The WiMax Deal Is a Disaster: How Google Got Snookered

The more I learn about the $3.2 billion deal announced earlier this week to salvage Clearwire’s and Sprint’s (S) WiMax businesses by merging them together, the more I am convinced that someone got snookered. And that someone was Google (GOOG) CEO Eric Schmidt. Maybe he just can’t say “No” to visionary billionaires like Clearwire (CLWR) chairman Craig McCaw. Or maybe McCaw got Intel (INTC) CEO Paul Otellini to lean on his buddy Schmidt. Otellini himself pledged $1 billion of Intel’s money towards the venture because he has made a big bet at Intel on selling WiMax chips. He also happens to sit on Google’s board. I don’t know if any of the above happened or not.

What I do know is that Google came reluctantly to the table and that for a long time the deal was being blocked internally at Google for some very good reasons. The main reason is that WiMax, as Clearwire is deploying it, is not a very good replacement for mobile broadband services. It is, above all, a fixed wireless solution. What it replaces is wired broadband services to homes and offices delivered through cable and DSL. That is how Clearwire is selling it today.

But to get Google - and Comcast (CMCSA) and Time Warner Cable (TWX) - to put up the cash, Clearwire had to promise it would build out a richer mobile broadband service as well. This is why Google invested—to bring the broadband Internet to mobile devices (some of them hopefully running the Android operating system). And it is why Comcast and Time Warner Cable invested. They don’t need a replacement for cable broadband to people’s homes. They need a wireless offering to fend off AT&T’s (T) and Verizon’s (VZ) incursion into their television market. (It’s all about who has the better bundle). Everyone is enthralled with this idea of WiMax as a disruptive wireless mobile broadband alternative. Even Neal Cavuto couldn’t stop waxing about the wonderful wireless future that this deal represents.

I wish that it were true. But here are a few problems, in addition to the ones I laid out in my earlier post:

1. Clearwire and Sprint have not yet proven that WiMax is a viable business even for fixed wireless. Clearwire lost $727 million last year, nearly five times more than its total revenues. And it is projected to lose increasingly more over the next couple years during the expensive growth phase of its business. Moreover, the uptake of the service in the 50 or so cities where it is available has not been so great. That is because, unless you live in a rural area with no other broadband alternative, it is trying to solve a problem that doesn’t exist. At this point, most people in the U.S. can get broadband at their home just fine through cable or DSL.

2. WiMax hasn’t proven itself elsewhere either. Even in Korea, which has had WiMax for two years and is supposed to be a broadband paradise, consumers are not clamoring for WiMax. There are only about 150,000 WiMax subscribers in Korea, well below initial expectations.

3. Before you can turn WiMax into a mobile broadband service, you need mobile WiMax equipment. Cell phones, laptops, and other devices with WiMax chips in them are a long way away. Intel is ready to sell those chips, but device makers are not going to put them in their gadgets until enough consumers want them. And most consumers are going to wait for a WiMax network to show up that they can access both where they live and when they travel. So there’s a chicken and egg problem there.

4. Clearwire doesn’t know how to act like a mobile company. It doesn’t have a mobile business plan. It has a fixed wireless business plan. In order to make WiMax truly mobile, you need to build out a network dense enough to cover subscribers as they move from one place to another. That is simply not the case today, even in the markets where Clearwire operates.

5. Sprint is conflicted. To deal with roaming and coverage gaps, Clearwire would need to use Sprint’s 3G cellular network as a backup. That would require another chip in each device, which would make them more expensive than competing devices from AT&T or Verizon. Also, it would require Sprint opening up its 3G network to Clearwire and, by extension, Google. That’s not going to happen.

6. WiMax is not a global standard. Here in the U.S., WiMax is built on 2.5 GHz spectrum. Overseas, it is built on 3.5 GHz spectrum. That makes it harder for equipment manufacturers to achieve the scale they need to make money from WiMax devices and network equipment.

