The Wireless ISP Industry & Cellular Wi-Fi Offloading: Analysis and Forecast

By Phil Leigh Senior Analyst

Inside Digital Media, Inc. www.insidedigitalmedia.com 813.837.3631 August 2011

Table of Contents
Executive Summary Background Description Origins Present Status Two Defining Characteristics Frequencies Employed Unlicensed Bands Licensed & Registered Bands White Space Three Catalysts Competitive Improvement Mobile Device Proliferation Declining Equipment Costs Favorable Business Characteristics Recurring Revenues Low Subscriber Churn High Profit Margins Latent Demand Organic Growth Favorable Competitive Environment Comparatively Modest Capital Requirements Capital Needs Linked to Subscriber Growth Incremental Revenue Sources Urban Development Threshold First Mover Advantage Constructive Regulatory Environment Typical Network Provider

Rural Urban Forecast Fixed-Station Wireless Internet Cellular Offload Speculative Developments Surprising New Entrants Regulatory Shift Conclusion

List of Tables and Illustrations Tables: Table 1 ISM Band in the United States Table 2 Ubiquiti Networks Corporate Growth Table 3 Forecast: Fixed Station WISP Services 2010 - 2015 Table 4 Forecast: Growth Rates Fixed Station WISP 2010 -2015 Table 5 Domestic Cellular Offload Wi-Fi Forecast 2010 2015 Illustrations: Figure 1 WISP Access Point Tyler, Texas Figure 2 Subscriber Antenna/Transceiver Figure 3 Wireless Internet Service Provider Assoc. Members Figure 4 Internet Access Pricing in Boston Figure 5 Shannons Law: C = BW x log 2 (1 + SNR) Figure 6 Point-to-Multipoint Tower Figure 7 Omni-Directional Field Figure 8 Global Internet Traffic Forecast Figure 9 Wi-Fi Offload Growth Forecast Figure 10 Towerstream Large-Area Wi-Fi Hotspot Figure 11 Sectorized Antenna Beams Figure 12 Towerstream Service Profile Figure 13 Maximum Wireless LAN Data Rates

Executive Summary
Wireless Internet Service Providers (WISPs) offer Internet service over terrestrial wireless facilities. Presently only about 2 million of an estimated 86 million domestic Internet subscribers get service from WISPs. Traditional WISPs provide service from fixed base stations to antennas typically mounted outdoors on customer premises. Base stations connect to the Internet backbone via fiber, cable, or point-to-point microwave lengths know as backhaul. The industry is about twenty years old and originated in Laramie, Wyoming. Presently there are about 2,500 such businesses primarily serving low population density areas where telcos and CATV operators decline to compete. The typical WISP has two signature characteristics. First, it normally uses unlicensed radio bands. Thus, it needs no regulatory approval to rapidly enter new markets. Second, backhaul is the biggest expense and normally is purchased from a duopoly of landline carriers. Consequently, WISPs are constantly seeking ways of bypassing fixed-wire operators to reach the Internet backbone. There are two types of unlicensed bands. One category is fixed and exemplified by the frequencies used to popularize Wi-Fi and Bluetooth. The other is white space, which to date has only been authorized in TV bands. However, white space holds considerable future promise because it does not require a specific allocation but instead relies upon dynamic geo-location to identify and use vacant channels in authorized bands. Finally, WISPs also commonly use licensed frequencies whenever they can be leased or purchased as a means of minimizing signal interference. Three Catalysts Growth of the Wireless ISP industry could be on the threshold of acceleration for three reasons. First, participants are increasingly able to compete in more populated markets. CATV operators and telcos have established a price umbrella in a number of metropolitan areas, particularly for business users. Unlike consumers, businesses often require symmetrical upload-and-download speeds, because they often send information as much as they receive it in the ordinary course of interaction with customers, suppliers, and other organizations. Yet, fixed-wire ISP typically provide faster download than upload speeds. Thus, Wireless ISPs are discovering they can offer symmetrical service speeds below the CATV-telco price umbrella, even in major markets. For example, Towerstream which is a

