Sprint Nextel's deal with LightSquared to build and run its LTE network for more than US$13 billion in cash and credits all comes down to money.
Sprint is partnering with the startup and getting $4.5 billion in purchase credits for its planned LTE (Long-Term Evolution) and satellite networks even though it already owns a majority stake in Clearwire, which has a national 4G WiMax network up and running. But the biggest reason Sprint is looking beyond Clearwire -- though it may still play a role in Sprint's LTE strategy -- is that Sprint thinks LightSquared can better find outside funding.
"LightSquared's going to pay them a large pile of money, whereas Clearwire's going to absorb a huge pile of money," TMF Associates analyst Tim Farrar said. Sprint, laboring against much bigger rivals AT&T and Verizon Wireless, wants both the mainstream 4G technology and a strong new revenue stream, he said.
Under the deal announced on Thursday, LightSquared will pay Sprint $9 billion over 15 years to host LightSquared's spectrum on the multi-technology network that Sprint is planning to build under its Network Vision plan. Sprint would also get the credits to go back and buy wholesale capacity from LightSquared to market its own LTE service. In addition, the companies agreed to a roaming deal that would allow LightSquared to offer access to Sprint's 3G network to customers of LightSquared's 4G and satellite systems. LightSquared plans to start launching LTE in major U.S. markets in the second half of next year.
Working with Sprint would save LightSquared more than $13 billion of capital and operating expenses over eight years compared with building the network by itself, the companies said. It would also allow Sprint to meet a U.S. Federal Communications Commission requirement to reach 260 million U.S. residents one year early, in 2014. But the deal raised questions about Sprint's relationship with Clearwire, its current 4G partner.
Clearwire launched the first 4G network in the U.S. and has been selling service on that network to Sprint and other partners since 2008. But after spending billions building out its infrastructure, Clearwire is so strapped for cash that it has done very little network expansion since the beginning of this year and has forgone marketing for its own branded service in several markets. When it announced first-quarter financial results in May, Clearwire said it had enough cash and investments on hand to continue operating for the next 12 months. The company expects to achieve positive cash flow next year.
LightSquared has raised about $2.3 billion since it launched last July, most of which it hasn't yet spent, and plans to raise another $3.5 billion before the end of 2013, when it expects to have positive cash flow from services revenue.
Sprint is relying on LightSquared to fulfill these funding plans in order to finance the network-building project. With Clearwire, by contrast, Sprint itself might have to foot the bill for LTE and for a network expansion to keep up with Verizon and AT&T, it said. On at least one occasion, Sprint has declined to buy into a Clearwire debt offering designed to raise capital for the company.
However, analysts don't see Sprint leaving Clearwire behind just yet. For one thing, LightSquared still needs FCC approval to start rolling out its LTE network, which tests have shown is likely to interfere with GPS (Global Positioning System).
"If we don't get clearance from the FCC, then the deal would have no reason to exist, so the agreement would be terminated," LightSquared Chief Marketing Officer Frank Boulben said in an interview Thursday. However, LightSquared fully expects the FCC to approve its plan in September.
Even if Sprint can build LightSquared's network and chooses to spend the $4.5 billion in credits to use the LTE network -- it might consume half of the network's total capacity, the companies said Thursday -- Sprint might still use Clearwire as part of its LTE infrastructure. Clearwire has enough spectrum to keep its WiMax network and also deploy LTE, and adding the new technology would require changes only to the edge of the network, which would be relatively inexpensive, spokesman Mike DiGioia said. With LTE capacity from both LightSquared and a Clearwire system, Sprint might become a stronger rival to Verizon and AT&T, said analyst Monica Paolini of Senza Fili Consulting.
"That could basically give them the volume and the critical mass to be not a distant third, but to be a (true) third competitor," Paolini said. "It's a very long shot, but what's the alternative?"
Paolini believes all U.S. consumers would benefit if that plan succeeded, especially if the market undergoes further consolidation through the merger of AT&T and T-Mobile USA. "Even without the merger, we are an environment that has less competition" than most markets around the world, she said.
However, there are potential pitfalls to the arrangement. If Sprint used the network it built for LightSquared, that would make its LTE strategy more complex than one that used its own capacity or that of Clearwire, said Phil Marshall of Tolaga Research.
Sprint already essentially operates three different technologies -- its own CDMA (Code Division Multiple Access), iDEN from the former Nextel, and WiMax through Clearwire. It developed the Network Vision plan in order to reduce complexity and costs with flexible base stations that can incorporate several different technologies. But the LightSquared network would use a set of frequencies completely separate from Sprint's, which could make it harder to get a variety of devices on the market for it, Marshall said. There is a better-developed ecosystem for LTE gear that uses the 2.5GHz band where Sprint's 4G frequencies lie, he said.
Marshall also believes the strategies of the two carriers go in different directions. Sprint wants to compete head-to-head with other major mobile operators, so it needs to build out its network in areas where they operate. Part of LightSquared's plan, on the other hand, is to offer other carriers coverage in places where they don't have it. That would require infrastructure in other locations. LightSquared has already signed deals with Open Range, Cellular South and SI Wireless to reach underserved areas, though it also has signed national electronics retailer Best Buy as a customer.
"It drives Sprint further from where they should be focused," Marshall said. The carrier should be concentrating on further improving its battered customer service reputation and serving markets that the two leading carriers aren't addressing well, such as prepaid and other mass-market opportunities, he said.
The one thing the deal won't do is help to clear up LightSquared's GPS problem, most analysts agreed.
"The FCC doesn't care if they have a contract with Sprint or not," said Roger Entner of Recon Analytics. "If it interferes with GPS, it's dead on arrival."
Stephen Lawson covers mobile, storage and networking technologies for The IDG News Service. Follow Stephen on Twitter at @sdlawsonmedia. Stephen's e-mail address is stephen_lawson@idg.com