7. McCaw may be a visionary, but sometimes he doesn’t see so clearly. Yes, he built what is now AT&T Wireless and sold it for $11.5 billion. But after that he also was responsible for Teledesic and XO Communications—two massive failures that cost investors billions of dollars. Clearwire was about to join those latter two before Schmidt & Co. came to the rescue.

Original post

Comments

[Texrat]

Point #3 is incorrect. WiMAX enabled devices, like Nokia's WiMAX version of the N810 internet tablet, are either out now or will be very shortly-- not "a long way away". So scratch the "chicken and egg" scenario.

And you may have valid reasons for pessimism, but none of the obstacles you mention are insurmountable. If past innovators let your sort of complaints get to them, we wouldn't be having this internet exchange right now.

[Steve Zecola]

Dear Mr. Schonfeld:

I worked on the original FCC regulations for cellular in the early 1980's and have either followed or worked in the mobile communications industry. If the industry had followed your logic, it wouldn't exist today. However, it is one of the largest, fasting growing and profitable industries in the world. It has made billionaires out of more than one person.

You neither show any understanding for WiMax technology (yes, it is mobile today - see ALVR) or customer requirements (one seamless system at home and on the road for all services on a broadband structure). You might want to see ALVL's recent press release with Digicel to get a sense of how customers react to a properly positiioned offer.

Your arguments are so far off the mark that they are not worth a point-by-point refutation.

[aurora703]

Using your logic Wi-Fi should not only never have come about, it shouldn't work now either. Wi-Fi does of course work and is very popular, in particular because Intel put Wi-Fi chips in all it's laptop chipsets. WiMax chips will also be in all Intel's chipsets, even desktops, and WiMax, which really is just Wi-Fi on steroids, will work because the technology is sound and the backers/investors (which you mention above) have a very vested interest to see that it does. Most of your logic is otherwise very flawed. Sorry.

[blogviewer2008]

You sound like the typical Wall Street analyst that has not bothered to talk with the actual people in the industry. Ignorance. My rough count has 350+ global rollouts of WiMax, many with mobile, not fixed. And again, like above, the rest of your points sound like whinings instead of business hindrances.

I see CLWR as the first pure-play on 4G service, with a 2-4 year lead on an unproven competitive technology, LTE (zero products, zero rollouts, and unfinished specs).

That equates to a 2-4 year monopoly and head-start on 4G. Value that.

[analysis101vp]

Another complete total waste of time in reading. I wish Yahoo would post credible more time worthy articles to read with some real substance. If this deal was a huge disaster, then why would huge names such as Google and Intel invest billions in it. How much is in your bank account Mr. Confeld??? Please go do something more useful to make money, like cleaning toilets. That's all people like yourself are good for. What a waste!

[Geddy]

Folks, it is indeed still an unproven technology. Everyone keeps touting how it works overseas but as he even mentions, not many customers (not just in Korea, anywhere). It has not been proven to work in a large market yet, though Sprint (Chicago) & Clearwire (Portland) already have markets built for many months now & still haven't launched...smells like trouble to me.
And yes, there are mobile devices already working on Clearwire's "Expedience" technology, just look at the numbers on their sales as well as google their customer complaints, they're horrible. By the time they figure out how to run things (Sprint REALLY needs to go back & fix their very glaring customer defection issue before branching out) LTE will be deployed & the small advantage of "first to market" they should have taken advantage of LONG ago (even by 2010, about when LTE will start deploying, they'll have only half their population covered with WiMax) will be gone. It takes a TON of money to deploy a new techology & that little pittance that the cable companies, Google, & Intel provided won't cover diddly.

[User 192182]

WIMAX may be a failure in the end, but Google is much more likely to "snooker" than be "snookered". Their actions during the 700Mhz auction were a clear demonstration of this. I suspect someone at Google saw the "Mythbusters"... episode in which it was proven that the mouse really does scare the elephant. Logical or not, the "elephants" (major 3G service providers) are pushing their technology and access roadmaps to stay ahead of WIMAX "mouse". Google benefits from this, as it broadens their opportunities to reach mobile subscribers 24*7. Is it not plausible that Google is "herding the mice" to get the "elephants" to run their way? They got the FCC and VZ to buy in to the open access 700Mhz bit, why not prop up a potential competitor to keep the big boys on their toes?

