• Spectrum deal points to united front against Bellcos
• Clearwire focusing on rural expansion, Sprint on population centers
• Similar alliances will be biggest threat to incumbents in many countries

Sprint Nextel and Clearwire are the biggest holders of 2.5GHz spectrum in the USand both are looking to build major WiMAX-class networks. But they are likely to steer clear of head-on competition, in order to accelerate their roll-outs andstrengthen the potential of new broadband wireless services to shift the balance ofpower in US telecoms and provide a counterweight to the Bell operators, with a full wireless triple play. The two operators are swapping spectrum, pointing to a mainly rural and suburban focus for Clearwire, enabling it to expand rapidly in areas of limited competition as it aims to create a national system for wholesale and roaming as well as end user access. Meanwhile, Sprint Nextel will focus on larger population centers, under pressure to meet its FCC obligation to offer 2.5GHz service to 30m citizens by decade end.

Creating a broadband wireless network will be key to Sprint's desire to offer its own mobile and triple play-capable services, either directly or through key partners such as the cablecos. These will be essential to its bid to gain influence and market share at the expense of Verizon, AT&T and Cingular.Similar alliances are arising elsewhere, such as Australia, where Unwired and Austar are exchanging spectrum in order to create an integrated national network that allows each operator to focus on its core markets and to grow more rapidly, and which deprives the incumbent of the ability to weaken its challengers with a divide and rule approach.

Sprint Nextel and Clearwire have agreed to a major deal to swap spectrum assets in the 2.5GHz broadband wireless band, where they are the main US holders. This echoes similar agreements in Australia and elsewhere, in which potential competitors instead agree to divide the market between them, in order to deploy new networks more rapidly and take on the established 3G carriers.

Under the agreement, which is subject to FCC approval, Clearwire would transfer to the recently merged telco licenses for nine midmarket cities, and would gain in return spectrum in 61 small, mainly rural, markets.

It is not thought that any cash would change hands. The main cities involved are Buffalo, New York; Baton Rouge, Louisiana; Mobile, Alabama; Stockton, California and Pittsfield, Massachusetts.

The structure of the swap suggests that Sprint Nextel - which has an obligation under the conditions of its merger to build a 2.5GHz network reaching at least 30m Americans by the end of the decade - will focus initially on large and medium cities, while Clearwire will continue its expansion of the past year in rural and suburban areas. By dividing the spoils in this way, rather than competing head-on, the two largest holders of 2.5GHz - the main spectrum for WiMAX in the US - will be free to expand more rapidly and keep margins relatively high in the crucial early years.

The Sprint Nextel ambitions:

The two companies have been engaged in unofficial talks since before the Sprint-Nextel merger plan was unveiled, regarding possible spectrum deals, and even the possibility of a full sharing of each other's networks. The aim has been to avoid a situation where the two most viable builders of national broadband wireless services in the US tear each other apart, instead of creating a strong alternative to other broadband options and, in particular, the massive power of the Regional Bell operators and their cellular ventures. Sprint Nextel has made it very clear that it intends to be a counterweight to the Bellcos, an ambition bolstered by its far reaching alliance with the major cable providers, to bring mobile services to their bundles and allow them to take on the DSL giants in the market for fixed/mobile triple play services. The $71bn merger was not just about gaining scale by merging the companies' cellular bases, but about transforming the nature of the business to become a broad-based, multiservice operator with a cornerstone role in the broadband, mobile triple play sector.

In this respect, the 2.5GHz spectrum is the lynchpin of the whole deal, because of its suitability for high bandwidth services and the fact that Sprint Nextel has access to 80% of the population, far ahead of any comparable assets held by the Bellcos. The company sees broadband wireless as a means to create its own broadband access network quickly and relatively cheaply to take on the Bells, and also as a parallel system for its 3G network, for backhauling cellular base stations and for offloading traffic from 3G frequencies to 2.5GHz. This will be particularly valuable when delivering high bandwidth video,and much of the combined operator's medium term plan for 2.5GHz services is focused on what Sprint CEO Gary Forsee calls "the third screen" - the handset as media center and even television. Sprint, which has been a US leader in delivering early television services over its cellular network, believes a higher capacity network is required to deliver really attractive media services.

However, to achieve its access obligations, and also to support sufficiently radical and attractive data-intensive services, it needs more bandwidth in many major population centers. Hence the deal with Clearwire, which is likely to be the precursor of others, perhaps with sharing pacts in tier one centers. We would also expect Sprint Nextel to attempt to acquire 2.5GHz frequencies in these major cities that are currently held by other players, whether local operators or asset owners with inactive spectrum.

