VCs Love WISPs
By Jeff Goldman, Thu Dec 19 11:30:00 GMT 2002

Despite the state of the economy, venture capitalists are still able to find a bright spot in the telecom industry.


In the current economy, particularly regarding technology investments, it's just a bad time to seek venture capital: certainly, no venture capitalist will take an ISP seriously any more. Right?

Wrong. According to a recent survey by the Wireless Communications Association International's License Exempt Alliance (LEA), investments in wireless ISPs, or WISPs, have totaled more than $445 million this year in the U.S. alone. Doug Keeney, who chairs the LEA and is CEO of US Wireless Online, says he was extremely impressed by the survey's results.

"We were surprised not only by the large amount of capital that has flowed into license exempt operators, but also by how efficiently this capital has been used," Keeney said. "Wireless ISPs have rolled out broadband service in virtually every state of the union-and in hundreds of rural and metropolitan markets, overcoming a downward trend affecting so many other telecom sectors."

Taking advantage of the strengths wireless technology can offer in competition with DSL and cable, WISPs are finding innovative ways to successfully provide competitive broadband access-and venture capitalists are taking notice.

Reasons for Reflection

The LEA's motivation for organizing the study, Keeney says, was relatively straightforward: the organization felt that WISPs weren't getting the media attention they deserved. "Wireless broadband has been underreported in the media," Keeney said. "We felt like our story was pretty impressive, but was not being well communicated. So we decided, let's start with the money."

In addition, with wireless spectrum in short supply, the FCC's Spectrum Policy Review is trying to clarify the ways in which license-exempt spectrum is being used-and the LEA's study helps them do so. "The Commission has been asking us to help them understand what we've done with license exempt as an industry," Keeney said. "It's a very hard question to answer without some data."

The survey involved a year of secondary research, combing through press releases both from WISPs and from venture capital firms, as well as interviews with the LEA's WISP members. The data gathered was then combined with a conservative estimate of the capital acquired by the approximately 1,000 smaller WISPs that hadn't been surveyed, resulting in a total of $445 million.

That total, Keeney contends, is far lower than the actual amount of current investment. "We weren't able to get numbers from some obvious, large deployments," he said. "We didn't include Cometa Networks-the IBM, AT&T, and Intel deal-although one can logically deduce that's more than a $100 million investment. So we were relatively conservative in our estimate of the money on the table."

Numbers like these are very hard to pin down: a different study, the recent 2002 Semi-Annual Wireless Industry Venture Capital Report from Growthink Research, reached a different conclusion. Growthink's report found that investment in WISPs in the first half of 2002 totaled just over $111 million, far less than the LEA's conclusion-but still an impressive amount.

All Grown Up

Corey Lavinsky, Growthink's Director of Market Research, says it's logical to expect WISPs to do well, even in the current economy. "We live in a very mobile society, and there is a great need and desire for new wireless technologies," he said. "Necessity is the mother of invention: the economy isn't. The need and desire for new wireless technologies will continue, whether the Dow Jones Industrial Average is at 15,000 or at 5,000."

George McFadden, the Wireless Communications Associations' Communications Director, suggests that it's taken some time for WISPs to reach the point at which they're worthy of serious investment-but that time is now. "Sometime late last year, the whole license exempt WISP operator story started to make the transition from hobbyist to real business," he said.

And Keeney says that transition to real business has helped to allay one key concern. "Scalability is an issue we always hear from venture capitalists," he said. "Manufacturers have now had enough time, and a large enough consumer base of operators, to create products that will support 200, 300, 400 simultaneous users per radio. So we've now gotten over the issue that would keep us from becoming large companies, and that's scalability."

One investor who agrees is Magnus Melander, Investment Manager at the Swedish venture capital firm, BrainHeart Capital."We are now at the point where the underlying WLAN technologies and products are good enough in terms of price, capacity, and usability," Melander said. "The benefits for businesses using WLANs are now well understood."

