Why T-Mobile is Sprint's best hope

September 13, 2010: 11:19 AM ET

With Clearwire experiencing growing pains, Sprint's best option for 4G expansion might be turning to a rival competitor for cash.

Sometimes the best allies are also the unlikeliest.

This might be the case if T-Mobile invests in Clearwire (CLWR), which is majority-owned by Sprint (S). Currently, Clearwire offers fourth-generation (4G) wireless network coverage to more than 41 million people throughout the U.S., but it plans to expand further to cover 120 million people, including New York City residents this week, by the end of 2010. Clearwire's recent expansion has been achieved thanks in large part to Sprint, which owns a 54% stake and invested $1.2 billion in the company late last year. But for Clearwire to reach its goal of covering 200 million people by the end of 2011, it will need an estimated $4 billion in additional funds.

This poses a problem for Sprint, the third-largest U.S. mobile carrier. Should it pony up additional funds itself, or look elsewhere? According to recent reports, Sprint's board of directors is leaning towards the latter, and one investor it's considering is T-Mobile USA, which is owned by Germany's Deutsche Telekom and is a major Sprint competitor.

At first glance, Sprint and T-Mobile working together sounds like an unholy alliance. But even Sprint CEO Dan Hesse hasn't completely disregarded the logic behind the third- and fourth-largest mobile carriers working together, even suggesting to the Financial Times that the two could merge into a larger, arguably stronger, competitor. And while T-Mobile has not officially announced its own 4G plans, Deutsche Telekom CEO Rene Obermann stated earlier this year the company was exploring options and will be open to cooperation when it comes to 4G, which could include working with other network operators such as Sprint.

Sprint may say otherwise publicly, but 4G remains the company's sole saving grace as it tries to draw new customers and keep current ones. The carrier, which has been losing customers to AT&T (T) and Verizon Wireless (VZ) for years, reported a net loss of $760 million in its most recent quarter, down significantly from a $384 million loss the same time last year, but it added a net 111,000 customers. Not coincidentally, that was the same period the mobile carrier released the first 4G phone to market, HTC's EVO 4G, which reportedly sold more than 66,000 units the first two days in stores and remains sold out online today.

Moving forward, Sprint's advantage of being first to market with 4G will become increasingly tenuous. Verizon, the nation's largest carrier, intends to deploy its own 4G network, based on long-term evolution technology (LTE), later this year, with planned coverage for 100 million Americans by end of 2010 and double that by the start of 2012. AT&T will follow suit with its own LTE-based network debuting next year. Meanwhile, Sprint uses a different competing technology, WiMAX, as the underpinnings for its new network.

If T-Mobile invests, Clearwire would have the necessary funds to continue expanding, T-Mobile would have the technology for its 4G strategy, and WiMAX (and thereby Sprint) would have the leverage to stay competitive as Verizon and AT&T deploy their own 4G networks. It won't be the magical solution to all of Sprint's woes, but it will certainly put the mobile carrier in a stronger position when the 4G race begins heating up later this year.

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About This Author
JP Mangalindan
JP Mangalindan
Writer, Fortune

JP Mangalindan is a San Francisco-based writer at Fortune, covering Silicon Valley. Since joining in 2010, he has written on a wide array of topics, from the turnaround of eBay to the evolution of net neutrality. A graduate of Fordham University, Mangalindan has also written for GQ, Popular Science, and Entertainment Weekly.

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