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Clearwire's

(CLWR)

plans for mobile WiMAX service in North America come during interesting times -- in the sense of the putative ancient Chinese curse.

Facing the Fury of Mammoth Squirrels

The U.S. mobile data scene is difficult to explain without going through an acronym jungle. Let's hop through the terms as rapidly as possible.

In 2007,

AT&T

(T) - Get Report

will start offering nationwide coverage for W-CDMA terminals souped up with HSDPA upgrade technology, on top of the GPRS and EDEG upgrades of the older GSM infrastructure.

Verizon

(VZ) - Get Report

has long since upgraded its CDMA infrastructure with 1xRTT and EV-DO technologies.

Sprint

(S) - Get Report

will start offering mobile WiMAX alongside CDMA/1xRTT/EV-DO in 2008, backed by an ambitious new network launch.

Why am I getting all boring and technical right at the start of a column? Mostly to emphasize just how much the incumbent operators have already invested in upgrading second-generation mobile networks (GSM for AT&T, CDMA for Verizon and Sprint) and subsequent third-generation technology. Upgrades are getting upgrades.

Roughly, over the past three years, mobile data has shifted from 100-200 kbps real-world speeds to 1 Mbps range. That's plenty for email and light browsing, the main corporate applications. Games and videos have not reached beyond 5% of mobile subscribers.

Behemoths AT&T, Verizon and Sprint all have more than 50 million subscribers. Sprint has stumbled badly of late and is betting the farm that its new mobile WiMAX initiative will resurrect its CDMA-iDEN franchise. T-Mobile is half of Sprint's size and is

trying to gain an edge with aggressive pricing and a new UMA service combining Wi-Fi and GSM.

Clearwire is not competing with complacent, cautious dinosaurs defending their old telecom turf without new ideas or initiatives. U.S. mobile operators are scurrying around like squirrels on speed, adding new network upgrades on an almost annual basis in their bid to boost mobile data usage.

Despite the massive advertising spend on raising awareness of mobile content services, the operator that has arguably bet the most on mobile data was the biggest loser of 2006's competitions for subscriber growth

and

churn, Sprint. Not only is it failing to add subscribers, it has had to work hard just to replace the ones who are jumping ship in favor of AT&T and Verizon. The mobile data offerings of AT&T, of course, have been a mess because of a series of delays of a serious nationwide 3G service launch.

Yet U.S. consumers don't seem to care that much. If consumers don't currently care about how much better Sprint's mobile data service is compared with AT&T's or T-Mobile's, what will make them care about mobile WiMAX in 2008 or 2009? Far superior performance at far lower prices?

Product Dilemma

Highly developed smartphones now pack so much processing power and display finesse that they are increasingly supplanting laptops for email and light browsing among business travelers. Beyond 2008, selling laptop cards will take you only so far.

Ultimately, mobile WiMAX will have to compete against AT&T and Verizon in mobile handsets, because these operators can offer attractive phone/PC card bundles. The mobile operators have spent so much on developing their mobile data infrastructure that they surely will be quite willing to compete harshly on price if mobile WiMAX starts showing a pulse in the mass market.

Not one of the U.S. operators can afford to lose an inch in the mobile data wars. They all must assume by now that mobile voice revenue is doomed to decline over the next five years. Even T-Mobile has given up on its 3G skepticism and is now rushing to build its own W-CDMA network. The very concept of mobile voice driving revenue growth is dead.

The mobile WiMAX services of both Sprint and Clearwire will go up against borderline desperation from AT&T and Verizon. Back in the early 1990s, land-line operators were complacent and had their lunch eaten by challenger operators launching mobile networks. This time, the incumbents are already in full crisis mode, plotting to blunt the long-term threats from VoIP and WiMAX technologies.

In addition to newly upgraded mobile services from AT&T and Verizon, Clearwire's mobile WiMAX is going to compete against Sprint's mobile WiMAX. At this point, it looks like major phone vendors are naturally going to bet big on Sprint with their first wave of models. That means that the biggest early research-and-development spending is going to CDMA/1xRTT/EV-DO/WiMAX phones.

The Clearwire question is, how does the company intend to compete effectively against a hybrid service combining nationwide CDMA coverage with WiMAX features from an operator that already owns its mobile infrastructure and while waging war on two other flanks with the leading W-CDMA and CDMA2000 incumbents? Where is the edge?

I can't believe PC cards are enough, and handset design is very, very hard. By late 2008, 12 mm thick, 70-gram 3G phones featuring Wi-Fi access at a $50 subsidized retail price will be commonplace. Flat-rate 3G mobile data plans will no doubt be a lot more attractive than they are now -- T-Mobile's rather desperate W-CDMA launch alone should guarantee that.

Admittedly, at this early point it's very hard to evaluate the mass-market potential of Clearwire's future service. Little is known about the price/performance balance of mobile WiMAX devices in 2008-2009.

But it seems very likely that Clearwire will land smack in the middle of a vicious mobile data price war. An early success for mobile WiMAX would mean a very aggressive marketing push from Sprint aimed at re-establishing this operator as a growth machine, the primary strategic goal for Sprint now that the strength of its average revenue per user is waning. Verizon would probably hit back with aggressive pricing, and Cingular and T-Mobile would no doubt retaliate.

We know how the U.S. operators deal with price offensives. Over the last half decade, new innovations such as family plans and early-evening tariffs quickly dispersed across the U.S. mobile market. Aggressive new pricing initiatives were often adopted by two to three rival operators within months of their inception. The recent, roughly two-year Indian summer in the U.S. mobile telecom pricing environment may have lulled people into complacency.

Judging from the steep downward tilt of Clearwire's post-IPO price action, that torpor may now be subsiding.

At time of publication, Kuittinen had no positions in any of the stocks mentioned in this column, although holdings can change at any time.

Tero Kuittinen is a senior product specialist for Nordic Partners, Inc., a pan-Nordic brokerage firm. Although Kuittinen is an employee of Nordic Partners, Inc., the statements above are being made in Kuittinen's personal capacity and are in no way are the statements of Nordic Partners, Inc., nor attributable to the company. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Kuittinen appreciates your feedback;

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