[nikos9516]

Your views on interoperability & client devices show ignorance of a basic scaling factor: WiMax chips can and will follow the WiFi trend: in 2003 buying a WiFi laptop was a premium, now you need to try very hard to buy one that hasn't (and they have a/b/g/n workable in 99% of the globe ...)

[User 192182]

WiFi uses free unlicensed spectrum and has no core infrastructure requirements. Anyone can buy a WiFi router, pick their channel and blast away without ever purchasing any wireless service from anyone. WiMax (at least in the US) is a very different case. Licenses and infrastructure are expensive and the uptake will be dependent upon some operator network build. If the client device suppliers want to throw caution to the wind and put a WIMAX chip in every widget they're definitely getting "snookered": because WIMAX is not nearly as simple as WIFI.

[Jermski]

IMHO - WIMAX is the next logical step in wireless technology and Sprint/Clearwire is at least 2 years ahead of the competition.

You can't expect to make a profit without taking risks - I think Google and Intel have made the right choice here by investing in a technology that is likely to provide access to the same services you get at home, via mobile.

I'll bet you're a "glass is half empty" kind of guy ;)

[analysis101vp]

I would suggest reading from a more credible source backed by very successful and consistently profitable companies like Intel and Google.
Here it is... www.intel.com/pressroo...
Don't waste your time reading the opinion of this clown Erick Confeld.

[Vikking]

Communications infrastructure is not a stagnant business in most parts of the world. While we a lucky to have cable and dsl available to us most of the world is not so fortunate. WiMAX has the potential to become the new de facto standard when setting up new "last mile" infrastructure so long as it is more cost effective than laying wires. While it may never be a huge success in modern cites it has the potential to gobble up 100% market share elsewhere which would make it a huge success. It seems like they need to adapt their strategy to the places where they are far more competitive i.e.: places where wires are planning to be laid.

[vader2008]

Sounds like Erick may be a Verizon or AT&T crony.....LTE is so far off, we are talking 5-6 years before it even starts competing......plus, it will be a CLOSED network.....same old, same old from the telco monopolies......

Mobile WiMax is real and it is here today. And what analysts continue to miss (some, like Erick, by design) is the fact that this will be an OPEN network and OPEN standard......pay on demand, by the second, minute, hour, day, week, month, year.....build any device and put a WiMax chip in it for connectivity to the Internet or private MPLS network perhaps? Car stereos, camcorders, appliances, trucks, buses, cars, cash registers, billboards (Google advertising connection?), webcams, phones using VoIP, etc, etc, etc.....oh yeah, and did I mention that WiMax is STANDARDS based and has Security and Class of Service (think VoIP) built into the protocol?

How about a true backup to those wireline T1s so many businesses buy from Sprint today? Or (Telco's shiver) true LAST MILE replacement of that T1? Don't forget that Sprint is one of the LARGEST wireline Internet service providers in the World and would love to stop paying those LOCAL LOOP CHARGES to their competitors AT&T, Verizon & Qwest.....just bypass those telcos and pass the savings on to the business customer! And no more 4 week provisioning times to get those T1s delivered......just drop ship a Cisco router with a Wimax chip and have a multimeg T1 or MPLS circuit up and running in a couple days!!!!

Simply put, WiMax is going to change the wireless and wireline world FOREVER. Not since the introduction of today's commercial Internet back in the mid-90s have the telco's been so worried about their monopoly.

WiMax is a GAME CHANGER and this is why Google and the Cable Companies are so interested......Google seeks an open standard and the cable companies see a way to truly hurt their biggest competition.

The fun is about to begin......

