WiMax finds a plausible Plan B

Here’s story about a potential application of WiMax† outside consumer mobile wireless by San Diego Gas & Electric, as reported by earth2tech:

SDG&E’s Director of Network & Communications Services, Jeff Nichols told us today that SDG&E has filed an application for $30 million in smart grid stimulus funds from the DOE for a $60 million smart grid wireless project called GridComm that will span the entire 4,100 square miles of its footprint. Nichols says GridComm will use different types of layered wireless technologies… For about 30 percent of the network where higher bandwidth is required, the utility could use WiMAX. …

Nichols says GridComm needs an option like WiMAX — a nascent, high-speed wireless technology that delivers a lot of bandwidth and has morphed into an alternative wireless option for cell phone companies’ next-generation networks — for areas of the network that will be collecting a lot of data. For example, around major grid assets, like substations, utilities collect data from phasor units, which monitor the reliability of the grid and collect information like voltage, current, and frequency in real time. Other examples he said could be using the network to deliver mapping information to mobile workers, or provide video services for facility monitoring.

Nichols said SDG&E hadn’t yet chosen a vendor for any WiMAX gear and the project is still a proposal, not a done deal. While we’ve heard of a couple WiMAX smart meter pilots, SDG&E is one of the first large utilities that I’ve heard of embracing WiMAX for the smart grid. It was just a matter of time before one did, as the ecosystem around WiMAX for the smart grid has grown considerably larger over the past year, and now includes smart meter software maker Grid Net, smart meter maker GE, Intel’s WiMAX chips and vendors like Alvarian eying the emerging smart grid market.

I think this is a wonderful opportunity for WiMax. The global race against LTE for mobile 4G wireless solutions is over, even in the US. Still, the technology works, it’s standardized and has credible suppliers. In businesses not subject to direct network effects of a 2-sided market — i.e. internal business networks rather than handsets and base stations — it has time to market advantages and probably some hungry vendors.

Hat tip: Greentech Media

† Like most financial journalists, as a matter of style I refuse to write WiMAX, QUALCOMM, INTEL, FORTRAN etc. etc.

Openness in the news

A few tidbits highlighted in the inner pages of a friend’s WSJ this morning. All are about (to some degree) IT openness.

Comcast is partnering with Clearwire (and thus Sprint) to resell its WiMax service to its existing cable modem subscribers. In integrating its offerings, Comcast is seeking to increase switching costs. More fundamentally, either this suggests that Comcast realizes that revenue growth in its core business is over, or it decided it needs to bundle in-home and coffee shop Internet access for residential users to compete with AT&T (DSL + Wi-Fi hotspots) and other integrated telecom companies.

Meanwhile, Clearwire is eager to generate revenue and win WiMax adoption before the more widely endorsed LTE tsunami comes flooding in.

The EU has forced major mobile phone makers to adopt a standard recharger plug by 2010. Nominally to reduce the number of chargers in landfills, of course it’s really about forcing an open standard to reduce switching costs. While I think this is exactly the sort of trivial economic micromanagement that governments should avoid, fortunately the government didn’t have to push too hard as European and US telecom trade associations had previously brokered the plan.

Alas, the format is the relatively new (and incompatible) micro-USB instead of the ubiquitous mini-USB that I already have on all my hard disks and some of my existing cameras and cellphones.

Dell is rumored (by the WSJ and earlier reports) to be planning an Android device aimed squarely at the iPod Touch. This makes a lot of sense, since for many users, the value of the iPT comes from its WebKit web browser, a mail client, Google maps and an RSS reader. Assuming Android has gotten around to fixing their awful email client, the open source (and thus inherently commoditized) platform makes perfect sense for the company that seeks to copy Apple’s new technology innovations (and old production innovations) as its core commodity business declines.

As with other Dell technology efforts, it would enable the low R&D company to build upon the R&D efforts of others, a classic (if decades old) example of open innovation.

Correction on Clearwire — but not WiMax

In response to my posting yesterday, the Clearwire PR agency contacted me to point out a material omission: the $3.2 billion investment that Clearwire announced on Dec. 1 from Intel, Google and some cable companies. This did not show up in the most recent (Sept. 30) balance sheet reported by CLWR, and I did not see the announcement when it was made. Thus, compared to my conclusions yesterday, Clearwire has the cash to do a lot more deployments before it runs out of money.

