Clearwire is a big player in a growing industry, but it hasn't made a cent of profit. The Bellevue, Wash., broadband provider has lost more than $7 billion in the past decade and recently has flirted with bankruptcy. But analysts see a paradoxical way the company could turn its losing streak into a win: Clearwire might redeem itself by selling off its broadband network.
The proliferation of mobile devices and the introduction of faster, more powerful mobile networks are creating a surge in demand for mobile data. Wireless data traffic grew 123% in 2011, according to CTIA, a wireless industry group. And that's just the start. Cisco estimates mobile traffic will rise 18-fold between 2011 and 2016 to 10.8 exabytes a month, or an average annual growth rate of 78%. Carriers are scrambling to build 4G networks, investing in LTE technology that can be several times faster than conventional networks.
Yet Clearwire is starving for revenue even as the industry it serves is taking off.
The problem is that building those networks is expensive. And therein lies a larger lesson for broadband providers: It's not enough to build a big network. You still need everyday consumers to subscribe. Clearwire set out to sell wireline and mobile broadband to consumers, but most U.S. smartphone owners don't know Clearwire as a brand. So the company moved toward a wholesale model, selling access through intermediaries. But when it came to choosing a brand-name partner, Clearwire stumbled in choosing Sprint, a distant third after AT&T and Verizon. The partners planned to build a 4G network based on 4G Wimax technology that is quickly being outpaced by LTE.
Clearwire brought in $2.2 billion in revenue since October 2003, when the company was formed. But it has racked up an aggregate operating loss of $7.1 billion, including a $2.3 billion loss in 2011 alone. In other words, Clearwire has spent roughly $4 for every dollar of revenue it's brought in.
The company's inability to post a profit has caused its stock to plummet. After going public in March 2007, Clearwire rose to a high of $35 per share a few months later. But it has only been downhill since then. Last week, the stock hit a new all-time low of $1.07 a share.
The new low is noteworthy because Clearwire had recovered from a crisis late last year, when concerns mounted that the company was at risk of declaring bankruptcy. Sprint, which owned 54% of Clearwire shares at the time, hinted at the possibility in a conference call. Of course, even the whiff of bankruptcy is poison to investors. Clearwire shares plummeted as fears of its bankruptcy loomed.
There are reasons to believe that Clearwire has what it takes to make it out of the morass. It responded to the crises with bold action. It patched up its financial differences with Sprint, while reducing Sprint's ownership to less than 50%. It signed new wholesale contracts, including some that were cunningly designed to undercut the increasingly onerous wireless-data plans of AT&T and Verizon.
And, although it once again failed to post a profit last quarter, Clearwire generated $65 million in cash (against negative cash flow of $247 million a year earlier). The company vowed that its $1.4 billion in cash would sustain it through another year. That time frame is crucial, because it gives Clearwire a small window to build out its own LTE network.
Despite those valiant efforts, investors remain unpersuaded. The stock today is lower than it was in late 2011, when the word bankruptcy was associated with Clearwire. That may be because the LTE network Clearwire is building won't begin to be deployed until next June, a few months after the company may have run out of cash.
And that puts Clearwire in a peculiar position. The company could go broke in a year, but in the meantime it's building out LTE capacity that carriers would kill for. One analyst cited by Barron's hinted at a near future when Clearwire may be worth more dead than alive. "There's a limited amount of spectrum out there, and Clearwire is sitting on a ton of it. If it does go out of business, if they don’t make debt payments, it may actually be a positive for investors throughout the capital structure, because when they auction this thing off... and when AT&T and Verizon show up, as long as the current administration doesn’t stop them from buying the spectrum, there’s a lot of value here relative to what the stock is reflecting."
Which is to say - as strange as it sounds - Clearwire's best chance at success now may be corporate failure. The company set out to bring broadband to the masses at a reasonable price. But when the masses finally wanted broadband, they didn't want Clearwire. They wanted their broadband from the brand names that would make them pay dearly for it.