If NextWave Wireless is to live up to its name and become the next wave of radio network in the USA, it has an awful lot of work to do. So far in 18 months of being back in existence, post Chapter XI, it has amassed $500 million of spectrum in the US, Canada and Europe and has almost completed the development of a pretty unique set of chips which can pull together virtually any spectrum into a single network.
Our colleagues over at Wireless Watch say that this type of chip is going to become very popular with companies like Intel and Qualcomm targeting the same design aims, so why should a start up like NextWave beat them to the punch.
But the company has also acquired multiple technology partners which can collectively build broadcast video networks, design handset video architectures, offer downloadable DRM and create Wi-Fi/WiMAX hybrid mesh networks.
To convince anyone that its CEO, Allen Salmasi, is anything other than crazy, the company has to bring its chips to market, on an R&D budget of around $50 million a year, and get its Henderson, Nevada based mobile WiMAX Wi-Fi hybrid system up and running, and demonstrating its technology to the satisfaction of wireless service providers, cable operators, Internet service providers and content companies, in fact anyone that might either build or offer some kind of network in the US over the next few years.
NextWave, unlike the early 1990 Broadband Wireless pioneers, seems to have replaced the adage ‘Build the networks and they will come,’ which caused widespread bankruptcy back then, with one which says ‘Buy the spectrum and they will come,’ a slightly cheaper and slightly less risky approach, and the entire premise for NextWave is that someone else will pay for the building of a US-wide network, which will reach up to 248 million Americans. What it will do is provide the technology.
If that doesn’t happen, NextWave can testify to the idea that spectrum is remarketable, having recouped over $5 billion from its own spectrum assets which it failed to pay for in its first life. So it can always sell its spectrum of once again.
The simple idea is that by demonstrating technology that can create an IP based triple play class network across multiple, unrelated spectrum chunks, NextWave effectively increases the value of its spectrum holdings quite dramatically, and if it can lease out these assets to companies which have the financial wherewithal to build them out, both can gain.
The truth is that it is tough to do anything much with WiMAX in unlicensed spectrum because there’s too much interference and too many network wannabees chasing unlicensed usage, mostly in 5.8 GHz in the US, which fails to go through more than one wall and which usually only works with fixed wireless outdoor connections.
Back in 2005 when NextWave came out of its Chapter XI proceedings, it began acquiring spectrum and today after various auctions and lease deals it has holdings in AWS, WCS and BRS/EBS spectrum, which sit in 2.3 GHz, 2.5GHz and in AWS, which has two separate paths, in 1.7 GHz one way and 2.1GHz the other.
No-one right now has a single radio chip which is agile enough and broad enough to scan up and down all of that spectrum, find the active frequencies, report into a local base station and move freely between frequencies as and when it wants to do some heavy lifting, such as download a video file. And that’s the edge that NextWave thinks it can bring to market and there, in essence, if it succeeds, is the key behind its likely future value as a company. But the aim ahs been on the agenda of many of the worlds largest chipmakers and NextWave really is in a race to get there first and at the same time, do it economically.
This whole improbable scenario would collapse except for the caliber of the people behind NextWave. The CEO Salmasi was the Chief Strategic Officer at Qualcomm and initiated and led the development of CDMA technologies there. That’s the technology which underpins a $70 billion market capitalization monster, and there are plenty around prepared to bet that he, and his various engineering colleagues from other similar wireless behemoths such Motorola and Nokia, can do the same again.
Right now there is virtually no slack in the valuation that is applied to NextWave, which makes money expensive. Its shares trade right now at $9.54, valuing the company at just $805 million. It has spectrum assets on its books of some $528 million, and its most recent filings show that just the spectrum that it holds indefinitely (which it can renew) is valued at $450 million, with that valuation based on amortizing the amount it paid for it. It has $200 million in liquid assets and the bulk of its debt, some $355 million is fresh, borrowed to buy the latest of those assets and isn’t due until 2010 and 2011. All it has to do by that time is convince the debt markets that it has a viable business model, and it will be able to recycle that debt and push it off into the distance.
It is making losses of around $105 million a year, on revenues of just
$24 million, but all of that comes from its subsidiary Packet Video, a 300 man handset and portable device software designer which leads on video capabilities carried in pure IP packets.