The GigaOM analysis of that announcement also suggests that when Sprint handed Xohm over to Clearwire, it transferred two additional markets (Chicago, Dallas) which were close to being ready. As reported by Unstrung earlier this week, ThinkEquity (a WiMax-centric analyst firm) expects that Clearwire will launch nine markets in 2009: Portland in Q1, one market in Q2, two in Q3 and five in Q4. The Unstrung article also reported:

The analyst firm is now projecting that Clearwire will have to raise the additional $3 billion it has already said it will need for WiMax deployment by July 2010, which should then be "sufficient to last through to cash-flow breakeven in 2014.

Its five recent strategic investors presumably know about those cash needs, and thus are unlikely to have put in the $2b without budgeting the remaining $3b. If their the investors’ financial situations remain stable, and if Clearwire hits adoption targets, then it could conceivably reach cash flow positive in another five years.

That’s a lot of ifs for a company with a market cap of $0.76 billion, entering a period when consumer confidence and business liquidity will remain low for some time to come. But it’s not impossible, which is why CLWR is only down 60% in the past year, rather than 100%.

However, I stand by my existing prediction: WiMax is still doomed. A little company like Clearwire can’t generate enough orders to make WiMax viable against what will become hundreds of millions of LTE subscribers worldwide, and eventually Clearwire’s suppliers will be unable to keep up.

In researching the December announcement, however, I saw this tidbit in an ArsTechnica article :

The company is hedging its bets: the firm said its WiMax deployment will be designed to support LTE—just in case.

This sort of transition (also picked up by FierceWireless and Electronista) is made possible because both LTE and WiMax are cousins, both IP networks based on OFDM technology.

Perhaps Clearwire will use WiMax as a way to get a foothold, and then convert to LTE when its LTE rivals start to enjoy a cost advantage due to economies of scale. The switch would not be without precedent, as Cingular dumped TDMA cellphones (aka D-AMPS, IS-54, IS-136) for GSM starting in 2001.

But of course Clearwire would have to convert while it still had cash or financing to pay for the infrastructure upgrade, and hope that its supplier was still offering the upgrade. The Portland network is apparently using WiMax infrastructure from Motorola, which both has major bets on WiMax but also is investing heavily in LTE: it claims essential LTE patents and is aggressively promising to deliver LTE infrastructure. (Sprint Xohm was also using Motorola in Chicago, although initially committed to using Samsung.)

Clearly Clearwire stays alive as long as its strategic investors have the money and willingness to keep funding its buildout: I won’t try to hazard a guess as to how long that will be. If its infrastructure can be converted to LTE, perhaps its exit strategy is to sell itself to Deutsche Telekom to kickstart what will likely be a lagging US footprint for T-Mobile’s global deployment of LTE. However, Clearwire’s ability to sell itself to a carrier other than Sprint will likely be limited by the terms of Sprint’s agreement to transfer of Xohm infrastructure to Clearwire, as well as its ongoing agreement to resell WiMax services from Clearwire.

Another bad week for WiMax

Lots of WiMax news today:

• The only national WiMax carrier, Clearwire, has doubled its national footprint, going from one city (Baltimore) to two (add Portland). Clearwire has ambitious (I’d say unrealistic) goals to win 425,000 subscribers, more than half of about 750,000 households in the Portland metropolitan area.
• Intel wrote off $950 million of its $1.6 billion investment in ClearWire. CLWR shares dropped 74% during calendar year 2008. This also suggests that Intel’s $300 million in WiMax advertising is probably worthless, too.
• Nokia dropped its only WiMax device, a WiMax version of its N810 tablet, to shift all of its 4G focus to LTE.

When ClearWire was preparing its IPO near two years ago I concluded:

As with other such businesses, I can see three outcomes:

1. Clearwire gets enough money from the IPO to grow big;
2. Clearwire does well enough to get gobbled up by one of the big boys (a successful strategy recommended by my old mentor Charlie Jackson); or
3. Clearwire runs out of money and dies.

I think we can rule out option #2 — Sprint got out of the WiMax business by handing it to Clearwire, and it’s got big enough problems of its own that it can’t bail anyone else out. The other US carriers aren’t interested in WiMax because they’re all going with LTE. Foreign carriers are even less interested in WiMax.

With two of its key strategic investors pulling back, a few analysts speculate Google that will add to its existing $500 million investment in Clearwire (but no one is predicting a complete bailout). I can’t see why Google would want to do this.

The chances of #1 don’t look very good either. As of its Sept. 30 balance sheet, ClearWire has less than $400m in liquid assets on its books. Verizon Wireless is on track for capital spending of about $10 billion just in 2008 — and (for those of you who don’t watch American TV) it already has a large nationwide network.

