Sprint Nextel (S) is arguing whether to let its rival operator, T-Mobile USA, to invest in Clearwire Corp. (CLWR). Sprint is well aware that the investment will give lead to cutthroat competition and may even challenge its leading position in the deployment of 4G services.

Sprint offers speedy data services to customers via 4G network in collaboration with Clearwire. The expansion of 4G services is vital to Sprint’s survival in the U.S. wireless market, given its continued market share erosion. Sprint merged its wireless broadband unit with Clearwire in 2008 and currently owns 54% of the stake.

Clearwire needs new funding by the end of the year and is in talks with new and existing customers about an expansion of its footprint in the U.S. If T-Mobile, a unit of Germany ‘s Deutsche Telekom AG, invests in Clearwire, it will clearly gain a stronger position, thereby raising competitive threats for Sprint. As of now, Sprint is way ahead in deploying 4G network of its prominent rivals AT&T Inc. (T) and Verizon Communications Inc. (VZ).

Sprint currently deploys 4G services in 49 cities with the Clearwire network. AT&T plans to roll out its 4G services in 2011 and Verizon plans to launch 4G services in 25–30 markets in the fourth quarter of 2010. Presently, T-Mobile does not provide any 4G service.

In order to maintain its leading position among 4G networks and fulfill Clearwire’s need for funds, Sprint is considering alternatives like allowing new investments or enlarging its own stake and take full control of Clearwire. Sprint may potentially takeover Clearwire by purchasing shares from other Clearwire investors such as Comcast Corp. (CMCSA), Intel Corp. (INTC), Google Inc. (GOOG) and Time Warner Cable Inc. (TWC).

Sprint’s 4G WiMax is a major opportunity in the wireless market and may drive future revenue for the company. Sprint launched the first 4G handset “EVO 4G” in early June and the second “Samsung Epic 4G” in late June.

We are currently recommending our Neutral rating on Sprint supported by our Zacks #3 (Hold) Rank.

Zacks Investment Research

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