WISP operating in New York, Boston, Chicago, Miami, and nine other big cities, reports it under-prices landline ISPs by 30% - 50%. Second, the advent of smartphones and tablet computers is creating an enormous new business opportunity for offloading cellular data traffic to largearea Wi-Fi and similar unlicensed networks. Cisco Systems predicts Global mobile Internet traffic will grow 26-fold from 2010 to 2015, for a compound annual rate of over 90% 1 . Such growth is too much for even fourth generation cellular systems to handle. As a result both Verizon Wireless and AT&T Mobility have already imposed metered pricing on their cellular data plans. Thus, users will increasingly look for Wi-Fi hot spots as a means of avoiding such fees as well as the congested traffic they imply on cellular systems. Gradually some individual Wi-Fi hot spots will evolve into large area Wi-Fi Oases enabling users to stay wirelessly connected to the Internet in zones where pedestrian traffic tends to dwell or loiter. Third, capital equipment costs are rapidly dropping as new competitors offer models designed from commercially available semiconductor chips and opensource software. Although companies like Motorola Solutions were historically the dominant equipment providers, new entrants like MikroTik and Ubiquiti are taking market share with lower cost equipment. For example, from its June fiscal year in 2006 to fiscal 2010 Ubiquiti sales increased from $ 2 million to $137 million. Attractive Industry Features Although a little-known line of commerce, the Wireless ISP industry has at least a dozen favorable characteristics. First, is a high percentage of recurring revenues owing to monthly subscriptions. Second, is a typically low subscriber churn rate. Third, since there are no regulatory rate-of-return limitations profit margins are normally high once fixed costs are absorbed. Fourth, theres a demand backlog. Although the industry has served rural markets for almost twenty years, a number of potential subscribers continue to be located out-of-range of existing facilities. Those impending customers should be within range of TV Band White Space transceivers scheduled to enter the market later this year.

Cisco Systems, White Paper, Entering the Zetabyte Era, June 1, 2011

Fifth, much of the industrys growth is organic in the sense that customers are seeking service and demand does not need to be induced with expensive marketing campaigns. Sixth, the competitive environment is favorable. In rural markets the main competition is satellites where service suffers from characteristic latency. Seventh, capital requirements are modest by comparison to fixed-wire ISPs. Eighth, capital needs grow in lockstep with subscriber gains. Ninth, WISPs have the potential to offer telephone and video services along with Internet access, yet have not done so to the same extent as the fixed-wire ISPs. Even when WISP networks have limited bandwidth, companies can partner with a satellite provider for the video component of a triple-play packaged subscriber option. Tenth, the industry is on the threshold of moving into urban markets much like the CATV operators of thirty years ago. Eleventh, although unlicensed spectrum provides for free-market entry, WISPs have the first-mover advantage for base-station locations. Twelfth, on-balance, the FCC seems to be adopting steps, such as TV Band White Spaces, that are constructive to the industry. Market Projections Our industry projections are divided into two categories. First is a forecast of subscribers and revenues for the traditional Wireless ISP business using fixed customer premises transceivers to connect with fixed base-stations. Second is a forecast of users combining both collected and imputed revenues for cellularoffload networks using Wi-Fi and TV Band White Spaces. Some rates must be imputed because the service is offered as a component within a bundled package. Table 3 (page 28) provides our forecast of subscribers and revenues for traditional WISP services from 2010 to 2015. We project the number of domestic subscribers will rise from two million in 2010 to a little over five million in 2015, translating to a compounded annual growth rate of about 20%. Revenues are projected to grow at an even faster 30% compound annual rate because average monthly subscription rates are projected to rise. Average monthly fees for businesses are forecast to rise from $100 to $205 primarily as more commercial accounts are added in larger markets. Residential rates are projected to gradually increase, largely as a reflection of more video

consumption. Consequently, overall revenues are forecast to grow from about $1.1 billion in 2010 to $4.2 billion in 2015. Table 5 (page 32) is our forecast of the domestic cellular offload market. We project the number of domestic hot spots will rise from 92,000 in 2010 to almost 230,000 in 2015. It is estimated the number of regular users will rise from about 2.3 million to 14.2 million over the same period. Since many of the added hot zones will be marketed as a component of a bundled package of services, the applicable revenues are imputed. For example, major CATV operators such as Cablevision, Comcast, and TimeWarner Cable offer such networks as a free incentive to keep existing subscribers from cutting the cord. Thus, it is necessary to impute revenues associates with such networks. The combined collected and imputed revenues are projected to grow from $0.2 billion in 2010 to about $1.1 billion in 2015, providing a compound annual growth rate of 37%.

