Sprint's risky bet on WiMax

(breakingviews.com) -- Sprint is betting the farm on the WiMax standard. The U.S. mobile phone carrier's customers are melting away. Yet it has scrimped on cellular network capex to double down on wireless broadband. Putting another $1 billion into cash-burning partner Clearwire, while a rival technology is catching up, amounts to a binary bet for shareholders.

Sprint's problem is simple -- its customers are dissatisfied. It lost another 801,000 of its most profitable customers in the third quarter. More than four million have fled to other networks over the past year. Sprint's bigger rivals scent blood and have been aggressively courting customers with advertising campaigns and handset offers.

Yet Sprint (S, Fortune 500) has slashed capital expenditure to an unsustainable level. Its current budget is equal to 7% of sales, which is less than half what rival AT&T (T, Fortune 500) spends -- and AT&T's revenues are more than 15 times as large as Sprint's, so it has the advantage of scale as well.

Instead, Sprint is increasing its bet on Clearwire (CLWR), the company rolling out WiMax. This wireless technology could make broadband ubiquitous, even in rural areas. But it will face stiff competition. While WiMax is the only "4G" technology currently deployed, a rival technology backed by Sprint's deeper-pocketed rivals will be available soon. This standard, called LTE, may be widely used within two years.

Moreover, Clearwire may need even more cash. It thinks it will burn up to $1.3 billion in the second half of the year. The $4 billion it has in the bank after the current round won't last long at that rate. If it needs more, Sprint would have to pony up to keep majority control. That might be difficult, as it is already heavily indebted -- its market capitalization is $9 billion, while its net debt was almost $16 billion at the end of last quarter.

Sprint's stock has really become a highly leveraged bet on WiMax. The payoff for success would be enormous. But WiMax has fewer than half a million customers. The odds of it becoming a widespread standard are low if it can't quickly build on its temporary advantage before a more powerful competitor gets going. If WiMax doesn't catch on, it would exacerbate Sprint's troubles.

Handset makers don't like designing equipment for second-tier standards, and customers tend to flock to operators with the best phones. At worst, Sprint could even be forced to adopt LTE, which would be a heavy burden for the already indebted company. The clock is ticking on Sprint.