&T Wireless when the content is available on the web. What I will do is take the time to note some similarities between Clearwire and the past.
Does Knowing the Past Provide Insight to Clearwire’s Future?
Remember James Barksdale CEO of NetScape? Before he joined NetScape he was President of McCaw Cellular Communications, from 1992 to mid-1994. During this time, McCaw Cellular and AT&T merged in an $11.5B deal. This was quite an accomplishment for Craig McCaw who had started buying spectrum licenses for cellular networks in 1983 for $4.50 per license. Over time, McCaw learned how to value these licenses, use them for collateral to raise debt to finance infrastructure expansion and, with the help of AT&T build the first nationwide wireless network to promote a wireless plan without roaming charges. McCaw Cellular communications was a power player in the market for spectrum licenses. I wonder if Craig learned this lesson from the business of cable television (his starting point) wherein the cable franchise license is the equivalent to spectrum ownership in the wireless world.
If one studies the history of McCaw Cellular and then AT&T Wireless, the strategy of acquisition was at the core of the company strategy. Spectrum ownership enables a range of strategy options: spectrums can be sold, traded, monetized or used as collateral for working capital. At the core of the business, spectrums are the enabler of the next phase, which is the subscriber acquisition phase. When were hear analysts reference footprint penetration, this is a reference to how many potential subscribers are covered by a spectrum or cable franchise footprint. The next metric of interest is the subscriber rate. If company like Clearwire owns spectrums that cover ten (10) million potential customers, but only has 100,000 customers the penetration rate of the spectrum ownership is easy to calculate. Here is a key quote from the Clearwire S-1:
“We were founded by telecommunications pioneer Craig O. McCaw in October 2003, and we launched our first market in August 2004. As of March 31, 2006, we offered our services in 27 markets in the United States covering more than 200 municipalities with an estimated 4.8 million people. In addition, we offer wireless broadband services in Brussels, and Dublin, Ireland, which together cover an estimated 1.0 million people. Our unconsolidated joint ventures offer wireless broadband services in 7 regional markets in Denmark and Mexico, covering an estimated 10.0 million people. As of March 31, 2006, we provided portable wireless broadband connectivity to approximately 88,000 subscribers in the United States and approximately 11,500 subscribers in Belgium and Ireland."
Using this information from S-1 we know for the U.S. market, Clearwire has a market penetration rate of 4.8M people and a subscriber percentage of 1.8%. Here is a link to a somewhat dated article from BCR on broadband wireless spectrum licenses. The BCR article is dated because it does not reflect that concession that AT&T agreed to with the FCC in January 2007, to complete the acquisition of BellSouth. The concession was that AT&T would relinquish their ownership of their 2.5 GHz spectrums and will have disposed of these licenses to third parties within one year. This leaves Sprint (NYSE:S) as the major owner of 2.5 GHz spectrums followed by Clearwire with the disposition of the BellSouth (soon to be AT&T) licenses to be determined. I would suspect that after the Clearwire IPO, they will be a major player for the acquisition of these licenses.
How will Wall Street view the Clearwire IPO? We will learn in a couple weeks, but here are some comments from Jim Cramer on his Mad Money Show (link is in the 4th paragraph from the top) with an additional link to a TheStreet.com article:
“There's an even better man in this industry than James Crowe (CEO of LVLT)... One whose proven to be the greatest money maker...The money maker? The great man I'm talking about, the man who, every time his name is mentioned I pay homage, is Craig McCaw! He's back and he's bigger than ever with CLWR - a new company that he's about to take public. I think you should get in on this red hot action. If you can't get in on the IPO, with Merrill Lynch, Morgan Stanley, JP Morgan... Wachovia, Bear Stearns, Citi, Jeffries, Raymond James, Think Equity or Steifel Nicholas...CLWR is the company that you'll be asking for. It's a company that does WiMax service. Think wireless internet with a 30-mile range. I'm convinced it's going to be a great money maker. I'm convinced because of the great man, Craig McCaw. In 1986, he founded McCaw Cellular, leading the pack on the cellular phone game...Then, in 1994 - just eight short years later - he sold his cellular company to AT&T for $11.5 billion. 9,326% return over eight years - nirvana! He saw the future of an emerging technology - cellular phones. In 1986, who was thinking about it then? That industry was still in its infancy...With CLWR, his next big show, he sees a similar future for WiMax. And this time, he's letting you buy a piece of it with this IPO...The CLWR IPO. This is McCaw's WiMax company, and WiMax is the future of broadband. It can provide wireless broadband access 30 miles away. It works just like WiFi, like the wireless network at your house, your job, or at your school. But it's faster and more efficient; radius of about 750x longer than the current wireless networks. WiMax isn't a pipedream. On Mad Money, we know that broadband is the place to be. We know there is a broadband shortage. We know that broadband market penetration is growing rapidly. WiMax combines all the best futures of a broadband connection - your wireless connection and now cellular phones in one service. They've starting offering VoIP in their WiMax wireless network, which could potentially erase the need for any old-fashioned cell phone networks...Already CLWR has gone from having 1,000 subscribers in 2004, to 206,000 subscribers last December. I call that growth. The IPO is priced between $23 and $25. Because Craig McCaw is a great man, I'd be willing to pay - and get this, a big change for me - I'd pay $28 to $35 for the stock after it comes public. The stock will probably dip after the initial IPO buying frenzy. They usually do. My suggestion is to buy a quarter of your position - maybe even half - if you're feeling really enthusiastic. Then wait, wait, wait for the thing to dip, before you put the rest of the position on. CLWR isn't a trade off the pop caused by the IPO; it's a stock I really like long-term.”
