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Intel...What Were You Thinking?!?

News Analysis By Robert Liu
TMCnet Wireless and Technology Columnist


At first glance, Intel’s decision to invest in Clearwire Corporation may baffle some observers. In an era characterized by the likes of Vonage (News - Alert) bleeding red ink, why is the world’s largest chipmaker shelling out $600 million to an unprofitable service provider that only serves approximately 100,000 subscribers? What is Intel thinking?

Some analysts believe Intel’s decision is a smart move in more ways than one. The chip giant isn’t just looking at Clearwire to boost the Worldwide Interoperability of Microwave Access (WiMAX) standard. If Clearwire’s management team (led by the cellular pioneer that locked out Ma Bell of the cellular market in the 1980s, Craig O. McCaw,) can execute properly, Intel could even succeed in bringing industry heavyweight Sprint (News - Alert) into the WiMAX fold.

“This is a very good move on Intel’s part,” said Phil Solis, senior analyst at ABI Research. “It’s one more reason for Sprint to choose mobile WiMAX. This is something that could further push Sprint toward mobile WiMAX.”

Sprint intends to make an announcement this summer about which wireless technology platform will be used for its next-generation network. According to Sprint spokesman John Polivka, the company has conducted a number of trials using a variety of modulation specifications, including two WiMAX alternatives. (No decision has been made public by Sprint as of this publication date.)

“If Intel is successful with this strategy, it not only captures a new market, but it undermines some of the competitors out there,” explained Daniel Meron, analyst at RBC Capital Markets. “Incumbents themselves are reluctant to make a move because they don’t have any pressure. Having Clearwire out there may have the same effect that Covad (News - Alert) had in 1999.”

In the five years that WiMAX has evolved into the 802.16-2004 (Fixed) and 802.16e-2005 (Mobile) specifications, carriers have shown some interest in incorporating the technology to deliver wireless broadband service over a wide area network (WAN) or metro area network (MAN). But that interest has been mired by the vast number of competitive options, which has clouded the technology roadmap.

Ironically, the amount that Intel paid to Clearwire is the same as the amount Qualcomm (News - Alert) paid for Flarion Technologies in August 2005. At that time, Qualcomm and Flarion argued that their proprietary Orthogonal Frequency Division Multiplexing (OFDM) technology called Flash-OFDM was superior to WiMAX and lobbied to build support for the spec through the IEEE standardization process. But recently, the IEEE took the highly unusual step of suspending the activities of the 802.20 Working Group, pending an investigation into “irregularities” — a move that Flarion officials have characterized as disruptive and unfair. Flarion and Nextel had an extensive Flash-OFDM trial in North Carolina until June 2005.

In addition to Flash-OFDM, Sprint has been conducting ongoing trials with UMTS TD-CDMA supplied by IPWireless, which has also received $14 million in combined funding from Sprint and Nextel. IPWireless officials dispute the notion that Intel’s Clearwire investment creates a partner for Sprint to embrace WiMAX.

“I think, looking behind it, we’ve seen some things that don’t make sense,” said Jon Hambidge, Vice President of Global Marketing at IPWireless. “The whole idea that this creates a roaming partner…is that really the case? It’s pretty clear that this creates more of a competitor than a roaming partner.”

IPWireless, in fact, had conducted a trial with Clearwire’s predecessor company. Despite what is claimed in a Securities and Exchange Commission filing, Clearwire actually wasn’t founded by McCaw in October 2003. As early as October 2002, Clearwire had an agreement with IPWireless to deploy its TD-CDMA standard, but that deal collapsed once McCaw’s NextNet Wireless, a provider of wireless networking equipment, was merged into Clearwire.

“One frustration we’ve had as a company is we’re showing real technology in real trials, not PowerPoints,” Hambidge told INTERNET TELEPHONY.

But Clearwire wasn’t fully WiMAX-compatible either. When the company first launched its wireless broadband service in August 2004, the 802.16e-2005 standard was still evolving. That meant the network and gear supplied by the NextNet subsidiary weren’t fully compliant with today’s Mobile WiMAX spec.

“The equipment is very similar to what Mobile WiMAX is, but it’s not Mobile WiMAX,” ABI’s Solis said.

So, to ensure future compliance, Clearwire will now get all of its wireless broadband equipment from Motorola (News - Alert), a strong Intel ally that shrewdly acquired the very profitable NextNet subsidiary. Nearly three-quarters of Clearwire’s 2005 revenue came from the production and sale of base stations and customer premises equipment (CPE), which netted a bottom line of $46.6 million.

That leaves Intel with a business that only accounts for a quarter of total revenue. Despite serving 4.8 million people in 27 markets covering over 200 municipalities in the U.S., as well as a few markets in Europe, Clearwire only has 88,000 subscribers in the U.S. and 11,500 more in Europe. Along the way, it racked up nearly $175 million in net losses since its inception and expects to realize significant net losses for the foreseeable future.

As a result of Intel’s investment, Clearwire was spared the agony that engulfed Vonage during its initial public offering. The infusion allowed the company to shelve its IPO plans.

“Intel didn’t want that IPO to go poorly. Intel has to make sure there’s at least one 2.5 band WiMAX network in this country,” Hambidge explained.

“Intel looks at it as a loss leader, but they are trying to change the make-up of the industry. Intel is creating a market because the market is not there. Intel is taking its own fate in its own hands,” Meron added. IT

Robert Liu is Executive Editor at TMCnet and a regular contributor to Internet Telephony Magazine. Previously, he was Executive Editor at Jupitermedia and has also written for CNN, A&E, Dow Jones and Bloomberg.

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