Kerton Wireless Review – October 2, 2001

from the kerton-wireless-review dept

Well, the Kerton Wireless Review is back. Click on “read more” below to get the full scoop on the NextWave fiasco, ideas for a hybrid 802.11b/Cellular internet access system and plenty of other wireless news and opinion. And, of course, if you want to get KWR by email here’s the subscription page. If you’re unfamiliar with it, the Kerton Wireless Review is a wireless column of sorts written by Derek Kerton, that we publish here.

KWR - The Kerton Wireless Review
Monday, October 1st, 2001.

1???????In-depth Article:? The NextWave Fiasco
2???????A Little Sunshine From Nextel and Nokia
3???????Vodafone "Launches" bid for Control of Japan Telecom
4???????Hybrid 802.11 - WLAN (Cellular) Mobility Solutions
5???????Pet Peeve - Announcing Service That Doesn't Exist
6???????Cell Phone Guns - They're Real
7???????Bits and Bytes

1???????In-depth Article:? The NextWave Fiasco

Those who have read the KWR for a while know that I delight in soap-operatic business stories.? In this class, the NextWave saga should be up for six daytime Emmys.

NextWave is an enigma of a telco.? Most telcos spend money and resources building out networks, providing service, and developing technology, but NextWave seems to spend all of its time and resources in the hallowed halls of justice.? Originally, I believe that the company was operating under legitimate intentions to build out an advanced network, but more recently, it seems that they are merely posturing in order to extract money from the FCC and the US taxpayer.? Here's how the saga began:

In 1996, the FCC auctioned off a batch of Block C, D, E, and F PCS licenses to companies who would provide wireless phone services in certain US markets.? This particular auction was limited to smaller firms, a strategy the FCC uses to foster competition in the wireless industry.? A new firm, NextWave, walked away from the auction about $4.7 Billion lighter, and with the rights to multiple licenses in key markets.? Naturally, it is difficult for a new firm to bankroll a billion in cash out of pocket, so in the interest of fostering competition, the FCC finances the spectrum purchase with a down payment and ongoing payments.

Note:? this wasn't a "3G" auction, since this spectrum wasn't specifically earmarked by the FCC for 3G traffic.? When the FCC eventually holds a 3G auction, it signifies that the FCC requires that a 3G network be built on that spectrum.? The Block licenses that NextWave won were auctioned as simply "PCS" spectrum.? This means NextWave could use it for PCS, or go one better and use it for 3G.?

NextWave's plans at the time were to acquire at least another $2 B in financing from equipment vendors, and build out a "new nationwide wireless network which will provide the first Internet Protocol, packet-switched, high-speed data and voice service via a wireless network."? NextWave would then become a "carrier's carrier" OEM selling this efficient 3G-type data network to the other carriers so they could re-brand and sell it to their subscribers.? This is a neat idea, and is more efficient that having each carrier build out its own 3G network with disparate technologies.? NextWave was to do it cheaper and better, and with greater scale economies.

Unfortunately, the company was over-extended, and the money ran out before the network was built.? There is disagreement on the issue, but it appears NextWave may have missed some of the payments it owed the FCC on the spectrum licenses it held.? NextWave filed for bankruptcy protection in 1998, asking the court for protection while it reorganized its assets, rollout plans, and financing.? Federal Bankruptcy Judge Adlai S. Hardin, Jr. awarded NextWave protection, believing that the troubled company could gather up its assets, re-finance, and still make a run of it.

Since the first bankruptcy hearing, it appears NextWave, its creditors, the FCC, and the court have been dancing around New York courthouses submitting, disapproving, and pointing fingers, but never getting any closure on the issue.

The FCC, after some time, got impatient with NextWave.? Facing a shortage of spectrum for wireless companies that actually built networks and provided services, the FCC decided to cancel Nextwave's licenses and put the licenses back up for auction.? NextWave, of course, protested, but the FCC claimed it had a right to repossess the spectrum since NextWave allegedly defaulted on payments.

Now I sympathize with the FCC, but I've got to clarify that this was a colossal mistake.? When a US Federal bankruptcy court protects a firm's assets, it is not wise to repossess them - even if you are the FCC.? Meanwhile, the FCC announced it would appeal to the U.S. Supreme Court to clarify conflicts between the Communications Act and the federal bankruptcy code.? The FCC wants the Justices to rule on whether the courts or the commission have jurisdiction over spectrum licenses.

