Sprint Buys Clearwire

Sprint Nextel Corp. has acquired the remainder of Clearwire Corp. it did not currently own for $2.97 a share.

Clearwire's board of directors has approved the deal, and Sprint has gotten commitments from Comcast, Intel Corp. and Bright House Networks in support of the deal, as well.

The $2.2 billion purchase values Clearwire at $10 billion, including net debt and spectrum lease obligations of $5.5 billion.

The deal removes one national mobile service provider from the U.S. market, and gives Sprint the full management control of Clearwire it will need if, as expected, Sprint launches some sort of new attack on industry pricing and packaging, something Softbank has indicated it will do in the U.S. market, as it has done in the Japanese market.

Data services are likely to be the focal point for any such effort, for obvious reasons. Voice and messaging services are a declining source of revenue for most providers, and Softbank attacked the Japanese market by disrupting data service plans. Softbank Japan already earns perhaps 66 percent of its revenue from data services.

Softbank does not view the U.S. market as saturated, in that respect. Aside from rapidly growing data service revenues, there is the possibility of enticing consumers to buy subscriptions for tablets and other devices.

That is the thinking behind claims that mobile data penetration of three hundred to five hundred percent is conceivable, a claim Verizon Wireless itself made years ago, referring to machine-to-machine services as an example.

In 2006, when Softbank decided to buy Vodafone KK assets, it likewise was criticized in some quarters for undertaking a risky gambit.

Some will argue Softbank is taking another huge risk by entering a country where iit has no previous operating experience, and by assuming a huge new debt load, after only recently shedding a similar debt load.

Softbank argues it is a reasonable risk, and that its prior experience taking on NTT Docomo and KDDI show it can compete in a market dominated by larger service providers.

Softbank, many believe, will use the same strategy it used in Japan, which some would describe as providing a large number of complementary features or services to create a “sticky” relationship with the end user.

Others will point to the pricing strategy. In Japan, Softbank’s 2006 acquisition of the Vodafone unit was not universally considered wise.

But in just one year, Softbank managed to boost its subscriber base from 700,000 in fiscal 2006 to 2.7 million. By the beginning of 2008, Softbank had grabbed 44 percent of Japan’s new mobile subscribers, well ahead of KDDI’s 35 percent and NTT-DoCoMo’s 11 percent.

Some think Softbank will be willing to launch a price war, as well.

In Japan, Softbank was willing to sacrifice voice average revenue per unit to make market share gains.Back in the 2006 to 2008 period, Softbank was willing to accept a $13 a month ARPU decline to build market share.

Spectrum will among the assets Softbank will be able to leverage. Hence the presumed need for full control of Clearwire.

It already is clear that Softbank has vaulted into the top ranks of global mobile service providers,measured either by subscribers or revenue.

There are growing signs that the U.S. mobile service provider market is unstable, in terms of market structure, though it remains unclear precisely which segments might fare the worst.

Some would point to the whole prepaid segment as one example, while others would say the smaller regional providers are most at risk. Some might argue it is the other national carriers most at risk, should Sprint succeed in attacking market pricing.

"What is clear for now, in our view, is that the current strategy, indeed the entire current business, isn't working," said Craig Moffett, an analyst at Sanford C. Bernstein. Moffett seems to be referring to the regional U.S. wireless carriers.

Others might argue that the financial stresses resemble the earlier transition from dial-up Internet access to broadband access. In this case, the transition is from feature phone to smart phone business models.

In that earlier transition from dial-up to broadband access, many suppliers found they no longer could compete in the broadband business. The reason was that dial-up Internet access was an “app” using the subscriber’s existing phone line. That meant suppliers did not have to pay to use the line.

With the advent of broadband, customers had to buy the new access service, and dial-up economics ceased to be viable, as would-be broadband suppliers had to lease wholesale lines, or build their own networks,  to provide the retail service.

Now, in mobile, it appears that the cost of supporting handset subsidies is pinching operating revenue, while the cost of building fourth generation networks likewise will hit earnings.

The immediate stress is heavy for the regional mobile providers, often using prepaid models, since the cost of handset subsidies now becomes a major operating expense.

Regional or prepaid service providers clearly have had a tougher 2012 than had been the case in the mid-2000s, for example. Leap hasn't been profitable since 2005, for example. MetroPCS profits dropped 63 percent during the first quarter of 2012.

A study undertaken by Tellabs suggests that mobile service provider profitability could become extremely challenging for some mobile operators within three years, with costs surpass revenues for many operators.

In North America that could happen by the fourth quarter of 2013 or as early as Q1 2013. Developed Asia Pacific service providers could see problems by the third quarter of 2014. In some cases this could happen as early as Q3 2013, Tellabs said.

Service providers in Western Europe could run into trouble by the first quarter of 2015. In some cases this could happen as early as the first quarter of 2014.

On the other hand, new supply is poised to come to market, including Dish Network’s proposed new Long Term Evolution network, and possible new networks from Globalstar or LightSquared, which could provide more support for mobile virtual network operators.

The point is that the U.S. mobile market is entering a period of greater instability and potential disruption.