Background
Description Wireless Internet Service Providers (WISPs) offer Internet service over terrestrial wireless connections. Only about 2 million of an estimated 86 million domestic Internet subscribers use WISPs. 2 Of the remaining 84 million about 77 million are wired broadband subscribers typically via CATV or telephone companies and the remaining 7 million still rely on dial-up access. 3 WISPs transmit data via radio frequencies between the providers nearest high-speed access point -referred to as a base station -- and a small transceiver located on subscriber premises. A wireless networks access point is normally positioned on a tall structure such as a tower or multi-story building as illustrated in Figure 1. The
2

Congressional Testimony, Brett Glass, Owner of Lariat WISP, Albany County, Wyoming, February 15, 2011. 3 Leichtman Research Group, Nearly 1.3 Million Add Broadband in First Quarter of 2011, May 17, 2011

pictured example is in Tyler, Texas which is a community with about 100,000 residents in the northeastern part of the state. Often base stations connect to the Internet via high speed fiber or coax cable. Owing to the traditional frequencies utilized, a WISPs coverage area is normally around 10 15 miles in radius from the tower and works best when there is a direct line-of-sight to the subscribers antenna. Typically customers mount an antenna outdoors on the roof of their home or office as illustrated in Figure 2. (It is the small rectangular unit mounted at the apex of the pictured roof.) Usually the antenna connects to a modem indoors that looks much like ones used for conventional broadband wired access. Thus, inside the home or office, users may be unaware that Internet access is provided by a wireless link. Figure 2 Subscriber Antenna/Transceiver Origins The first WISP was organized in 1992 by a freshly-minted Stanford electrical engineering graduate who moved to Laramie, Wyoming where he discovered the only Internet access was on campus at the state University. Since he worked as a private computer consultant, the situation was intolerable. Consequently, he organized Lariat as a cooperative to provide Internet access primarily to businesses in the town. The telephone company installed a T1 in his home for a monthly rate of $6,000. He distributed the bandwidth to Lariat subscribers using unlicensed radio frequencies. At the time the most affordable wireless data networking equipment operated in the 900 MHz band that was commonly shared with cordless phones. Since Laramies population was only about 25,000, Lariat had comparatively few interference problems relative to what it would have encountered in a bigger city. Present Status Currently about 2,500 WISPs operate in the United States. Many are members of the Wireless Internet Service Provider Association located in the small downstate

Illinois town of Mount Vernon. Like Lariat, members mostly serve rural areas and are geographically distributed as indicated in the map below. Subscribers are often too remote and widely separated from wireline facilities for a cable or telephone company to justify the expense of laying broadband cable. Although satellite access is available in such regions the geosynchronous orbits result in too much latency compared to WISP service. The typical WISP has fewer than 1,000 subscribers and is family owned. Towerstream and KeyOn are rare examples of publicly traded operators. The former concentrates in large cities and the latter is headquartered in Las Vegas while serving sparsely populated western states. Figure 3 WISPA Members

Two Defining Characteristics

Lariats experience underscores a two signature industry features that largely remain applicable today. First, Wireless ISPs normally use unlicensed radio bands. Reliance upon such frequencies has two implications. One is that WISPs can rapidly enter markets and expand within them because no FCC license is required. Typically WISPs also avoid the customary franchise agreements local municipalities normally apply to wireline ISPs. A second connotation is that the bands must be shared with any FCC compliant device. Consequently, not only will competitors operate on the same channels, but so also will certain consumer appliances such as baby monitors or cordless phones. Therefore WISPs must carefully design networks using carrier class equipment in order to accommodate contentious traffic and optimize throughput performance. 9

Second, ultimately WISPs must connect to the Internet. In rural areas backbone access is normally only available from a landline carrier which often holds a monopoly. The $6,000 monthly fee Lariat paid for a 1.5 mb/s T-1 connection in 1992 is a typical example of the historical excesses that only gradually moderated as CATV operators started to compete. By comparison todays residential subscribers in major cities get 20 mb/s service at $40 - $60 per month. Even today a telephone company controls the most effective circuits for reaching the Internet backbone in Denver from Lariats operating territories around Laramie. The picture below illustrates the current backbone access situation in Boston. Verizon is the local incumbent telephone company and Cogent is an independent multinational ISP with about 70,000 miles of fiber. The two designated buildings are merely hundred meters apart. Tenants of the one on the left must normally connect to the Internet via Verizon which charges $500 a month for a T-1 line providing only 1.5 megabits per second. That translates to a fee of $267 monthly for each megabit-per-second of bandwidth. Offices in the building on the right can connect at the much faster speed of 100 megabits per second for $700 monthly via Cogent. Thus, subscribers in the right-hand building get Internet access for only $7 monthly for each megabit-per-second of bandwidth, which is 97% lower. Figure 4 Internet Access Pricing in Boston

