Friday, February 23, 2007

Size Matters

Since re-introducing myself to Mike Mace, the iPhone introduction, and supervising a student project on mobile phone operating systems, over the past two months my research has been moving back towards cellphones. I started researching the industry in 1996 as part of an international research project, and originally hoped to do my dissertation on it, but due to problems with the data (Baby Bells not keeping archives of their launch of US cellular service in 1983-1985) I had to switch to another topic. Still, I got a couple of papers out of the early work, some teaching cases, and material that will eventually end up in my next book.

Now that I’m back on the cellphone beat, I’ve loaded my favorite RSS reader with a bunch of mobile phone industry blogs and news feeds. One of the most provocative sources of industry gossip is the wireless section of Seeking Alpha. Its timely stock-oriented snippets nicely complement Mace’s blog, which tends towards think pieces on long-term corporate strategies for making money (rather than which stocks to flip).

On Thursday, Seeking Alpha had a fascinating posting about the planned IPO next month for Clearwire, a company that hopes to get rich using WiMax to deliver local broadband service. Clearly Clearwire is benefiting from great press, as well as the big pile of money Intel is throwing at WiMax. Of course, there are serious concerns about whether WiMax can deliver on the hype any time soon.

The posting by Bill Koss on the planned Clearwire IPO was unusually long by Seeking Alpha standards (3,300 words), but I encourage you to read the whole thing. Three key points:

  • There are eerie parallels between the Clearwire IPO and the Netscape [sorry, not NetScape] IPO. And we know what effect that had.
  • Many expect Clearwire to succeed because its chairman (not CEO) is Craig McCaw, reprising his old script.
  • Clearwire is competing against big companies in an industry where size matters.
[Cellular One]The parallels to McCaw’s earlier career might be a positive or negative. Although McCaw has a book about him, most people don’t remember who he is. They might remember the Cellular One brand name he created, or that he sold McCaw Cellular to AT&T for $11 billion effective in 1994. (Of course, AT&T spun off AT&T Wireless in 2001, it was bought by Cingular in 2004 , and is now AT&T again.) Later he was in the news for funding the Nextel turnaround, and having to split his billions in a messy divorce.

Koss argues that McCaw is following the same pattern of amassing spectrum at any price, assuming that it will rise in value. That worked for cellphone licenses in the 1980s, but it remains to be seen whether it will work for wireless broadband.

I heartily concur with his last point, which is that an infrastructure business (building a nationwide network) requires a lot of cash and has huge economies of scale. As I teach my technology strategy class, this is the big change of the IT industry from 30 years ago — no longer is it enough to have a cool idea and launch a company in a garage, because the Intels, Ciscos and Oracles of the world (or AT&T, Comcast and Verizon) can throw more money at the problem if they decide you’re on to something.

As with other such businesses, I can see three outcomes:
  • Clearwire gets enough money from the IPO to grow big;
  • Clearwire does well enough to get gobbled up by one of the big boys (a successful strategy recommended by my old mentor Charlie Jackson); or
  • Clearwire runs out of money and dies.
There’s a lot that can happen either way — uncertainty about the technology, about demand, about economics, about direct competitors (e.g. 3G), and substitutes (wired broadband). That’s why IPOs are not for the faint of heart.

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