So absent a tremendous positive cashflow from its existing (or near-term) markets — or a new round of debt or equity — I don’t see how ClearWire is going to build a nationwide footprint. And if there are doubts about the prospects of a nationwide network, business travelers aren’t going to sign up for the existing and forthcoming cities.

Eight months ago, I said: “WiMax as technology is done, finish, finito — stick a fork in it.” After this week, it seems as though Nokia and maybe even Intel agree.

In those eight months, the availability of capital and the willingness of consumers and businesses to spend money on technology has dropped dramatically. So I’m even more pessimistic about WiMax than I was before.

Update Friday 7pm: Clearwire contacted me to point out that it received a $3+ billion investment in December, which I discuss in my Friday posting.

World's biggest WiMax bet

Other than Intel (which has poured in some of its excess billions), no firm in the world has placed a bigger bet on WiMax than Sprint. The falling (if not failing) wireless carrier is praying that bringing WiMax to market now will allow it to steal market share on its three major US rivals, who are all waiting for the WCDMA-derived LTE.

Today Sprint’s XOHM service (soon to be combined with Clearwire) rolled out its first market in Baltimore. As various analysts have noted, having only a single market limits its value to business travelers until it can build out its national network. Sprint is also waiting for wider availability of WiMax “modems” for laptop and desktop computers.

The pricing models are quoted at $25 for home and $30 for “on the go” service (these are the “temporary” discounts). Not being in Baltimore, I’m not clear what the household price is for multiple devices: we have four computers at home, so can we share one modem between them, as we do with our cable modem and before that with our DSL “modem.”

Beyond the capital for the rollout and the people’s unwillingness to join due to network effects (i.e. limited markets), it seems to me that Sprint faces three big issues:

1. Is it fast enough, compared to wireline substitutes. With claimed download speeds of 2-4 Mb/sec, they should be able to beat wireless alternatives until LTE, but their revenue model suggests they also want some of the last mile residential business.
2. Will their prices be aggressive enough? Home broadband is a commodity, so people won’t pay a premium for it. They will pay extra for combined mobile/home service, but I suspect the pool of end consumers who want to pay a lot (out of their own pocket) for mobile broadband is pretty small.
3. Will their networks have enough capacity? Obviously congestion has been a huge problem for the rollout of new networks since the earliest days (cf. 1984 Los Angeles AMPS rollout), and “all you can eat” wireless plans encourage consumers to use a lot of bandwidth. If they provide poor service they will lose customers, and if they have to build more infrastructure than planned they’ll lose money.

I’ve been a big WiMax and XOHM skeptic. Now that they’ve launched, my opinion doesn’t matter — what matters is whether they can get enough customers and serve them cost-effectively before LTE shows up.

Time to stick a fork in WiMax?

Various geeks and entrepreneurs have been trying to exploit the opportunities created by the big bad cell phone oligopolies that have been ripping people blind. All of the various claimed solutions are facing their own problems.

One solution is the all-you-can eat cellphone carriers represented by MetroPCS and the Cricket service of Leap Wireless. While these services have been gaining market share — particularly among teens and twentysomethings — in February the four major carriers rolled out their own flat rate plans. The effect of the $100/month (with roaming plans) on $40/month (no roaming) plans is yet to be seen.

Another proposed solution was the idea of free or cheap municipal Wi-Fi. But with the failure of Earthlink’s efforts and most city-sponsored plans, this appears to be a dead end.

This week, Sprint reopened its planned WiMax partnership with Clearwire, combining their respective properties into a joint venture that’s also funded by Google, Intel and a passle of cable companies. To me, the deal suggest that WiMax as technology is done, finish, finito — stick a fork in it.

While Forbes optimistically proclaims this the salvation of WiMax, IDG asks whether the coalition will “save” WiMax? I think not. Just a few reasons:

• There have always been problems with the fundamental WiMAX business model, problems not solved by this new deal.
• Quite a few analysts are skeptical that this partnership will succeed.
• Not all the partners are fully committed; one analyst noted that Google is “wading, not jumping” into WiMax with a one-time $500m investment.
• Analysts writing for Barron’s wonder whether after spinning off WiMax, Sprint will shift to the same 4G strategy as every other major carrier in the world: LTE.

Actually, none of these are my reason for concluding this week that WiMax is through.

My reasoning is this: if this is the best the world can muster for a WiMax carrier, where’s the economies of scale? The upside? The growth? People made fun of CDMA, but it had half of the US and Canada, all of Korea, and a significant presence in Japan and Latin America. If WiBro and WiMax get reconciled (as claimed), WiMax will perhaps get 25% of the US, all of Korea and less than 10% of all other major world markets. Despite Intel’s claims, no one is going to bundle WiMax support into laptops for such a niche solution.