I think Cramer covers most of the pre-IPO publicity campaign for Clearwire. As an exercise from my Updated 2nd DotCom Bubble post, I will frame Cramer’s comments with the Behavioral Attributes Chart developed to discover the formation of an investment or market bubble.
Clearwire IPO Promotion Talking Points
Need for Thought Anchors
1. Image Transfer: The process of taking a successful or unsuccessful act and concluding the same outcome from separate and discreet acts that seem similar. We are comfortable with the process of using analogies because it empowers us to feel educated and familiar with new concepts and ideas. Unfortunately, analogies are rarely accurate and are a practice that prevents us from fully understanding a new concept and the context of that concept.
2. Labeling: We tend to practice the act of placing and labeling dissimilar actions, events, people and companies into generalized groups. Because something looks like X then it must be X. We enjoy labeling things and comparing them to past experiences as a process of familiarization with new ideas and concepts.
Once in a Lifetime Opportunity
2. Yes. Here is the collaborative quote “WiMax combines all the best futures of a broadband connection - your wireless connection and now cellular phones in one service.”
Power of Story and Legends
1. Emotional Decisions: Making decisions based on the emotion of the moment, as opposed to a longer period of reflection is an easier process then research and validation of risks. We like to buy a new car because we like the emotional appeal of the new car in the showroom.
2. Decisions Based on Story and Myth: This is the act of stating a data point as if it is fact without citing the source of the fact or supporting evidence. This is the method in which group decision making occurs. Stories and myths provide thought drives that provide momentum for decision making.
Belief in New Market Paradigm
1. Yes. Here is the collaborative quote “I'm convinced it's going to be a great money maker. I'm convinced because of the great man, Craig McCaw.”
2. Yes. Here is the collaborative quote “…he sold his cellular company to AT&T for $11.5 billion. 9,326% return over eight years - nirvana!”
Overconfidence and Ignorance
1. Induction: The act of reasoning in which the conclusion, though supported by the premises, does not correlate with facts of the premises.
2. Lack of Research and Knowledge: Failure to frame suppositions with facts and sources that can be verified and cited.
1. Yes. Here is the collaborative quote “…They've starting offering VoIP in their WiMax wireless network, which could potentially erase the need for any old-fashioned cell phone network.”
2. Yes. Here is the key fact quote “…Already CLWR has gone from having 1,000 subscribers in 2004, to 206,000 subscribers last December. I call that growth.”
1. Following the Crowd: The act of following the actions of others, rather then confirming a strategy or choice independent of others.
2. Stationary Reasoning: This is the act of basing a conclusion on events or data points from the past without consideration that these points are no longer valid or as significant.
Greed, Missing Market of Lifetime
1. Yes. Here is the collaborative quote “If you can't get in on the IPO, with Merrill Lynch, Morgan Stanley, JP Morgan... Wachovia, Bear Stearns, Citi, Jeffries, Raymond James, Think Equity or Steifel Nicholas...CLWR is the company that you'll be asking for.”
2. Yes or No. Here is quote to consider “He's back and he's bigger than ever with CLWR - a new company that he's about to take public.” Is Craig really bigger then ever? I think selling McCaw Cellular for $11B in a pre-technology bubble market was bigger.
Denial, Not Accepting Responsibility for Mistakes
1. Denial: When a failure or mistake occurs we tend to isolate or compartmentalize that failure.
2. Refusal to Learn from Errors: We have a tendency to blame failure on outside events that are unrelated to our performance. We tend to think of these failures as bad luck – rather then result of direct action.
