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From Istanbul To Sand Hill Road
Clearwire, Craig McCaw's Wimax wireless broadband provider which raised $1.5B last year, is planning to go public in the next two weeks to raise another $400M. You have to raise a lot of money to build a nationwide communications network, that's not the surprise. The surprising question is why there is the need for another service provider when both telco's and cable companies are offering a bundled voice, video and data service they call 'tripleplay'. The answer, I believe, is hidden in the question itself. Is tripleplay really good for consumers? I don't think so. This is the whole point of this post, but before we go there let's briefly go to school on Clearwire's business.
Last week, while on vacation, I got the chance to read the Clearwire S1. As of Sept 30th 2006, they had 144K paying customers over their total coverage area of 5.6M people. That's nearly 3% penetration in 1 year. The blogosphere doesn't appear impressed with this number but it is real growth. That growth gave them $76M in revenues for the first 9 months of 2006 vs. 15M for the whole of 2005. They did spend $142M in sales and marketing, but the service business in itself is at about 50% EBITDA which is better than their competition. If they can keep churn low, they can more than recover that big subscriber acquisition cost, and their churn is low. It's at 1.9% per month which is at least half of their competition.
So what do all these numbers mean? It means they are growing, the operating metrics are healthy with room for improvement. But why? Why are people switching to Clearwire? Their speeds are not materially faster than Cable modems and DSL. They are also charging about $40/mo which is comparable to current offerings with the bundle discount. So it is not the price, it is not the performance. What is it then? The answer is in their prospectus, I quote:
We believe that our subscribers are attracted to our current wireless broadband services primarily because our network combines some of the best features of cable modem, DSL and cellular networks into a single service offering at an attractive price. While we serve a large variety of subscribers, we believe that the majority of our subscriber base can be divided into the following broad categories:
subscribers who are dissatisfied with other service offerings, often because of perceived or actual poor quality of service,[url=http://www.sport.fr/smartphones/moncler.asp]moncler homme[/url], slow speeds, price, the requirement to participate in undesired bundled offers, difficulty of installation or unsatisfactory customer service;
The last bullet is the killer, and is why I think Clearwire will succeed. I don't think consumers really want the bundling. It's not that important to have one less bill when you give up so much for it. Clearwire offers the price you get with the bundled discount, but you are not locked to one company. Maybe you want voice from another provider, or don't want a landline at all, maybe your cell phone is good enough. What if you move from a place that has a different cable company, then you have to change everything including your broadband. Do you really want that? How about one company that will give you one thing, and give that simply, reliably and in time, ubiquitously? You move, your broadband moves with you. That's got to be worth something, and Clearwire has figured it out.
The cable companies and telcos have painted themselves in such a corner with "tripleplay" that they've forgotten that it benefits them a lot more than the consumer. This is their Achilles Heel and I believe Clearwire will exploit it. The only additional cost of Clearwire is the additional bill, but that is easily overcome by the inherent portability, simplicity, and almost surely better customer service.
This is the counterintuitive marketing behind Clearwire, and I believe it is working. 58% of their subscribers switched from either cable modem or DSL. I was involved in a Wimax investment when Wimax was a zero billion dollar market. I am very happy to see the market coming, and Clearwire appears to have the right marketing, right team and right business model to take advantage of it. Plus, if Jim Cramer says so, it must be true.