Finding the Real Winners in Wireless
smartmoney.com
By Tiernan Ray
April 25, 2001
Provided By SmartMoney.com
SCIENTISTS TELL US the dark universe is actually filled with light. Background radiation made up of electromagnetic waves from the Big Bang flows through space pretty much evenly in all directions. Last week I discussed a renewed interest in financial markets to see this electromagnetic energy harnessed to give humans access to the Internet via wireless networks. Today I'll discuss the players that may make that happen. The key to understanding this market is to realize that when people get hold of a potentially limitless resource owned by no one, we tend to turn it into a real-estate game of jealously guarded properties.
For that reason, what people believe wireless is capable of is strongly tied to which swaths of electromagnetic spectrum are in favor at the moment. The system in operation now, called local multipoint distribution service, or LMDS, runs over very high frequencies within the microwave band, between 28 GHz and 38 GHz. (This story is lamentably confined to spectrum allocation in the U.S.; frequencies vary in other parts of the world.) Teligent (TGNT) and Winstar (WCIEQ) wanted these frequencies because they can carry 155 million bits a second of data or more, which is fast enough to accommodate the 100 million bits a second at which many corporate networks run.
These were to be the "cream" wireless applications, the expensive services, and that's why LMDS became all the rage a few years ago. Then the practical limitations sunk in. The high-frequency transmitter and receiver on either end of an LMDS link have to be within sight of one another, requiring expensive siting of towers on hillsides and building-tops to assure an unobstructed communications path.
Favor has now turned to MMDS, an acronym for multichannel multipoint distribution service. MMDS isn't new: It was the old stuff, at one time, used for wireless-cable services back before everyone got excited about LMDS. Last year Sprint (FON) and WorldCom (WCOM) bought up the licenses for MMDS from smaller companies that won spectrum in the last MMDS auction way back in 1996. On April 6, the FCC granted the MMDS holders the legal right to transmit two-way services, clearing the way for wireless Internet service delivering hundreds of kilobits a second, and perhaps as much as 10 megabits, to each user. It isn't as fast as LMDS, but MMDS also doesn't have the degree of line-of-sight issues, since the lower waves of MMDS can more easily penetrate foliage and other obstructions. As well, proponents say MMDS should be able to use vastly cheaper receivers for each subscriber. Sprint has been buying receivers from Hybrid Networks (HYBR), one of the more prominent system vendors for MMDS, to run these services in the 2.5 to 2.7 GHz band, far below the 28 GHz frequency of LMDS. Based on recent estimates, Sprint is off to a, well, sprint, having signed up 30,000 MMDS subscribers thus far. In an April 18 report, ING Baring's Gregory Miller anticipates that at its current rate of between 1,000 and 2,500 new customers a week, Sprint should have at least 90,000 customers by year's end.
Transmission in the MMDS band has its own drawbacks, and that's where the snazzy technology comes in. The signal at these frequencies tends to travel to the receiver simultaneously over many different paths through the air, arriving at the receiver out of sync, resulting in a blurring of the signal. A technology called OFDM, in development by Adaptive Broadband (ADAPE) and Cisco Systems (CSCO), among others, helps resolve this problem by breaking up the wireless signal into chunks and sending each chunk on a separate frequency at a slower transmission rate. The receiver has more time to detect the right signal, eliminating blurring. OFDM is quickly becoming the miracle technology for many applications. It's being considered as the basis of local area networks that may translate data at 54 million bits a second inside offices, while AT&T (T), among others, is applying it to mobile wireless networks of the future. Dubbed '4G wireless,' AT&T's invention may some day put a 40-megabit-a-second Internet connection in the palm of your hand.
But that's just the start. Several private companies offer advanced, patented technologies to improve the efficiency of MMDS systems that use OFDM. At a recent conference in San Francisco entitled Network Outlook, some of them presented for venture capitalists their roadmaps of how high-speed wireless access may evolve. BeamReach of Mountain View, Calif., takes OFDM and adds signal-processing chips that can move chunks of the signal from one frequency to another if interference occurs on any one frequency. Wireless Online of Santa Clara, Calif., has developed antennae that can increase the area covered by an OFDM radio system by 50%.
These technologies, say proponents, should make it possible for OFDM/MMDS systems to cover a greater number of businesses and residences with each transmitter, lowering overall costs. In fact, equipment makers are claiming they can lower the cost to the carrier to add each new subscriber to about $500 to $600, which would compare favorably to what's generally agreed to be an installation cost of between $750 and $1,500 for cable and DSL.