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The situation in Boston underscores an increasingly significant frustration known as the last mile problem. Access to high-speed Internet termination points such as the building pictured on the right is generally controlled by a duopoly of CATV operators and telcos. As Internet video steadily gains popularity, both incumbent industries are conflicted about providing economical Internet access since it might encourage customers to discontinue conventional telephone and TV video services. Recent press reports indicate a number of North American pay TV operators are starting to impose usage-based ISP pricing. 4 Wherever possible Wireless ISPs seek Internet connections at inexpensive termination points such as the one provided by Cogent in Boston. The problem in Boston is that the most popular 2.4 GHz band of unlicensed spectrum is so crowded -- and the power limits so low -- that local WISPs cannot get reliable connections to Cogent without using Verizons expensive facilities. However, one start-up company named Netblzr has organized a WISP co-operative that connects to Cogents attractively priced access via the 5.8 GHz unlicensed band.

Frequencies Employed
Wireless ISPs use a combination of frequency bands for delivering Internet access to subscribers. Historically they involve (1) unlicensed bands, or (2) licensed and registered frequencies. More recently, cognitive methods for utilizing the white spaces of reserved channels originally set-aside for others have been approved by the FCC. Unlicensed Bands For nearly a century government authorities have generally managed wireless communications by allocating designated bands for dedicated applications. In the United States the Federal Communications Commission (FCC) has long exercised such authority. For example, FM radio broadcasters operate between 88.5 108 MHz. Similarly broadcast TV stations 2 6 extend from 59 88 MHz while the remaining stations use other bands. Cellular telephone gets several bands, but one of the earliest still in use is 824 849 MHz. Specific licensees are given exclusive authority for specified channels within each band to operate inside designated power and geographic limits. Anyone failing to hold a license creating electromagnetic signals within those channels is deemed to be generating interference. Interferers must promptly cease such transmissions and may be fined. Thus, if the services provided by the licenseholder are popular such as TV shows, music radio, or cellular telephony authorized operators essentially have an inexhaustible gold mine from a business viewpoint.
4

Linda Hardesty, Usage-Based Billing Gains Steam, Cable 360.net, June 21, 2011

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However, the FCC also recognized there are important applications for the electromagnetic spectrum that either (1) dont involve communications, or (2) provide valuable communications functions that would not be widely used if licenses are required. An example of the former is a microwave oven. Garage door openers, baby monitors and cordless phones were early examples of the latter. Thus, a few bands were set-aside for unlicensed use. Internationally, unlicensed bands are normally labeled Industrial, Scientific, and Medical (ISM) frequencies. All compliant equipment may operate in such bands. If the participating devices happen to be used for wireless communications, they must be designed in a manner to accommodate unwanted interference. They also must conform to FCC power limits and other specifications. But given conformance, they may be freely marketed without restrictions. As indicated in Table 1 below, the FCC set-aside a number of ISM bands. Presently the most useful for communications are those highlighted in yellow and referred to as the 2.4 and 5 GHz bands. They are most useful because they (1) provide reasonable bandwidth, (2) are available nationwide without restrictions, and (3) may be utilized with reasonably priced transceiver equipment whereas hardware for the higher frequencies is much more expensive. Also, the application of spread spectrum techniques often enables devices to communicate effectively in the presence of interfering signals. BlueTooth and WiFi are both variations on spread spectrum principles. Their interference-tolerance has made them so popular that the 2.4 and 5 GHz bands are sometimes informally referred to as the Wi-Fi and BlueTooth bands. Table 1
ISM Band in United States Frequency Range 902 - 928 MHz 2.4 - 2.5 GHz 5.725 - 5.875 GHz 24 - 24.25 GHz 61 - 61.5 GHz* 122 - 123 GHz* 244 - 246 GHz* Center Frequency 915MHz 2.45GHz 5.8 GHz 24.125 GHz 61.25GHz 122.5 GHz 245 GHz Bandwidth MHz 26 100 100 250 1,500 1,000 2,000

* Subject to local acceptance

Although the next available band in the 24 GHz range offers more than twice the capacity of each Wi-Fi band, it presents a couple of problems. First, presently available transceivers are much more expensive. Second, signals above 10 GHz