Clearwire's Moves:

Meanwhile, Clearwire itself seems to be amassing new holdings in rural areas, enabling it to target the huge underserved areas of the US, where the main growth in fixed and, in future, mobile broadband services will lie. This is an attractive way for a well funded start-up to start to build market mass, since there is less competition from established carriers, the cellular market is fragmented and there are many areas lacking significant DSL or cable access.

Creating high margin services and then signing roaming deals with Sprint Nextel and more localized providers would generate market presence and cashflow, the basis for Clearwire's longer term and more ambitious goals to create a national service, with both retail and wholesale activities.

This is the second year running that Sprint and Clearwire have exchanged 2.5GHz spectrum assets around the turn of the year. At the end of 2004, they did a significant lease transfer deal that allowed Clearwire to launch in many of its current markets. Clearwire is building out using its own pre-WiMAX NextNet equipment - also the basis of a major roll-out in Canada by a Bell Canada/Rogers joint venture, with which Clearwire has a close alliance. Sprint Nextel is trialling Motorola and Samsung gear and has a development pact with Intel. Nextel has also trialled IPWireless and Flarion non-WiMAX options, and was rumored to be preparing to test NextNet too.

Benefits of the alliance:

While it might be better for consumer choice in broadband wireless to have competing services from Sprint Nextel and Clearwire, this factor is more than balanced by the increased speed with which a combined entity could deliver valuable services, and the scale of coverage. Especially as, even though this could be a near-monopoly in licensed spectrum, it will face plenty of price and service competition from the wireline and cellular offerings of the Bell companies and others, and would help offset the increasing dominance of AT&T/SBC, Verizon and Bell- South, plus the Cingular venture.

Both Sprint-Nextel and Clearwire have sufficient spectrum to create their own networks, but there is a strong logic to a combined effort that would wrongfoot the Bells and create a truly nationwide network in a shorter timeframe than either entity - Sprint distracted by merger and EV-DO migration, Clearwire by building the business - could achieve alone. This could lead, regulator willing, to a pooling of spectrum assets or a major roaming agreement, going beyond the current apparent strategy to stay out of each other's core markets.

Australia:

This more cautious initial approach is still worrisome for the incumbents though, and mirrors efforts in other countries to maximize the potential of broadband wireless to shift the telecoms balance of power. A good example is Australia, where Intelbacked start-up Unwired Australia has been aggressive about the superiority of WiMAX-ready technologies over 3G as a mobile broadband platform, and its resulting ability to challenge incumbent telco Telstra.

"HSDPA/3G is an underpowered technology which will not meet the needs of people looking for a broadband equivalent wireless service," said chief technical officer Eric Hamilton in November, when Telstra announced plans to move both its CDMA and GSM networks to HSDPA. Unwired uses the Navini Ripwave mobile broadband technology, which will be migrated to support 802.16e in about a year's time.

To boost its challenge, Unwired last year announced a spectrum swap with Austar, which allowed the former to focus mainly on urban markets and the latter on rural and suburban, with a comprehensive roaming deal to connect both systems. Like the Clearwire agreement, this should lead to the more rapid creation of a national service based on WiMAX-class technology, and remove at least one competitor from the scene.

Under the agreement, Austar will trade a portion of its 2.3GHz license to Unwired, in return for part of Unwired's 3.5GHz license, and the license boundaries will be redrawn with new licenses issued. As a result, Austar will hold 2.3GHz and 3.5GHz licences in areas that roughly align with its current subscription television market in regional Australia, while Unwired will hold the 2.3GHz and 3.5GHz licences for the majority of metropolitan Australia.

Unwired chairman Peter Shore said: "The beauty of building Wi-MAX-compliant networks is interoperability. As the networks are rolled out, Unwired would be able to sell a national service to all regions where Austar builds its network, in addition to its own city network and services, enabling Unwired customers to roam seamlessly from city to country and vice versa."

The deal will create a national service and a viable challenge to incumbent telco Telstra. Wireless is expected to grow at three times the rate of broadband overall in Australia in 2005-6 and to account for over 10% of broadband lines by 2008, the highest in any developed economy. Austar's equipment supplier has not been revealed.

This article originally ran in Wireless Watch, a publication of Rethink Research. Reproduced with permission. For information on the weekly Wireless Watch Newsletter and other Rethink Research products and services, click here.