Packet Video came out of the compression and signal processing business, and wants to be a software company able to target the entire handset market, but of course would be delighted if one such captive market was delivered through the creation of new WiMAX networks on spectrum sub-licensed from its parent. Packet Video was acquired for $46.7 million in July 2005, prior to NextWave going public again.
On its own Packet Video would take many long years before it could create enough business to cover the existing NextWave losses, and that was never intended, instead it is, like other acquisitions before it, a way of bypassing both R&D and customer acquisition by buying up well thought of, technologically advanced players that directly affect what NextWave is up to, trying to generate a kind of snowball momentum.
The two other core acquisitions, prior to its recent purchase of IP Wireless, were Cygnus Communications, which perhaps gave it a head start in developing WiMAX semiconductors, which it acquired for just $9.8 million in February 2006 Wi-Fi mesh, and start up GO Networks, paying up front $13.2 million, with performance based further payments that may have made the price as high as $25.7 million, although those revenue deadlines are more or less now passed.
In January Packet Video has added the acquisition of tiny Swiss Secure Digital Containers for $19 million, in cash.
In all these acquisitions cost NextWave around $124 million, and if we add those acquisitions to the $528 million of spectrum assets, and the $200 million of cash, we reach $843 million, which is less than its market capitalization it had when it announced the purchase of IP Wireless for up to $235 million. Since then the value has fallen.
To say that the value is now under the net asset value isn’t strictly correct. When each of these companies were purchased there was plenty of goodwill in each case, and in the case of IP Wireless, a considerable amount, especially given that it was more or less pre-revenue, or at least pre-volume revenue.
But we can say that the sum of the value of NextWave is less than the value of the parts it has purchased. Which implies that either Wall Street doesn’t ‘get’ the NextWave proposition or more likely only insiders get it and outsiders cannot yet afford to speculate on it until it proves that its plan is working.
But let’s be clear at least about what it is trying to do? NextWave does not dream of being a Clearwire or a Sprint. Let’s put that idea right. Instead it dreams of being a Qualcomm.
Although its filings often state that many of its senior executives have worked at companies like Airtouch, AT&T Wireless, McCaw Cellular, Nextel and SprintPCS, that’s just to prove that it has the know how to build networks, but the corollary of that is that this gives it the know-how to develop the right kind of components and equipment that are valued by operators in the real world.
The networks it plans to build will be smaller and will need many separate partners. For a start it offers a great way forward for Competitive Local Exchange Carriers. Take companies like Earthlink? Rulings on unbundling by the FCC have left the CLEC model in tatters and the rising costs of using an incumbent’s lines is squeezing this market, which is why companies like Earthlink are pursuing the municipal wi-fi market using wi-fi mesh.
A hybrid network where devices can use either wi-fi, or where they can shift and directly use the WiMAX backbone frequencies, is a positive step for companies like Earthlink. Much the same can be said for VoIP specialists like Vonage, and for smaller incumbents and even for those companies, Like Level 3 Communications that have their own fiber networks, and which offer backhauls services, but which could also offer a way to spread out its reach to its existing customer base.
Many of the early WiMAX operators wanted to challenge the existing tier 1 hegemony, but were stuck without dedicated spectrum and instead had to share the congested and inappropriate license free spectrum. It will only be once NextWave proves itself, that these types of operators would turn to NextWave and get the equipment and the spectrum in one place.
That could, of course give rise to many creative deals where the spectrum, and perhaps the equipment, can be leased in return for a percentage of revenue, keeping the impact on carrier cash flow down. And MVNOs on such a network would be able to establish innovative fixed and mobile schemes. Take one of the major retailers in the US. We know they have considered offering their own rural broadband and mobile networks. Many of them, such as Wal-Mart have been unable to offer this through one of the majors because store locations tends to be rural, with all the problems of backhaul and reach that this implies. Debt agencies would queue in line to fund a network that was gong to be sold by Wal-Mart or any of the other major retailers, and management companies could also emerge.
Municipalities, hotspots providers, ISPs, small mobile incumbents, even Tier 1 incumbents might all find reasons for lighting up a specific region if both the equipment, the roaming capabilities and the spectrum were all provided in one place. Roaming connectivity would be a given, by using the frequency agile capabilities of the NextWave chipset.
The reason that some of these might choose to work with NextWave is quite simple, hybrid WiMAX and WiFi networks are cheap to build and yet incredibly spectrally efficient. They can also handle bandwidth-intensive, quality-of-service dependent, applications such as mobile television, VoIP telephony, streaming audio and video, video conferencing and real-time gaming.
