Sprint's Secret to Cost Cutting: WiMAX

The wireless broadband technology is expected to help mobile-phone companies slash billions in expenses for sending calls

by Olga Kharif

When Sprint Nextel Chief Executive Gary Forsee unveiled plans in August to build a nationwide communications network using the latest wireless broadband technology, he boasted that the network will deliver calls and video to consumers at lightning speeds. That new network may bring another consequence: cost savings amounting to billions of dollars a year.

Each year, Sprint (S) pays other companies a bundle to connect cell-phone calls over parts of the network that it doesn't control. In industry parlance, the process is known as "backhaul" and it pertains to a short but expensive stretch of the network controlled by big phone companies including AT&T (T) and Verizon (VZ).

Here's how it works. Say Sprint needs to connect a wireless call from Portland to New York. A call from a cell phone connects to the nearest cell tower. From there it's conveyed to the carrier's switching center, where it's zipped across the country, typically over a fast and cheap fiber-optic cable. But to get from the cell tower to the switching station, it's conveyed over a so-called T-1 backhaul line.

Cheaper Route

That's where Sprint's new network, based on WiMAX technology, could play a key role. By using WiMAX over that crucial leg, Sprint Nextel could cut network operating costs by two-thirds, figures Andrei Jezierski, partner at venture consultancy i2 Partners in New York.

The few miles that a call travels from the cell tower to the switching center are "the single most expensive network operating cost" for wireless carriers, says Jezierski. Backhaul accounts for more than 30% of wireless network operating costs, which themselves account for about one-third of total operating expenses, he estimates. At Sprint, wireless operating costs added up to $20.1 billion last year.

Cost saving is key as subscriber growth slows and competition gathers steam (see BusinessWeek.com, 12/20/06, "WiMAX IPOs Are on the Way"). Carriers need ways to cut costs fast or watch their financial performance crumble. Sprint Nextel plans to roll out its WiMAX network in a few markets in late 2007.

Sprint Nextel isn't the only company interested in bypassing backhaul costs (see BusinessWeek.com, 8/8/06, "Sprint's Boundless Ambitions"). Cable companies also are testing an alternative fiber-optic technology in hopes of cutting costs associated with the wireless services they are rolling out. A slew of companies like Nextlink, a subsidiary of XO Holdings, have emerged in the past year to offer yet another type of wireless backhaul. Today, Nextlink offers its services in 12 markets.

Backhaul Boom

For these small third-party vendors, the wireless backhaul market could be the ticket to big growth. On Dec. 20, investment bank Jefferies & Co. initiated coverage of Nextlink's rival, FiberTower (FTWR), with a buy rating. In its latest quarter, FiberTower reported revenue growth of 135% over a year earlier. FiberTower's customers include Cingular, Deutsche Telekom's (DT) T-Mobile, and Verizon Wireless.

As alternative backhaul operators spring up, the traditional wireless backhaul business could come under increasing price pressure. At stake is part of the estimated $3.3 billion in backhaul revenue generated by North America's telecommunications companies in 2005, says Michael Howard, an analyst with consultancy Infonetics Research. At Verizon, wireless backhaul services add up to about $1.8 billion in annual revenues, or 2% of total sales. The T-1 business offers among the highest profit margins of all telecom services.