1. Yes, there is no mention of XO Communications.
2. Yes, there is no mention of how Clearwire is different or the market is different from WinStar and Teligent.
Even with this level of excitement and the fact that Cramer’s comments lead to the conclusion that this is a premature hype IPO, I think there are fundamental questions about the Clearwire business plan and what the long term expectation hypothesis should be for the company. With all the Craig McCaw promotion, it should be noted that Benjamin Wolff is the CEO of Clearwire. Craig McCaw is the Chairman of the Board and founder of the company and has a broader set of business interests.
Will Clearwire be the Third Member of the WinStar/Teligent Group?
I am sure this question does not want to be contemplated by the people taking Clearwire public in the coming weeks, but I think it has to be asked for several reasons. Here they are in order:
1. WinStar and Teligent History Comparison
These companies were spectacular failures that cost shareholders billions of dollars. We could spend hours talking about these companies, but in the end they were attempting to build local loop connections through high speed broadband wireless to bypass the LECs and move traffic onto long-haul, fiber backbones that spanned coast to coast.
2. What Portion of the Market does WiMAX Fit?
Readers of my blog note that I have discussed the affect that Verizon’s (NYSE:VZ) FiOS initiative is having on the market and the counter reaction coming from Comcast. If Verizon, Comcast and eventually AT&T moving towards a fiber to the home strategy, how does WiMAX play in the metro? I am FiOS customer for data only, but even I was intrigued by their recent mailing of a 1000 channel TV lineup. Given the choice between fiber to the home and using wireless LANs in the premise, why would someone subscribe to a WiMAX service? I think WiMAX is suited to a rural market play. The rural markets will be the last to receive fiber to the home due to the high cost and low population density of the market. If that is true, then Cramer’s expectation of rapid and significant subscriber growth will not happen if Clearwire does not have a compelling value proposition to secure subscribers. Long term, I do not see how broadband wireless competes with fiber. Broadband wireless has a place in the rural market, the non-fiber to the home market and with the mobile professional.
3. Does Clearwire need a Backbone?
Clearwire need to raise capital on the public market because they need to buy spectrum licenses and build more WiMAX infrastructure. What is not mentioned is whether Clearwire needs a national backbone? If the rise of video is taxing the infrastructure of the internet backbones, maybe Clearwire will need their backbone to ensure connectivity. This is not content play that Akamai could solve; this is a connectivity and bandwidth challenge. The world of long-haul backbones has changed over the past few years. The AT&T backbone is not a part of SBC and they call the new company is called AT&T. The MCI backbone is now part of Verizon. The Sprint backbone was merged with Nextel and the new Sprint is the primary competitor to Clearwire. AT&T, Verizon and Sprint are all hybrid service providers with private backbones. This leaves Clearwire with two options in Denver: Qwest, Level(3) and XO as backbone options. This also provides interesting merger speculation for the future. Can imagine Jim Crowe and Craig McCaw in the same company? How about Clearwire merging with Craig’s old company XO?
4. Land of Giants
Why did Sprint and Nextel merge? Why did Verizon buy Nynex, MCI and GTE? Why did SBC buy PacBell, SNET, Ameritech, AT&T and BellSouth? Why did Comcast buy AT&T Broadband? Bigger is indeed better in the world of service providers. The reason bigger is better is the affect of two divergent forces. The first force is the decline of profitability of voice as a service. Peer to peer voice like Skype is free, but VoIP is generally a $24 a month flat rate service. The other force affecting the market is that service providers are increasingly finding themselves in a market wherein buying decisions are based on the cost of bits per second. It is challenging to differentiate bandwidth other then cost. In this market construct, bigger is a better and a full capability (i.e. quad play) service provider has a stronger balance sheet to fund the business. In short, the big five service providers in U.S. market: Verizon, AT&T, Comcast, Time-Warner (NYSE:TWX) and Sprint are better capitalized to fight a war of declining profit margins and increasing infrastructure costs.
I do not know what the future holds for Clearwire, but I know that the leadership team will deserve high praise for accomplishing an IPO this week. One final note on the future of Clearwire and the backbone question, in the link above to the history of AT&T Wireless there is a quote from a March 3, 1997 interview that Telephony magazine did with Steve Hooper, then CEO of AT&T Wireless:
“From a business perspective, we’ve been able to fulfill a dream we set out to fulfill: to become a nationwide provider of wireless services. AT&T has allowed that happen. Their balance sheet allowed us to buy those licenses. We couldn’t have done that as a stand-alone business.”