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are attenuated by the presence of water vapor and carbon dioxide. However, since the wavelength is about 80% shorter 24 GHz networks can provide narrower transmission beams which are particularly desirable in urban markets where wireless congestion is more prevalent. Licensed & Registered Bands Wireless ISPs often seek access to bands that are free of competing uses thereby enabling faster throughput, especially in congested areas. Thus, a number of bands set-aside by the FCC for dedicated use might be leased by WISPs from the license holders. One example is Business Radio Service (BRS) which was originally used by the CATV industry to provide television subscription services in rural areas where the low population density did not justify the expense of laying cable-to-the-home. It uses frequencies ranging from 2.5 2.7 GHz. About four years ago the FCC allocated 50 MHz of spectrum between 3.65 3.70 GHz as available to registered users. While a registered user does not get exclusive access, the registration has the effect of putting other operators on notice that the registered users are operating in the band. It has the effect of alerting newcomers to the potential for conflict thereby encouraging them to design their own networks within the band in a manner that minimizes interference. Within the industry the 3.65 3.7 GHz band is informally termed lightly licensed. White Space Most recently the FCC signaled a movement toward a policy enabling certain licensed bands to be used by anyone employing compliant cognitive devices to detect vacant channels. The best example is the TV Band White Spaces initiative. In short, White Space equipment utilizes spontaneous location-awareness to determine which TV channels are not in use given the applicable geographic location. For example, if no TV broadcaster is using Channel 9 within range of a given locale, the White Space device may use Channel 9 for wireless networking, or any other similar application. Since TV frequencies normally travel further and better penetrate walls than the unlicensed bands, this is good news for WISPs who want to reach potential subscribers currently beyond the reach of existing facilities. Most importantly, however, the cognitive approach holds promise to apply to many more bands than those used by television as explained by this animation

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from Nokia. According to the National Science Foundation less than ten percent of the available spectrum is used at any given time5 .

Three Catalysts
Three factors are thought likely to accelerate growth of Wireless ISPs. First, is their improving ability to compete with fixed-wire ISPs. Second is the explosive growth of portable connected devices such as smartphones and tablet computers. Third, is an incipient and growing shift by hardware providers towards equipment designed with less expensive commercially available as opposed to custom -- semiconductor chips. Competitive Improvement Although domestic fixed Internet access is a near duopoly controlled by the CATV and telco industries, both have increasingly important reasons to inflate or obfuscate pricing. Notwithstanding that Internet access is their most profitable business, CATV operators continue to have many more video subscribers than Internet customers. Thus, pay-TV remains the industrys lifeblood. The rapidly increasing popularity of YouTube, NetFlix-streaming, and other Over-the-Top (OTT) Video delivery is motivating a growing number of subscribers to seek ways to discontinue conventional pay-TV. The point especially applies to a growing percentage of subscribers whove learned how to watch OTT-Video on their TV screens. Consequently, fast Internet service is often only available from cable companies as a component of a bundled service including pay-TV and fixed telephony. The bundles are deliberately structured to discourage subscribers from substituting OTT-Video for conventional pay-TV. Traditional telephone companies adopted a similar approach. Among consumers they also emphasize bunched packaging for the same reasons as the CATV industry. However, it is among businesses as opposed to consumers -- where their Internet pricing is having a bigger detrimental affect. Thats because they hold a larger market-share of business telephony as compared to the CATV industry, especially for the last mile. Among both CATV and telco providers the most economical Internet service fails to be symmetrical. Its generally suitable for consumers who are typically watching video as opposed to uploading it. But businesses often are uploading as much content as they are downloading in the normal course of interacting with customers, suppliers, and other organizations. Consequently, they have a greater need for symmetrical speeds whereas the typical Internet service offering
5

Losey, James and Meinrath, Sascha, Free Radio Spectrum, Media Alliance, http://www.mediaalliance.org/article.php?id=1905