[WirelessHan Solo]

The translation of the business model lacks comprehension of what McCaw and friends have planned for WiMax and more importantly the telco pipeline that will feed these services and revolutionize telco services worldwide and ultimately change the perspective of how these services will be delivered to the world. Perhaps you should invest all you have in AOL :)

[LonnieDevereaux]

Erick:
Don't listen to what these bozos say. You wrote a very nice article. Your spelling and punctuation are perfect! You also used a very good assortment of words, many of them containing more than 3 syllables.
You're a great writer, Son. Keep up the good work! I wish your brother Richie wrote half as well.
Mom

[Smack Talker]

Eric is speaking the truth. WiMax is far too general a term for the large class of licensed and unlicensed spectrums and applications for long-range wireless internet-type connectivity. The real idiots are the guys that keep buying the "Next big thing" stocks so that they can all be "First-movers&quo... and "Smart-Money"... You all look like a bunch of goofs buying up wimax plays like they are Sirius and XM (Remember, those were "Pure plays" on Sat. Radio, "Guaranteed" to win because the good ol USA was only authorizing 2 licenses. Big bust for all but the pump and dumpers.

Do yourself a favor and leave the loss-strategy investing to the googs and Intel types- they have money to lose. Investors here will wait 3-4 months for the FCC to authorize the deal and none of you folks can even say for sure what networks, equipment, costs, access, etc. will be available in WiMAX for enough years that you would be better to jaunt down to the Starbucks and sit on your WiFi laptop learning about Municipal bonds and CDs.

Tha way you will still have some money to invest when the world does change... The bleeding edge is for those with thick skin, not big ideas about being first in line when they hand out the millions.

[SNB]

Wimax is a game changing technology, i am based in an emerging market where wired BB penetration is very low. Wimax as a technology will help drive quick adoption and ubuquitous deployments without having to go through what the mature markets went through. Also it has a great roadmap as it progresses. IF you need seamless connectivity on the fly and want to make internet access real & available in every corner of this world this is teh bext solution. Yes initial cost structures are high but the players need to look at long term and future opportunities. Disrupting technologies are always ambiguous, and its been proven for decades that these technologies change teh rule. eg: , television, radio, telephones, aeroplanes, computers now its internet and the list goes on....

[DanielChvatik]

A lot of people are confusing a great technology with a great company and a great company with a great stock. No one is arguing that WiMax isn't a great technology. So are satellite phones and we know how that ended. Many people point out the tremendous benefits of WiMax in developing countries. Well, that wonderful but I don't think Clearwire services those countries.

And yes, WiFi is everywhere now, but it took several years to reach these levels of penetration, not to say the efforts of many different companies on different fronts. Clearwire may not have that much time. Besides, the business models between WiFi and WiMax are very different. Not many companies were able to make a lot of money selling Internet access over WiFi. The ones are do are in niche markets (like airport or hotel WiFi access). I think it's too early to call whether Clearwire will be successful or not. But if they fail, they will probably pave the way for another company that will successfully deliver broadband speed wireless data.

[Geddy]

I don't really believe the other major carriers are too worried about this "new" competitor (can't really call Sprint a competitor to AT&T and Verizon with the hemorraghing of customers they've had lately). Both Clearwire (Portland) & Sprextel (Chicago & DC) have had WiMax markets built out for almost a year now & still have yet to release them to the public....smells like they're having troubles getting it to work to me. Even if they already broken promise to launch by end of year comes to fruition, the supposed "first to market" advantage will be greatly negated as LTE is literally (in wireless terms) right around the corner. At most all the new Clearwire is promising is less than half the population covered by 2010, which just happens to be when the other carriers start LTE launch. I can promise you they will not take as much time as Clearwire is taking to fully launch & cover their markets. I also want to comment it takes MUCH more money to deploy a new nationwide technology than the pittance the bidders (Google, Intel, cable companies, etc.) have committed to so again, doesn't look pretty to me.

[rhodope]

Thanks for the info, This article has motivated me to take a position with regards to WIMAX and if this is the best arguments against the tech then the prospects are good. The POTENTIAL is HUGE, even if all it does is provide last mile access to far flung neighborhoods and basic data connectivity to vending machines, medical instruments etc it sounds like we have a moneymaker on our hands. In addition the very idea of an open network is enticing because they can end up being used in ways that are completely unforeseen and profitable as well.