Winning through Flexibility

Keeney says one of the most striking things he discovered in conducting the LEA's study was the number of ways in which WISPs are taking advantage of wireless technology's essential flexibility. "Creativity abounds in wireless," Keeney said. "It really is only limited by one's imagination."

One example is Neil Mulholland, Chairman of the Iowa-based WISP Prairie iNet, who places antennas on anything from water towers to farm silos, allowing his company to provide wireless access to more than 45 communities throughout the state. "He'll deploy his network in any way, shape, or form-and that type of story is behind every operator," Keeney said.

Because of the flexibility of the technology, WISPs can provide access where other providers simply can't. "At US Wireless, we have taken one of the largest convention facilities in the U.S., over a million square feet, and turned it into literally the largest hotspot in the world," Keeney said. "There's no way we could have done that with wiring."

Wireless can also be deployed far more quickly over large areas than wired access ever could be. "Another operator provides broadband to large auto auctions that tend to be held in remote areas, because they need 70 or 80 acres for the cars they're auctioning," Keeney said. "They're able to provide a quick, two-week connection to these auto auctions."

That kind of innovation and adaptability, BrainHeart's Melander says, are very important to venture capitalists. "A lot of interesting applications and solutions are being invented when WLAN products get deployed," Melander said. "Specific needs in verticals of any sort are being addressed today, creating a whole range of new business opportunities."

Toe-to-Toe with DSL

Keeney says he was also surprised to find that most WISPs aren't focused on the rural areas where there's no competition. "We all thought that license exempt deployments were rural," he said. "We thought they were the low hanging fruit for operators: the Tier 2, Tier 3, and Tier 4 markets where typically there is no DSL or cable modem provider."

Instead, the LEA found that wireless is competing well against the wired Internet. "The overwhelming majority of operators are going toe-to-toe with DSL and cable," Keeney said. "They're metropolitan operators: they're not choosing the fringe markets. They're saying, through their deployments, that this is a very effective way to get broadband across the last mile: it's a very cost-effective deployment strategy."

Zelos Group analyst Seamus McAteer says the flexibility of wireless technology offers a perfect solution for the last mile. "There is a pervading perception that provisioning broadband to the last mile calls for fresh thinking, that DSL and cable rollouts have been too slow, and that wireless provides a low cost mechanism to distribute access," McAteer said.

In fact, Keeney says, wireless companies are able to support entire cities for a fraction of the cost of cable or DSL, which makes them very attractive to investors. "We can do an overbuild of, say, the Louisville ADI, for maybe $180,000," he said. "The cost to do an overbuild on a wireline type deployment would be $20 or $30 million. That's the efficiency of this market."

Looking Ahead

Regardless, the WISP industry is still very young, and a number of challenges lie ahead. One such challenge, BrainHeart's Melander says, will be developing solid roaming solutions. "A key booster to the WISP industry is well-working roaming," he said. "It's still early days in WISP roaming, but in my opinion, any WISP that doesn't have roaming built into their business model won't fully capitalize on their investments."

A major investment like AT&T, Intel, and IBM's recent creation of the nationwide wireless provider Cometa Networks is encouraging for venture capital firms like BrainHeart. If they're designed well enough to provide the kind of reliability a larger provider will demand, Melander says, smaller WISPs may eventually be purchased by such larger operators-offering venture capitalists a key exit strategy.

And Keeney suggests it's that kind of reliable infrastructure that WISPs are now able to provide, which is precisely what's making venture capitalists happy. "They're going anywhere, solving any problem, and doing it with 99.98 percent uptime," he said. "They're just doing it well: they're very good operators. They're dedicated, whether they have ten users or several thousand on their network. They're deploying pretty rock solid systems."

Jeff Goldman is a freelance writer covering a wide range of topics for a number of online journals. He currently writes regular articles for Internet.com's ISP-Planet. Brought up in Belgium, Jeff spent the last decade in New York, Chicago and London; he now lives in Los Angeles.