The spectrum formerly allocated to NextWave was auctioned off early this year, and multiple companies bid and won portions of the licenses.? Another interesting occurrence is that small companies like Alaska Native Wireless won some of NextWave's former rights, since the FCC maintained the mandate that only small companies could bid on the auction, but most small companies were only thinly veiled as fronts for the giant telcos with strong financial interests in the "new" spectrum.
A new round of legal wrangling ensued, with the result being a Federal court of appeals withholding NextWave's rights to the spectrum.? Now the FCC needs to ask politely for the likes of Alaska Native Wireless to kindly return the spectrum that they shouldn't have sold.? NextWave, of course, is seeking damages.

With the request to return licenses, the likes of Alaska Native Wireless, Verizon Wireless and VoiceStream Wireless all questioned the validity of NextWave's re-organization plan, and demanded the FCC re-visit NextWave's eligibility to hold wireless licenses.

Some industry observers are now saying that NextWave has found a more lucrative line of business than communications; that being litigations.? They are expected to try to milk this debacle for as much as possible, including reclaiming portions of the licenses, and reparations.? A look at 's press section will reveal that this company certainly has a core competency in drawn-out legal battles.? The most suspicious-minded observers think that any purported "build-out" plan at this point is merely posturing in order to garner as much in reparations as possible.

The answer to how NextWave could milk the situation is 'simple' arithmetic.? They bought the licenses for $4.7 Billion in 1996, and the FCC re-auction valued the same spectrum at some $16 Billion.? A proposed settlement between the FCC and Nextwave would see the new bidders getting the Block C portion of the $16B worth of spectrum they thought they bought for $10 B.? Five billion of the ten would go to NextWave as compensation, and they would still be able to keep the Block D, E, and F licenses.? Basically, Nextwave becomes a big winner on the unofficial spectrum futures market.

? I would agree that NextWave is now playing the FCC for damages, but frankly, you can't say they didn't warn the FCC.? I believe they truly want to build out a network, even though we have yet to see a complete, feasible plan.

With an FCC-blunder windfall, the firm now looks more solvent than ever.? They appear more able to pursue actual telco business as well as drama.? Thickening the plot, the firm recently surprised the industry by announcing $5 Billion of new financing from a variety of mystery investors!? The names of the sources are just now trickling out.

  • Qualcomm offered $300 M, contingent (of course) on NextWave using Qualcomm's proprietary CDMA 3G 1x and 1xEV technologies.? I truly respect the way Qualcomm operates.? They really know how to get their superior technology adopted in an unwelcoming world.? (To me, Qualcomm is a lot like the tough guy in all the prison movies.? He finds the weak, new inmates in the yard, and offers to help them.? The new guy is in trouble, and he needs the help, but if he takes the help, he's gonna be Qualcomm's new girlfriend.)
  • Swiss Financier UBS Warburg committed $2.5 billion to NextWave and will act as financial advisor.? This has added fuel to the legal fire, since the type of spectrum held by NextWave is limited to 25% foreign ownership.? NextWave, as usual, is offering sketchy information, and won't say what share of equity UBS Warburg will own.
  • There is speculation that some financing may come from Lucent, whose equipment will be used in a CDMA 3G build-out.

If you really want to know more, and can't get enough of this real-life daytime drama, tune into these links:
New Investors:

Possible Windfall terms with FCC:

2???????A Little Sunshine From Nextel and Nokia

In the midst of all the bad numbers Telcos are spitting out, it's nice to see that not everyone is bleeding red ink all over the industry.? Craig McCaw controlled Nextel has recently reported that they will meet all of their growth expectations.? For the third quarter, cash flow is up, and subscribers will increase by some 500k, compared to last quarter's 485k.? On Sept 7, Nextel announced they had reached the 8 million-subscriber mark.? Despite the good news, the terrorist impact on the stock market has plagued the valuation in what should have been a strong month.

Also good news, Nokia reported early in the month that it expects to meet third quarter earnings targets despite lower sales.? Earnings will be 5% lower year-over-year than 3Q 2000.? A week later, Moody's changed Nokia's debt Outlook to 'negative' on speculation that handset sales will continue to fall, and the networking division of the Finnish company would perform poorly.