One application that interests us now that IP Wireless have been acquired is to set up a rival to MediaFLO. IP Wireless installs for about $10,000 at an existing base station and requires at least 5 MHz of spectrum, which should give around 15 TV channels in QVGA graphics. NextWave should be able to acquire video and TV content (always under the protection of the Java Secure Digital Containers DRM), create its own TV channels, and deliver and license them to the existing tier 2 cellular incumbents all over the US using a slice (or multiple slices) of its own spectrum. Interestingly PacketVideo was showing a proof-of-concept demonstration of live streaming TV using MediaFLO at NAB last week, which shows that even Qualcomm thinks highly of its video device capabilities.
Like the WiMAX Wi-Fi chips of NextWave, the IP Wireless chips need to be volume manufactured cheaply somewhere (probably China). The more chips, the better the discounts. And this all takes time. The arrival time for all of these baseband ASICs is set for the second half of 2007, more or less in line with each other. And the arrival of the FPGA built Pico-base stations which NextWave is building, for extremely local networks, is also due this year.
This will use a technology that NextWave calls Adaptive Beamforming using smart antennas which it acquired with GO Networks, designed for offering a hybrid between cellular WiMAX operating, in a mesh with Wi-Fi.
NextWave doesn’t need to build a nationwide network to be successful. It needs to build a base for its chipsets and then begin to address overseas markets and scale its chip production.
Packet Video customers include Verizon VCAST, DoCoMo’s FOMA and Orange in Europe, while its DRM subsidiary Secure Digital Containers already has deals with T-Mobile, O2, SFR, Amena, Telus, Telstra, Hutchinson 3 and Rogers Wireless in Canada.
IP Wireless has had trials at Sprint, and with Vodafone, Orange, O2 and 3 Group for its TDtv product while Go Networks is really pre-revenue as yet.
Even so that’s an impressive customer list and an impressive list of companies that NextWave can call on, once it has chips, devices, base stations and a WiMAX profile that can work in most countries, across spectrum that was previously low value, because devices didn’t exist to pull it all together.
So NextWave today is valued at about the correct, high risk level for investors who have the confidence and market understanding to mix in some high risk telecoms investment and balance that against other blue chip investment. NextWave begins to develop real value only when it proves that what it is doing will work, and that requires the arrival of a big name customer after its Nevada trials show what its technology can do, and our guess is that won’t be much before the Holiday season at the end of this year. If it takes longer than that, it may already be too late.
If it achieves that, then the next time NextWave can give itself a value hike will be if one or more partners actually builds out a network and they demonstrate consumer or enterprise uptake or both. In the end the facilities that are likely to be created by a NextWave network really are multimedia based and consumer friendly, so what will trigger it up the valuation curve is when it signs a partner that has consumers as its core customers.
You may be left asking ‘Why doesn’t it just make chips, and sell them on the open market?’ But there are many competitors already doing this, and the winner in that market won’t necessarily be the company that produces the best technology. The value of all such companies are being held back by the lack of available spectrum with which to build WiMAX networks, and given that Spectrum is a big issue, why not solve it? That way ‘would be’ WiMAX operators might beat a path to your door and not fuss too much over the technology you are offering.
The final issue is to ask what kind of value does NextWave develop if it signs a big name cellular, ISP, MVNO, or incumbent by this time next year, and of course all of that is down primarily to the name and reach of whomever it signs, if it signs anyone. Its strategy is not to build a US nationwide network like Clearwire and Sprint, and so it isn’t burdened with the expectation of raising $3 or $4 billion.
On the other hand neither Clearwire or Sprint are likely to be customers for its equipment any time soon, although Barry West, the Sprint CTO has gone on record saying that if IP Wireless had more of an eco-system, he might have been inclined to use it for Sprint’s WiMAX video instead of Samsung and Motorola equipment, and under the right circumstances the decision could potentially be revisited.
But one thing is clear, that by putting its foot on the first rung of the revenue ladder for its core activity, NextWave would suddenly become worth more than the sum of its parts, because it would develop a genuine revenue stream likely to accelerate in just a year to the kind of levels where if it acquires no more spectrum assets and no more technology companies, it could break even. And that would give it a huge extension on its window of opportunity to build itself into the Qualcomm of the WIMAX world.