If WiMax dies, the big loser will be Intel, which has pumped billions into Clearwire and other WiMax efforts.

Municipal Wi-Fi: stick a fork in it!

Last month Earthlink admitted that its municipal Wi-Fi business was a mistake and it was bailing out. As I noted in my posting “End to the Wi-Fi mirage”:

This is probably the beginning of the end of attempts to build self-supporting municipal Wi-Fi systems (as opposed to those subsidized like parks and libraries as a “public good”).

This weekend, even the NYT has noticed (wistfully) that the city-subsidized plans are also on their way to oblivion. Not surprisingly, the system design overestimated the hotspot range and thus underestimated the number of base stations required. (WiMax partisans: take note.)

The obvious lesson is if public-private partnerships seemed like a risk-free way for government to get something for nothing, in fact if the private entity can’t make a profitable business, the partnership is doomed.

The municipal Wi-Fi fanatics are hoping to deny economic realities and have someone subsidize their pt approach to social action, urban renewal, etc. etc. But it’s time to stick a fork in the whole movement — it’s done for good. If people really care about making Internet accessible — rather than spending lots of money or building cool toys — then libraries and community centers with free Internet access are a lot less expensive way to (mostly) accomplish the same goal.

End to the Wi-Fi mirage

Earthlink is now trying to sell or close its municipal Wi-Fi operations — perhaps because it lost $80 million on municipal Wi-Fi last year (versus $20 million in 2006). Apparently some of the failed services are getting turned off. Earthlink also pulled back from the ill-fated Helio MVNO venture with SK Telecom.

This is probably the beginning of the end of attempts to build self-supporting municipal Wi-Fi systems (as opposed to those subsidized like parks and libraries as a “public good”).

The cause is not that different than Ricochet’s failure in the 1990s. Yes, Ricochet had slow nonstandard modems while Wi-Fi is ubiquitous and cheap. However, the economics of building infrastructure coverage are the same, and today the desirability and adoption of substitutes (other access methods) are probably worse.

Most seriously of all, it seems like the era of paid Wi-Fi is heading towards extinction — because free Wi-Fi at restaurants and coffee shops is becoming more the norm. I had lunch in Mountain View on Sunday and it seemed every bar on Murphy Street had free Wi-Fi. Starbucks announced Monday that it’s offering (limited) free Wi-Fi — to match all the other free sites — further fueling the commoditization of Wi-Fi hotspots. About the only place that people will pay for Wi-Fi is in an airport, because you can’t easily go down the street to find a better alternatives.

Without crunching the numbers, my intuition is that WiMax is going to face the same problem. Yes, the radios have longer range, but you still have to build more cells (and negotiate access and install backhaul) for lots of cells. If WiMax fails, then Sprint's 4G strategy will fail with it.

WiMAX business models

2nd in a series of insomniac blogging.

I still don’t quite get the WiMAX business model. OK, the radio has a long range, which is an advantage in rural areas, and thus works well for backhaul (cell phone tower to the PSTN). But for connecting users in a city, unless you divide it up into cells you’re back where car phones were in 1965 with IMTS with a heavily congested party line. And of course every time you add a cell, you add infrastructure cost; broadcasting has economies of scale but cells do not. For newcomers like Clearwire, this is a lot of infrastructure to build. One estimate put the cost of a new nationwide WiMAX network at $5 billion.

The biggest US player in WiMAX so far is Sprint, which announced last august it would roll it out as a successor to its EV-DO 3G service. The timing of Sprint’s support of WiMAX seemed odd, since they had a lead in rolling out mobile broadband (which means DSL rather than dialup speeds). Despite this confusion, after I talked to the Sprint guy at LA GMR earlier this month, one part of their strategy made sense: they already own tower sites and backhaul, so deploying WiMax is posting new radios and antennas rather than building infrastructure from scratch. So they can roll it out easier than a de novo entrant, costing only $3 billion.

Still, the claimed performance of WiMAX is not all that impressive — perhaps better than EV-DO and HSDPA, but not dramatically so. And we know (as with Wi-Fi) that claimed and actual performance vary widely, so who knows what the real technology will bring?

So if performance is (to give the benefit of the doubt) slightly better, but the infrastructure costs are just as daunting as for cell networks, what’s the point of WiMAX? Other than it’s not controlled by the big bad phone companies, or that Intel is pouring gazillions of dollars into it?