3???????Vodafone "Launches" bid for Control of Japan Telecom

The third largest public wireless data carrier in Japan, and also third in the world is Japan Telecom, purveyor of the J-Phone and J-Sky services of wireless access.? J-Phone has greater functionality and features than iMode, but is still playing catch-up to that leading service from NTT DoCoMo, and trailing #2 KDDI.

On September 17, a number of news sources (incl. Reuters, Bloomberg, AP) announced that Vodafone was making a play for control of Japan Telecom.? On September 20, press reports detailed that Vodafone Group offered $2.7 billion to boost its holdings in Japan Telecom from 45 to nearly 67 percent.

Readers of the KWR may recall my Dec. 22, 2000 issue (#21) article titled "Like a New Year's Bowl Game - Vodafone vs. BT" in which I discussed Vodafone's strategic plans for control of J-Phone.? At the time, a pre-implosion British Telecom was also making what I predicted was a losing play for the Japanese telco.

In the June 7 ?? (#31), we discussed how BT was starved for cash, and abdicated its shares in J-phone to Vodafone.? The gist was that Vodafone had all but won the bid for control of J-Phone, and would thus be in a good position to mount an offensive against DoCoMo on their home turf.? Lessons learned in that marketplace would benefit Vodafone globally.

Hey, I don't try to give the latest news, but I do try to offer insightful analysis.


4???????Hybrid 802.11 (WLAN) - WAN (Cellular) Mobility Solutions

In the last newsletter (available on my website) I discussed the emergence of public 802.11b access points, and their potential impact on carriers.? The 802.11 (Wi-Fi) access points are springing up in airports, hotels, and coffee shops around the country, installed mainly by a new breed of ISP represented by firms like Mobilestar.? They are selling easy-to-use, very fast connections in the same places where one would expect 3G data connections to be popular.? There are also numerous grass-roots community efforts giving away the same connectivity for free (

The advantages of public Wi-Fi access are numerous.? The 802.11b standard has quickly matured and the Wi-Fi seal guarantees interoperability among disparate manufacturers.? A user who already uses 802.11b in the office or home can very easily connect at any of the wireless LAN hotspots.? The Internet connections are typically uncongested and broadband speeds.

In my opinion, the disadvantages do not outweigh the pluses, but they will take some time for the industry to overcome. They are:

-???????most wireless ISPs work and bill independently, so a paid membership with one WISP will not allow roaming to another.? This is like the very early stages of the cellular phone industry.

-???????It has been difficult to find out where the public Wi-Fi hotspots are located.? This problem is starting to be solved by firms like WiFinder, which provides a free online directory including all fee and free hotspots.

-???????coverage is only in some 1200 known Wi-Fi hotspots, which leaves a whole lot of mother earth without coverage.? This means that a mobile worker can take advantage of public Wi-Fi services where available, but will need a WAN (cellular-type) data solution to fill in the abundance of space in between.

Here's how the first two problems will be overcome:? Like the cellular industry, the WISPs will undergo consolidation and strike roaming agreements such that users will not need to subscribe to each one.? Directories like WiFinder's will help users locate the hotspots.

The third problem will be slowly overcome by additional hotspots coming on-line, but also by the development of hybrid solutions.? A hybrid solution will be one in which a cellular modem connects the user when on the road, in a car, and otherwise mobile, but not at a hotspot.? To complete the hybrid, Wi-Fi protocols will be automatically selected and used whenever the user is located in range of an access point.? In order for this to be a "hybrid solution" and not just two separate solutions, there should be simplification and consolidation in three areas:

-???????protocol selection.

Billing:? An ideal solution would not increase the number of billing relationships the consumer has.? Optimally, your cellular carrier would strike back-office billing relationships with WISPs such that Wi-Fi access fees would appear on your existing cellular bill.

Hardware:? Ideally, a user would not need to deal PCMCIA cards like a Vegas pro.? A single PCMCIA card could be built with dual mode radios to support both 802.11b and cellular networks (CDPD, GSM, CDMA, or 2.5G).? This story deals mostly with laptop computers, but PDAs and other terminals could also be made with dual mode radios built in or as accessories.

Protocol Selection:? Optimally, the hybrid system would constantly monitor what networks are available, and choose the best network.? This means that while on a train, your card could select a CDPD connection, but once arrived at the train station, an 802.11b network would be automatically detected, and your Internet connection would be automatically transferred to the faster access.

