The curse of WiMax

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(Fortune) -- A few weeks ago, Sprint Nextel (Charts, Fortune 500) and Clearwire (Charts), an upstart wireless company backed by cellular pioneer Craig McCaw, severed plans to jointly build wireless broadband services, a venture that was supposed to accelerate the nationwide rollout of a technology called WiMax.

A month earlier, Sprint's then-CEO and one of its biggest WiMax proponents, Gary Forsee, resigned from Sprint under pressure. (And Forsee's WiMax advocacy may have cost him his job. Activist investor Ralph Whitworth reportedly thought Sprint's proposed $5 billion bet on WiMax was speculative, and a drain on cash flow.)

And just this week, Verizon Wireless, a joint venture of Verizon (Charts, Fortune 500) and Vodafone (Charts) said it would embrace a competing wireless broadband technology called Long Term Evolution, or LTE, a move that many analysts say could hurt WiMax.

This recent spate of bad news does beg the question: Has someone put a hex of WiMax?

Not exactly. The bottom line is that WiMax simply isn't living up to its initial hype. But then again, how could it? When Sprint said in August 2006 that it was going to build a nationwide broadband network using WiMax, it did so at a big, flashy press conference in New York, complete with an international cast of characters, big-name backers such as Intel (Charts, Fortune 500) and Motorola (Charts, Fortune 500), and promises of sexy, new interconnected devices.

"We'll give customers the power to harness business information and personal entertainment easily and inexpensively -- and in ways that they will one day wonder how they lived without," Forsee gushed in a press release.

"I don't think there's anything unique about WiMax," sighs Pali Capital analyst Walt Piecyk. "The challenges it will face early on are typical for any wireless technology."

Think back to the days preceding third generation, or 3G, cellular service. That version of broadband wireless was hyped relentlessly by the industry, so much so that some carriers in Europe wound up spending astronomical sums for wireless licenses for building these new networks. The carriers then found themselves with loads of debt they had to reduce, which delayed the deployment of the broadband systems.

Piecyk also points out that WiMax is a much harder technology to deploy than the standard to which it is most often compared: Wi-Fi. (Intel played an important role in seeding Wi-Fi by investing in Wi-Fi startups and installing Wi-Fi-enabled chipsets in laptop computers.) For starters, Wi-Fi used unlicensed spectrum, and, in many cases, was deployed by consumers and small businesses putting up single antennas in their homes or offices for individual or family use.

WiMax is much more like cellular technology. It is shared by many users, and that makes it tricky to engineer and deploy. Furthermore, WiMax is trying to make the transition from a "fixed" wireless service (one that acts like a landline but just happens to use wireless airwaves to deliver voice and data services) to a mobile service, one that lets users surf the web or download music on the go -- and sustains that connection while the customer is, say, riding in a car or train.

As a result, Piecyk suggests, WiMax will have to work out still more bugs before it is ready for prime time.

Meanwhile, Verizon Wireless' decision to adopt LTE as its fourth generation or "4G" wireless technology, also hurts the WiMax cause. If large, deep-pocketed wireless carriers start to coalesce around LTE instead of WiMax, vendors may start to go where the big spenders are.

"If I'm LG or Samsung and I have limited resources to invest in 4G, I would probably start to direct some of that money to LTE devices," says Moe Tanabian, a senior principal at IBB Consulting.

Especially when WiMax's one-time rich benefactor, Sprint, may be showing a little less largesse these days. Though the company has said it remains committed to its plans, Sprint also issued the following statement when it said it was terminating its relationship with Clearwire: "Sprint is reviewing its WiMax business plans and outlook and the company expects to comment further on these topics early next year."

That can't be good. Companies experiencing subscriber losses and disappointing earnings usually don't double down on new spending.

WiMax proponents, such as Dr. Mohammad S. Shakouri, a member of the board of the WiMax Forum, like to point out that Sprint is by no means the only company pursuing WiMax, and that globally, the standard is on track to reach critical mass. "The U.S. is an important market," he says. "But unfortunately, in telecom, the U.S. is not the leader."

Dr. Shakouri says more than 500 operators have WiMax licenses, and that there are more than 275 operators (most of them little, regional players) trying out the technology in some 65-plus countries.

Still, many of those trials will never turn into deployments, and a slide the WiMax forum provided listing the announced nationwide rollouts of the service is far from convincing. Among the highlighted countries doing full-scale rollouts of WiMax: Pakistan, the Kingdom of Bahrain and Iraq. But the first country trumpeted on the slide is the U.S., and the forum sites Clearwire and Sprint as the network builders.

Dr. Shakouri says, worst case, "if Sprint doesn't do it, someone else will buy the spectrum" and deploy WiMax in the U.S. That's not a terrible outcome, but it certainly would further delay the breathless promises made by WiMax proponents just a year ago.

WiMax, in the U.S., at least, may not be cursed, but it isn't going to cruise, either.