Now comes speculation that Sprint is pulling back from its WiMAX plans, or perhaps partnering with Clearwire to deliver some coverage rather than building it from scratch. Except during the Dot-Com bubble, capital markets impose a certain financial discipline and realism: if Sprint has shown its numbers to Wall Street and they’re worried, that’s further indication that the business model for WiMAX as a cellular replacement is (at best) problematic.

Technorati Tags: business models, mobile phones, Sprint, WiMax

Clearwire 1, Shareholders 0

In response to my earlier posting on WiMax startup Clearwire, the company sold about 15% of its shares, netting $559 million in its Thursday IPO, by pushing 24 million shares instead of 20 million. The stock fell both Thursday and again Friday, meaning those who paid $25 at the IPO have already lost 11.4% of their initial investment.

Interestingly, 20 months ago the company got $900 million in strategic venture capital, including $600 million from Intel. One thing I had missed was the lopsided voting rights of the founder and strategic investors, as reported by Bloomberg:

Clearwire will have two classes of stock, a format used by some companies to ensure that founders keep control. Class A shares, which will be offered to the public, will have one vote each. Class B shares will have 10 votes. McCaw controls 52 percent of the votes, according to the filing.

Wireless Week reports that the net voting shares are McCaw 49%, Intel 30% and Motorola 4%. Other shareholders are clearly just along for the ride, and so far it hasn’t been pretty.

Technorati Tags: broadband, Intel, IPO, WiMax

Size Matters

Since re-introducing myself to Mike Mace, the iPhone introduction, and supervising a student project on mobile phone operating systems, over the past two months my research has been moving back towards cellphones. I started researching the industry in 1996 as part of an international research project, and originally hoped to do my dissertation on it, but due to problems with the data (Baby Bells not keeping archives of their launch of US cellular service in 1983-1985) I had to switch to another topic. Still, I got a couple of papers out of the early work, some teaching cases, and material that will eventually end up in my next book.

Now that I’m back on the cellphone beat, I’ve loaded my favorite RSS reader with a bunch of mobile phone industry blogs and news feeds. One of the most provocative sources of industry gossip is the wireless section of Seeking Alpha. Its timely stock-oriented snippets nicely complement Mace’s blog, which tends towards think pieces on long-term corporate strategies for making money (rather than which stocks to flip).

On Thursday, Seeking Alpha had a fascinating posting about the planned IPO next month for Clearwire, a company that hopes to get rich using WiMax to deliver local broadband service. Clearly Clearwire is benefiting from great press, as well as the big pile of money Intel is throwing at WiMax. Of course, there are serious concerns about whether WiMax can deliver on the hype any time soon.

The posting by Bill Koss on the planned Clearwire IPO was unusually long by Seeking Alpha standards (3,300 words), but I encourage you to read the whole thing. Three key points:

• There are eerie parallels between the Clearwire IPO and the Netscape [sorry, not NetScape] IPO. And we know what effect that had.
• Many expect Clearwire to succeed because its chairman (not CEO) is Craig McCaw, reprising his old script.
• Clearwire is competing against big companies in an industry where size matters.

The parallels to McCaw’s earlier career might be a positive or negative. Although McCaw has a book about him, most people don’t remember who he is. They might remember the Cellular One brand name he created, or that he sold McCaw Cellular to AT&T for $11 billion effective in 1994. (Of course, AT&T spun off AT&T Wireless in 2001, it was bought by Cingular in 2004 , and is now AT&T again.) Later he was in the news for funding the Nextel turnaround, and having to split his billions in a messy divorce.

Koss argues that McCaw is following the same pattern of amassing spectrum at any price, assuming that it will rise in value. That worked for cellphone licenses in the 1980s, but it remains to be seen whether it will work for wireless broadband.

I heartily concur with his last point, which is that an infrastructure business (building a nationwide network) requires a lot of cash and has huge economies of scale. As I teach my technology strategy class, this is the big change of the IT industry from 30 years ago — no longer is it enough to have a cool idea and launch a company in a garage, because the Intels, Ciscos and Oracles of the world (or AT&T, Comcast and Verizon) can throw more money at the problem if they decide you’re on to something.

As with other such businesses, I can see three outcomes:

• Clearwire gets enough money from the IPO to grow big;
• Clearwire does well enough to get gobbled up by one of the big boys (a successful strategy recommended by my old mentor Charlie Jackson); or
• Clearwire runs out of money and dies.

There’s a lot that can happen either way — uncertainty about the technology, about demand, about economics, about direct competitors (e.g. 3G), and substitutes (wired broadband). That’s why IPOs are not for the faint of heart.

Technorati Tags: broadband, IPO, mobile phones, WiMax