After considering the three points above, it becomes clear that there needs to be a whole lot of cooperation before a hybrid solution becomes reality.? Most importantly, it requires carrier involvement.? Involvement demands that carriers radically alter their vision of high-speed mobile access from a pure 3G world to one in which WLAN access eats up a big chunk of profitable 3G usage.? That's a hard pill for carriers to swallow after sinking billions into 3G technologies and spectrum.? But carriers need to make a choice, and they need to make it quickly before new companies like Mobilestar grow and become incumbents, just like ISPs have for wired access.? Cannibalization has never been an easy choice for companies, but the alternative is to let someone else eat your lunch. (be careful here, as ALL today's WISPs are in trouble - even MSTR is looking for buyers - quietly.)

This can be a winning arrangement.? Carriers can offer the WLAN community a wider footprint and mobile access and the capital which the small firms lack for network build-out.? WLANs can offer carriers the ability to offload traffic from their expensive cellular networks onto more efficient Wi-Fi nets.

My conclusion is this; carriers need to embrace the emerging Wireless LAN phenomenon.? They should get involved, get relationships or ownership of WISPs, and limit the damage that they will incur by standing still.

Any company annoyed with being considered a dumb pipe needs to, on occasion, defy that description.


5???????Pet Peeve - Announcing Service That Doesn't Exist

To follow on the Wi-Fi article above, I'm getting a little frustrated at WISPs whose websites boast x number of locations, and a directory of these hotspots, but service at that hotspot doesn't yet exist.? I've been to multiple Mobilestar locations which their site has listed as active, but I could not get access and the Starbucks staff tells me that the service won't be installed until the next month.

Come on, people.? What have we learned?? Vaporware sucks.? Even worse when you make someone drive to a specific location to learn that your service is vapor.? By and large, I've been extremely happy with Wireless LAN service, but a sure way to irritate the average user is to under-deliver on your promises.

I'm sure the VCs, the street, and the press are all very impressed with the higher numbers of hotspots that can be achieved when one counts fictional locations, but a company has to prioritize whom it is seeking to please.? I would suggest the customer fit somewhere near the top of that hierarchy.

6???????Cell Phone Guns - They're Real

Here's a real scary prospect in these dire times.? International security forces are confirming rumors that a number of cell-phone shaped guns are being found and confiscated in Europe and the Middle East.

There's not much analysis for me to add here, other that the fact that we should all cooperate fully when we are asked to x-ray or otherwise demonstrate that our phones, laptops, etc. are genuine.? For the record, x-ray machines at airports do not damage laptops, memory, cell phones, PDAs, or even cameras with film.

7???????Bits and Bytes

Mobile games will generate revenues of $17.5 billion by 2006, Datamonitor predicts in a new study. This year, the research firm expects wireless gaming to earn $950 million from Europe, Asia and U.S. markets.

From Business Week and Gartner:? Shipments of mobile phones fell sharply in the second quarter and manufacturers Motorola and Ericsson grabbed market share from leader Nokia (NOK1V.HE), research group Gartner Dataquest said on Wednesday.
Global shipments of mobile phones to end-users in the second quarter of 2001 fell for the first time in the history of the indusry That is economically significant since mobile phones are the largest global consumer products category.? Second quarter shipments declined by 8.4 percent to 89.76 million units, from 97.98 million in the same period a year ago.?? ``This is the first year-on-year decline after years of phenomenal growth,'' said Gartner Senior Analyst Ben Wood.? Sales also fell from the first quarter, when 96.69 million cellphones were shipped.

In early September, Metricom, whom we've discussed at length in the KWR, refused a $20 million offer for all its assets (less spectrum, valued at $50 M) from Aerie Networks of Denver.? They are still in bankruptcy protection.

A quarter of all business-to-consumer transactions and 20 percent of business-to-business transactions will be conducted wirelessly by 2003, according to a study by META Group Inc.? I think these numbers overly optimistic. Perhaps they don't read the Wall Street Journal (read the next bit).

