Google Decides No Clear Path to the Future in Clearwire, Takes a Bath on Sale of Its Stake

By Peter Bernstein February 24, 2012

It only seems fitting in a Google week for me that it end with the search giant’s announcement that it will sell its interest in troubled wireless data network provider Clearwire Corp. In a regulatory filing, Google said that, starting on Monday, February 27, it will be selling its stock in Cleawire for $1.60 per share, or $47 million total. For those keeping track, this is a 94 percent loss on Google’s original $500 million investment that was made in 2008.

Google has been the third largest stake holder in Clearwire. Sprint, which is having troubles of its own in the hotly competitive U.S. cellular market, is the majority shareholder but does not have voting control. Cable giants Comcast and Time Warner Cable, who, along with Sprint, were looking at wireless data as “the next big thing” when they made their investment in Clearwire, are other big shareholders. Their original investments were $1.05 billion and $650 million respectively and chip manufacture Intel invested $1 billion. Bright House Networks is also a significant investor.

So what is this all about?

Good question. Interestingly, Clearwire states the reasons itself if you look back to their quarterly earnings report of February 15, 2012. First there was the good news:

  • Record Fourth Quarter 2011 Revenue of $361.9 Million, Up 107 percent year over year from $175.2 Million;
  • Full year revenues of $1.25 Billion, up 134 percent year over year from $535.1 Million;
  • Full year wholesale revenues up 876 percent year over year to $493.7 Million;
  • 2011 total ending subscribers of 10.4 Million, up 140 percent year over year from 4.3 Million;
  • Achieved positive quarterly adjusted EBITDA for the first time of $22.5 Million;
  • Average smartphone 4G usage increased 88 percent year over year in fourth quarter 2011.

But, look at the “Forward-Looking Statements.” Below are the most salient bullets in a long list as it pertains to Google deciding to bail out now:

  • “We have a history of operating losses and we expect to continue to realize significant net losses for the foreseeable future. “
  • “Our current plans and projections are based on a number of assumptions about our future performance, which may prove to be inaccurate, such as our ability to substantially expand our wholesale business and the expected timing and costs of deploying LTE on our wireless broadband network. “
  • “We plan to deploy LTE on our wireless broadband network, alongside mobile WiMAX and we will incur significant costs to deploy such technology. Additionally, LTE technology, or other alternative technologies that we may consider, may not perform as we expect on our network and deploying such technologies would result in additional risks to the company, including uncertainty regarding our ability to successfully add a new technology to our current network and to operate dual technology networks without disruptions to customer service, as well as our ability to generate new wholesale customers for the new network.”
  • “Many of our competitors for our retail business are better established and have significantly greater resources, and may subsidize their competitive offerings with other products and services.”
  • “Sprint owns just less than a majority of our common shares, is our largest shareholder, and has the contractual ability to obtain enough shares to hold the majority voting interest in the company, and Sprint may have, or may develop in the future, interests that may diverge from other stockholders.”

While Google did not say why it is selling now after having written down the value of its Clearwire investment in both 2009 and 2011, the list above is explanation enough.   The U.S. has not been and should have been expected to be a great market for WiMax except possibly in rural areas. 4G LTE has become the de facto implementation of choice for wireless broadband along with WiFI, and it is the perfect service for Apple iOS, Android and Windows devices. The “iconic” introduction of 4G iPads in March and the coming of iPhone5 which will be 4G LTE as well, and the fact that all current smartphones support WiFi means that Clearwire has a lot of catching up to do while strapped for money and time. 

As the soon-to-be proud owner of Motorola, Google sees its future based on an ecosystem that is app and device driven where the network is a so called “dumb pipe,” except that it had best be smart enough to be LTE and WiFi friendly.   Smart companies do not chase dumb pipes when it appears there is no chance for them to become smarter.  

As of this moment (around 1:30 PM Eastern Time), Clearwire (NASDAQ: CLWR) is off 5.52 percent at $2.14 dollars per share. Google is up to $610.70, up .76 percent for the day. The tale of the tape tells it all. Only time will tell how long the other big investors are willing to ride this horse. And, while the stock market is not reflecting it at the moment, the crippling of Clearwire’s prospects along with the growing troubles with LightSquared, which missed a payment to Insmarsat this week, is likely good news for Verizon and AT&T even if it does not solve their spectrum and current business model issues.   

You have to love the wireless industry both the U.S. and globally. There is never a dull moment as the industry’s annual gathering in Barcelona this coming week is sure to prove.

Edited by Rich Steeves
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