The start-ups will compete with Cisco and others to sell to new service providers like airBand of Dallas. AirBand promises it will provide 10-megabit-a-second connections for around $4,500 a month using Cisco's OFDM gear. With T-1 lines going for $1,000 or so a month, airBand's offering seems very competitive.
To some, this mix of technology and renewed market demand is extremely compelling. "We're very big on wireless access in the next few years," says Rex Dwyer, who helps vet wireless stocks at Firsthand Funds. Dwyer says Firsthand maintains a select few wireless investments, including Hybrid Networks, but also P-Com (PCOM), DMC Stratex (STXN) and Ceragon (CRNT), all of which develop a variety of LMDS and other kinds of radios. (Dwyer believes that the existing LMDS services will continue to be important, since they can be used in a kind of hub-and-spoke system to connect the many MMDS receivers that must be deployed.)
Larry Vanston, head of Technology Futures in Austin, Texas, says the ease with which wireless can be installed and its ability to cover large populations of subscribers will eventually lend it an equal share of the broadband market alongside cable and other technologies. However, he warns, "The technical advantages of wireless depend on a lot of nontechnical factors, like how much share a [wireless] carrier has and how well [the service] is marketed."
Indeed, skeptics still outnumber defenders, and longtime wireless devotees are some of the toughest critics. Bill Frezza, a former Ericsson (ERICY) executive and now a venture investor with Adams Capital Management, is unmoved by the rise of OFDM. "This is a tough market all around, and I don't see how a particular modulation standard is going to change anything," says Frezza. "What matters is to prove the business model." The business model, of course, means making back all the up-front investments in wireless, and many say it still can't be done because no one player can command a big enough market.
Most analysts agree that while wireless can be cheaper, the business doesn't make sense until many, many subscribers have been signed up. Since AT&T has managed to sign up just 11,000 customers for its service so far, last year's $390 million buildout represents a $35,000 cost to sign up each subscriber. "Every company I meet says we can make back the investment if we sign up just 7% of a market," says Rob Lucky, a telecommunications veteran with Telcordia. "The problem is, there are 10 other companies in each market that all have the same idea."
A large part of the costs of wireless comes from paying license fees to expensive MMDS and LMDS spectrum. For that reason, a few service providers are making a home in still another corner of the microwave band. What's known as the Industrial, Scientific and Medical, or ISM, bands at 2.4 GHz and 5.8 GHz have long accommodated microwave ovens, but it's better known these days for Apple Computer's (AAPL) Airport wireless network. Installed in a home, it gives access to a wired Internet connection from up to 150 feet away.
Now, however, some ambitious service providers are taking those wireless LANs into the streets. Broadband2Wireless, or BB2W, of Boston; Clearwire Technologies of Calabasas, Calif.; and the aforementioned airBand are representative of the new carriers. BB2W Chief Executive Paul Adams, a veteran of cable provider RCN (RCNC) and defunct DSL provider Flashcom, says he can throw up a few dozen transmitters around town and provide up to 1.5-megabit-a-second connections, both upstream and downstream, to each customer within a six mile radius of the tower. There's no spectrum license, and no cost to install the system because users simply attach a modem to their laptop or desktop, a process that he says should take about 15 minutes. BB2W is using equipment from Cisco and BreezeCOM (BRZE), but companies such as Malibu Networks of Calabasas and Canada's WaveRider Communications (WAVC) could also be suppliers down the road.
What's cool about the "unlicensed" folks is that not only do they avoid the high costs of spectrum, but they are also playing to a market that's being driven by the computer industry, not the telecom business. Apple's Airport technology relates directly to what BB2W is doing, and BB2W is working with chip makers such as Intel (INTC) and Intersil (ISIL) to make cards you could put in a laptop that would work with both Airport and BB2W's service. Some day, BB2W's Adams expects that technology will merge with the 4G technologies mentioned above, so that a laptop user scooting around town can sign on to the network and have wireless access at high speeds wherever he or she may be.
At the end of the day, there will be many wireless technologies competing against wired lines — including high-speed mobile, satellite and even something called 'free space optics,' which runs over the air on laser beams. Many of these technologies will be unified through an emerging standard called 802.16, which will hopefully create some economies of scale for the beleagured industry later this year. Technology Futures' Vanston may be right that wireless will eventually win a substantial place beside wired technologies. Clearly, though, it won't be without a serious fight from the wired world, and renewed pressure to show profitability in the wake of some high-profile losses. It's a gamble, but it's a very interesting one, I think you'll agree. |