The Wall Street Journal notes that wireless trading accounts for < 0.5% of online trades. This is great news - it indicates we have room to grow ;-)

British Telecom spins off its wireless assets, and renames them mmO2 PLC.? Catchy, eh?? The consumer brand will be O2, and all of BT's wireless assets will be rebranded under this umbrella including:? BT Cellnet serving the U.K.; VIAG Interkom in Germany; Telfort in the Netherlands; Digifone in Ireland; Manx Telecom in the Isle of Mann; and Genie, BT's wireless Internet service.? BT Wireless' 16.9 million customers can expect to receive their products and services under the new brand by spring 2002, and I'll bet they scarcely care.? I suppose this move, following on the branding success of companies like Orange, makes some sense, but it seems frivolous at a time when BT is falling apart at the financial seams., a division of Microstrategy, has closed its doors for good.? This author has examined the firm, first as an evaluation as a potential partner for Disney, and then at a time last year when the SEC identified some accounting discrepancies at the firm.? Readers will recall our cold evaluations.? If this economic slowdown were to only close down firms with weak products and technologies, and dubious accounting, it wouldn't be such a bad thing.

Japan's KDDI, third in the world for wireless Internet subscribership, has followed the leadership of #1 DoCoMo in delaying their 3G services.? KDDI says that its services won't be ready until April next year.

DoCoMo still claims that it will be ready to launch 3G services today (10/1/01) (after delaying earlier this year).? They have recently announced they will be selling 3G handsets publicly on October 1st.? I wish them all the best, but I think they'll have problems with the quality of service in the short term.? I just don't think the handsets are cheap, available, reliable, and power-miserly enough at this point.

AT&T Wireless has received top overall customer satisfaction ratings in 13 top U.S. wireless markets in J.D. Power and Associates' 2001 U.S. Wireless Industry Services Study.? Well done to ATTWS.? This speaks well to both their customer service, but mainly to good QoS.? Keeping the network up, running smooth tower-to-tower handoffs, and having available capacity are key factors in giving customers reliable service, and fewer dropped calls.

And so long as I'm handing out Kudos to ATT, let's mention that this week it began sending coupons for free hands-free units to 16 Million customers who did not get a headset when they bought their wireless phone.? There is still some argument over whether hands-free devices actually increase safety while operating motor vehicles, but you gotta give ATT credit for acting instead of talking.

An analysis firm called "The Carmel Group" has just issued their predictions that wireless handsets will outnumber traditional wire line phones worldwide by 2006.? Interesting prediction, sure, but I'm most taken by the firm's name "Carmel Group".? That sounds like a solid lifestyle choice.? Perhaps The Kerton Group should ponder a change to "The Tahoe Group".? Hmmm?

Liquor, Drugs, Music, and more?? British Telecom, or should I say O2, is gambling on people's vices to drive wireless use.? A new application on BT's Genie Mobile Net service will alert users when they are within a quarter mile of locations of music chain HMV, beauty chain Lush, liquor retailer Oddbins and pharmacy chain Superdrug.? This would have been funnier if the liquor store was named Lush, but I'll only distort the facts so much.? Seriously, this sounds like a lousy idea.? I hope there will be ample opportunity to opt out, and serious coupon incentives for those who opt in.? The notion of someone ringing my phone when I pass a store frightens me.? There are few things as intrusive as a ringing phone.?
Following on the bit above, research firm Ovum estimates that mobile location revenues will grow to $20 billion by 2005, with 80 percent of wireless data users accessing location information. Meanwhile, the Shosteck Group projects the applications won't take off until at least 2005.? I always advise caution in the use of location information.? This is the thin ice part of the pond when it comes to personal privacy, which means that even those who walk carefully risk falling in.? Respectable companies should err safely on the side of caution.

On the lighter side, Ananova and the BBC recently reported that the Queen of England has received her first cell phone as a gift, and uses it to keep in touch with her four kids and other friends.? Why am I not surprised that royalty somehow is not in the "early adopter" segment?

In a 6-5 vote, the Miami-Dade County (Florida) Commission approved an ordinance that makes it illegal for drivers to use hand-held cell phones as of October 2002.? Or was it a 5-6 vote? ;-)


Derek Kerton,

*Mr. Kerton is a principal consultant at The Kerton Group, based in San Jose, CA.? For more info, visit

*The analysis and opinions in this newsletter are the property of The Kerton Group, an independent consulting firm.? Any re-use or re-purposing should be cleared in advance by contacting:

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