For me, the most interesting part of Cook’s presentation was the announcement that iPhone has 5% of mobile market share worldwide. What I like about it is the sense of rebellion Apple brings to legacy market assumptions as usual. When Apple launched iPhone in 2007, there were lots of top investors who called this move stupid. They called Steve Jobs a “bigoted selfish individual” (if he was a female probably they would called her Ayn Rand resurrections) who is going against all business common sense and tries to enter a very mature market, with well established players and low margins. Steve Jobs proved that even if you are “the last” to enter a market, you can win if you produce “the best” with “highest margins” and still beats everyone. Even a lazy giant like Nokia!
I was reading Sprint’s CFO comments regarding Clearwire wasted money early on and remembered one of my old posts; Too Much Money and Ego; If you want to kill a Start-up! Successful companies stick to their fundamentals from the beginning. Although a company can and should evolve from an early stage start up mode into a more solid and robust operations, brings different caliber of managers in different stages and gradually morph into a “corporate” mind set; successful companies stick with their roots even in the later stages. This includes operating under tight-cash flow and careful spending and expansion to maintain their margins. With huge amount of money at the beginning and big corporate mentality from day one, there will be no “fundamental” to build the company culture around it. Also, building a “green field” nation-wide wireless operator does not make sense; anymore. You build the network without customers; increase your OpEx dramatically without increasing your revenue at the same time. That is why Clearwire’s net loss more than doubled in the Q1 to $267 million, compared to a net loss of $94.1 million during the same period last year.
Clearwire CEO Bill Morrow said at an investor conference in September that Clearwire hoped to secure more money via an investment by a company like T-Mobile or an auction of its unneeded spectrum. Looks like after all; selling the spectrum would be a last-ditch effort to raise money. Clearwire has long argued its vast spectrum holdings help set it apart from rivals like Verizon and AT&T, which are building LTE networks. Clearwire has around 120 MHz of spectrum in the 2.5-2.6 GHz band in most of its markets. Bloomberg reported Clearwire is looking to sell of 40 MHz of spectrum in its markets.
It is a strange world; your parent company gives you the valuable spectrum, you raise more money based on having this spectrum, you ran out of cash and can not raise more money, so you sell the spectrum that brought the money at the first place! What a strange business plan.
Here we go again; another day and another question about Clearwire future! They need money again and so far Sprint was the only main source of cash, but probably not for long. Sprint, which merged its wireless broadband unit with Clearwire in 2008, invested $1.2 billion into the company in late 2009. Credit Suisse analyst Jonathan Chaplin estimates Clearwire needs $4 billion to cover 200 million people in the U.S. by the end of 2011, up from the 120 million people it expects to cover by the end of this year. With limitations in the capital market, there are not many choices for Clearwire. While Sprint board is already divided on the issue of future capital injection, some people speculating the need to bring another operator as a major investor; like T-Mobile USA, into the mix to inject some capital and reduce the pressure on Sprint. The logic is sharing the network with Sprint could cut the cost for both parties, T-Mobile can benefit from this collaboration since they do not have a clear plan for their 4G roll-out.
But it is not that simple. T-Mobile as a GSM/UMTS based operator and in line with other T-Mobile operations around the world, needs to follow LTE path for the sake of its own integrity. While Sprint is struggling with its WiMAX launch because of limited available handsets, this issue will be even more problematic for T-Mobile, since most of the GSM world players have already chosen LTE as their migration path. Therefore, there will be no or very limited market for a GSM/UMTS/WiMAX phone.
Bottom line, it is decision time for Clearwire. They should come out of cash burning mode and create a real revenue to survive in this market.
The latest news from Sprint regarding their 4G offering problems due to lack of handsets and the news considering LTE roll out from Sprint management in the span of a week point to an unknown future for Clearwire and WiMAX deployment in the mobile domain in the US. Sprint management learned their lesson that a legacy cellular operator can not launch a service/network just based on data cards!
Clearwire with annual operational expenses of $0.5 billion and capital expenses requirement for expansion around $2-3 billion can not rely on its own revenue of $300 million! It is difficult to continue raising $3 billion per year with an unclear plan and justification of being a nationwide operator; sometime in the future. With capital mark dire situation and Sprint issues, Clearwire options are limited.
After posting “Is Clearwire Going to Survive?” last week, I received hundreds of comments, emails and messages from different readers; technical geeks, analysts, bankers and investors. What surprised me was coherency in responses and how people from different fields are emerging on one issue; “cash flow positive” is king in this economy. For services/operation companies, burning capital intensively is not an option anymore. Probably technology companies with a niche technology can justify their initial capital requirement without meaningful revenue for a while, but an operator can not burn cash without a meaningful cash flow. Cash is not king anymore; cash flow positive is the new king!
Recent news from Clearwire is not promising! New CFO is leaving the company after 10 months, Scott Richardson (Chief Strategy Officer) is going to leave as well. If you look at Clearwire cash flow, they have burned $2 billion last year to expand their network. With $0.5 billion operational cost, one billion dollar in cash and virtually no meaningful revenue (just $80 millions) the million dollar question is; should they go ahead as planned expand the network and burn the cash in six months, or halt the deployment and stick to their cash to survive another two years?
As a “green field” operator, the huge amount of cash burn in initial phase is inevitable. As number shows, you can not grow organically as an operator and go head to head with tier-one operators. On the other hand, although you think one billion cash is available; in wireless operators world it is peanut! It can not cover the cost of a limited rollout, leave alone other expenses including marketing. Cash starvation is going to damage all business models need huge amount of CapEx, including launching a “green field” wireless operators.