Higher interest rates threaten wireless operators

Higher interest rates threaten wireless operators
Last week the stock market went haywire over concerns of interest rate hikes and a high number of home foreclosures as a result. And rising interest rates could wreak havoc on wireless operators spending a lot of capital to build out service.

We've begun to see the impact in the second quarter on Leap Wireless, which posted a 57 percent decline in earnings for its second quarter because of rising costs and interest expenses associated with financing activities and higher income tax expense.

WiMAX operator Clearwire added fewer subscribers than anticipated by analysts in the second quarter, adding 41,000 in the quarter, which was down from 52,000 net additions in the first quarter. The cost per gross addition is what concerned many analysts. Clearwire paid about $343 per subscriber in the first quarter, and that number jumped to $471 in the second quarter. Those costs were about $13 million more than expected. Couple that with rising interest rates and the fact that the company isn't fully funded, and the story isn't a good one for investors.

Walter Piecyk of Pali Research downgraded Clearwire from "buy" to "neutral." He stated: "We are perplexed at why the company has not yet raised additional funds and fear that the increased volatility of the capital markets threatens to increase its cost of capital regardless of what quarterly results look like in the future."

Moving on to Sprint Nextel, the story doesn't look much better. Sprint saw its profits fall 95 percent in the second quarter as costs associated with its WiMAX buildout, severance costs and merger and integration expenses took their toll. Sprint spent $51 million on the WiMAX network during the quarter. Severance costs more than doubled to $85 million while merger and acquisition costs nearly quadrupled to $122 million.

The high costs associated with building out a WiMAX network is precisely why Sprint and Clearwire announced plans last month to join forces. But the details of the plan have been scarce. Perhaps we'll get a better understanding this week, when Sprint talks about the details of its WiMAX plan on Aug. 16 during the company's Technology Summit.

The bottom line is that operators like these must work to reign in their costs as they aggressively roll out new technology. And in this competitive environment, it might be a tall order. -Lynnette

P.S. Join FierceWireless Editor-in-Chief Sue Marek to learn more about the Sprint-Clearwire deal and how it will impact both domestic and international WiMAX deployments. Our invited guests will react to the Aug. 16 announcements and take your questions. Register here.