When Clearwire (NASDAQ:CLWR) launched in 2008, the company was a hot property.
It was poised to reap major benefits from the demand for mobile data services and 4G technology. It had major firms such as Google (NASDAQ:GOOG) and Comcast (NASDAQ:CMCSA) coughing up investments that finally totaled $3.2 billion for a stake in the company. And, it had made a smart Nasdaq debut with an initial stock price of $20.47 in March 2007.
Four years later, the company has become a hot potato for shareholders.
Two major investors have already sold or are considering selling Clearwire shares in the last month. First, the company’s founder and billionaire investor Craig McCaw sold 5 million shares in the last week of April. On Wednesday, semiconductor giant Intel (NASDAQ:INTC) followed suit by announcing that it planned to divest itself of 10 million shares (or a tenth of its 10% stake in the company) in the open market. No wonder, the company’s stock has shed 77% its 2007 debut.
So, what went wrong?
Clearwire started off with several positives: a first-mover advantage in the mobile broadband space, the largest spectrum allocation among all carriers, and glamorous investors such as Comcast that could be used to leverage significant distribution channels and customer relationships.
However, operating expenses proved to be the company’s Achilles’ heel. Even as it signed up a record number of new subscribers to its service during the first quarter this year (an increase of 533% from the same period last year), Clearwire posted losses amounting to $227 million on the back of rising operating expenses.
The company’s expansion plans shouldn’t have been a problem but they are. This is because Clearwire opted for the WiMax network configuration over Long Term Evolution (LTE) network configuration for its 4G plans. The difference between the two networks lies in deployment: while WiMax requires building of new networks, LTE can be upgraded over existing networks.
Unfortunately, Clearwire’s choice turned out to be the wrong one.
Even as the company burned cash building new networks, the industry has moved towards LTE as the de facto standard for mobile broadband. Sprint Nextel (NYSE:S), Clearwire’s majority stakeholder, has already indicated plans to shift to LTE. It is only a matter of time before Clearwire is forced to follow suit.
In addition, Clearwire’s source of funding is tenuous, to say the least. One would expect the firm’s investors, with their deep pockets, to come to its rescue. Nothing of the sort has happened so far.
As early as last year, the company was mulling options that included selling off parts of its spectrum, to generate funds for operational expenses. Instead, the mobile broadband company found itself in a tenuous and messy pricing negotiation with Sprint. That negotiation ended with Sprint becoming a major stakeholder in the company.
Clearwire recently indicated that it has funds for another 12 months of operations. However, recent developments in the telecom industry have ensured that it will have to wage a tough battle against more experienced and seasoned telecom players.
Given the firm’s past execution record, portents for that battle do not look good.