redherring.com
Is formidable Formus about to file?
By Phil Harvey
Redherring.com
October 4, 1999
While it's not surprising to see a communications infrastructure company attract money from tony investors, Formus Communications's recent $115.8 million funding round is turning heads in the U.S. and abroad.
Formus officials were unavailable for comment on the company's fourth round of financing. According to Herring sources, the company's senior executives can't talk now because they're too busy preparing Formus's S-1 paperwork so the company can file to go public.
The Denver-based telecommunications company plans to deliver voice, data, Internet, and video services to businesses outside the U.S. using Local Multipoint Distribution Service (LMDS), a wireless broadband technology. Since Formus's founding in 1996, the company has raised $202.3 million in financing from investors such as Bank Boston, Baring Communications Equity, The Centennial Funds, Chase Capital Partners, CIBC Wood Gundy, Alloy Online, Harbourvest Partners, Intel (Nasdaq: INTC), Crescendo Ventures, MC Partners, Northwood Ventures, Spectrum Equity, and Telecom Partners.
AIR BY THE NUMBERS
Analysts admit it's difficult to measure the worldwide opportunity for wireless broadband services (also called "fixed wireless," as opposed to mobile phones). LMDS systems, after all, haven't been deployed on a large-scale commercial basis.
Formus rides the millimeter wave to foreign markets.
VCs are finally seeing the potential of broadband wireless equipment. AT&T's moves in the cable and Internet worlds heighten the buzz around broadband.
Certain characteristics of fixed wireless technology make it attractive. According to information from the Wireless Data Forum and from Formus, a large antenna at a customer's building can get data throughputs equivalent to T-1 speed. Also, a single LMDS cell can support the equivalent of 3,800 telephone lines.
The Strategis Group expects that worldwide service revenues generated by fixed terrestrial wireless broadband systems will approach $10 billion in five years and $28 billion in ten years. Those numbers are based on scenario analysis applied to wireless broadband market potential estimates in 39 countries. In the most aggressive scenario, The Strategis Group says world wireless broadband service revenue could reach $26 billion in 2003.
Such numbers should be taken with a grain of salt, says Cahners In-Stat senior analyst Ray Jodoin. "LMDS is so new that I wouldn't hang my hat on any number or market projection," he says.
Numbers aside, Mr. Jodoin says there's good reason VCs are excited about the wireless broadband arena. "Some huge profits are going to be made here," he says.
The prospects of profitability become more apparent when companies such as Intel contribute what Intel spokesman Adam Grossberg estimates as "tens of millions of dollars" toward Formus's latest round. The more connected the world's businesses are, the better chance Intel has of profiting from sales related to servers, PCs, and other equipment, Mr. Grossberg says.
Intel's investment in Formus also reflects positively on the likelihood that wireless broadband technology is a viable solution for businesses, says Adam Goldman, general partner at The Centennial Funds, the Denver-based venture group that put up the seed money for Formus in 1996. He says, "When [Intel] puts its money on the line, customers get the sense that the technology is real."
THE BACKDOOR CLEC
"Wireless broadband delivery is an interesting backdoor approach to becoming a competitive local exchange carrier [CLEC]," Mr. Goldman says. Susan Welsh de Grimaldo, a senior consultant with the Strategis Group, explains that using wireless technology allows companies like Formus and competitors Winstar (Nasdaq: WCII) and Teligent (Nasdaq: TGNT) to offer voice, data, video, and Internet services without having to lease cable or phone lines from incumbent telecom companies.
The advantages of LMDS are amplified outside the U.S. For example, Ms. De Grimaldo says that in Brazil and Poland, the existing wireline infrastructure is limited and broadband access costs are high. In various parts of Europe, the lack of consistent government regulation means that incumbent phone companies aren't required to lease their bandwidth to competitors in some cities. In both cases, wireless broadband services are thought of as an end run around problems that would be otherwise too expensive or time-consuming for a small company to address.
At one time, Formus was poised to compete in the U.S. fixed wireless market, in addition to making inroads into other countries. In January, however, the company sold its stake in WNP, a Reston, Virginia, outfit that held a large number of licenses to LMDS frequencies in the U.S. When Nextlink (Nasdaq: NXLK) paid $695 million in cash and stock for WNP, Formus received $26 million for its stake.
FAST HORSES FOR THE COURSES
Though analysts feel that fixed wireless technology will supplant some wireline installations, there's no proof that fixed wireless broadband services are going to take the world by storm. Michael R. Hannon, a Formus board member and general partner at Chase Capital Partners, says that, as an investor, DSL, satellite, fixed wireless, and cable are all "just horses for the courses." The key, Mr. Hannon says, is to make sure you can offer the most economical broadband solution feasible to get the job done.
Like any other emerging technology, fixed wireless delivery isn't flawless. One challenge of offering such services in a metropolitan area is that buildings and billboards can block the wireless provider's line of sight, thus obstructing the signal and causing a service outage. Cahner's Mr. Jodoin explains, "When you get up to [LMDS wavelengths in] the 28-38 Ghz [spectrum], you have the ability to bring the signal to its knees by putting a Kleenex in front of it." In other words, even fog could be a problem if a provider doesn't have enough overlapping hub sites to maintain coverage.
Regardless of the hurdles, Mr. Hannon, whose firm has a 20 percent stake in Formus, is convinced that fixed wireless technology can solve infrastructure problems in both developed and underdeveloped countries. "What it all comes down to is, We're betting that businesses around the world will have a need for speed," Mr. Hannon says. |