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provides for download speeds that are three-to-four times faster than upload ones. Consequently, Wireless ISPs who deliver symmetrical speeds are discovering they can compete with wireline carriers, especially among heavy business users even in urban markets. Towerstream is a case in point. The company is a WISP concentrating in big cities like New York, Boston, Chicago, and San Francisco, among others. Over half its revenues are for balanced-directional speeds of more than 10 mb/s. Customers include The New York Times, Nokia, McKenzie & Company, Macys, Continental Airlines, and the Ritz Carlton, among others. The company reports it normally under-prices local telephone companies by 30% 50% 6 Simultaneously, pay-TV providers are contemplating steps that would make their Internet offerings even more vulnerable. Specifically, the rise of OTT-Video is causing them to consider charging metered rates, even for fixed-wire ISP service. 7 Both the leading wireless carriers, Verizon and AT&T, have already imposed consumption-based rates on cellular data plans. Research from AT&T Labs that examined communications pricing over two centuries concludes that network usage flourishes with flat rates, whether its postage, telegraph, telephone or Internet. 8 Thus, metered rates for wireline ISP services will strongly encourage users to find a flat rate alternative. The two industries most likely to compete against CATV and telco operators for Internet access customers are (1) electric power utilities and (2) Wireless ISPs. Electric Utilities. Electric power companies providing Internet access offer it in one of two ways. First, is by using the existing power lines as the communications path. The second method is to lay new coaxial or fiber optic cable using poles, conduits, and other company-owned facilities. The first method is known as broadband-over-power-line (BPL). It is typically much slower than coax or fiber. It also requires that communications and line conditioning equipment be installed throughout the intended service territory as well as on customer premises. Utilities that invested in coax or fiber networks are able to deliver much faster speeds. For example the Electric Power Board of Chattanooga, Tennessee offers speeds of up to 1 GB/s. Similarly, in college towns some utilities have
Towerstream Corporate Presentation, SRA 7th Annual Spring Growth Stock Conference, May 24, 2011. 7 Hyman, David, Why Bandwidth Pricing is Anti-Competitive, The Wall Street Journal, July 8, 2011 8 Andrew Odlyzko, Internet Pricing in Light of the History of Communications, (SPIE proceedings paper, July 25, 2001, Volume 4526, pp. 247 243)
6

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connected major apartment complexes to fiber thereby enabling landlords to package high-speed access as an amenity with the rent. Most such complexes were internally wired in an earlier era with fast coax, and the existing coax is used to distribute fiber bandwidth throughout the building. Thus, such utilities can reach a great many customers merely by connecting fiber to a single rental complex. Except in such instances where fiber access is to multi-unit complexes, electric utilities have not competed aggressively on price. As large regulated companies they are sensitive to potential accusations from competing CATV and telco providers that the power companys ISP service is unfairly subsidized by electric power customers. For example, the 1 GB/s service in Chattanooga is priced at $350 per month. Similarly in Gainesville, Florida hometown of the states largest University -- 50 Mb/s speed is priced at $75 monthly while 20 Mb/s costs $45 each month. Wireless ISPs. WISPs can also compete with incumbent Internet access providers, although the job can be more challenging from an engineering perspective. From a business viewpoint they are far more nimble and aggressive than electric utilities. They generally have no rate regulation and can freely enter any geographic market using unlicensed radio frequencies. However, they must engineer customer connections in a manner providing the desired throughput. Yet interference in congested bands severely constrains throughput owing to a limiting theory known as Shannons Law. The Law stipulates that although communications throughput increases linearly (in lock-step) with bandwidth, it improves only logarithmically with interference 9 . The precise equation is provided in Figure 5. A convenient index of noninterference is the signal-to-noise ratio (SNR). A high SNR implies little interference and vice-versa. When two people converse in a quiet room, the speech signal-to-noise quotient is high because there is little interfering background sound. However, two people attempting to share a conversation in a crowded alcoholic-beverage bar on a typical Friday night must contend with a considerable amount of background noise thereby reducing the signal-to-noise relation. The speed at which effective communications may be conveyed in the second scenario is much slower.

Glass, Brett, Lessons from Laramie, Presentation at Harvard University, December, 2009.

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Figure 5

Figure 5 illustrates that as the signal-to-noise ratio drops below 100x (or so) the communications rate quickly declines. But once the signal-to-noise ratio rises to 200x (or so) further improvements result in comparatively little throughput gain. For example, a 10x improvement in SNR from 100 to 1,000 only provides about a 70% increase in communications throughput. But a 10x improvement in SNR from 10 to 100 approximately triples throughput. The improvement is much greater as SNR rises from one-to-one up to ten-to-one. Shannons Law is particularly important for wireless communications because open space links have comparatively little control over extraneous noise whereas the protected environment of wires and cables is considerably more benign. Furthermore, WISPs have considerably smaller FCC-imposed power limitations by comparison to broadcasters or the power that can be piped through a cable. Thus, they must use tightly focused beams to deliver fast Internet speeds in congested markets. Thats why the typical big-city WISP delivers Internet service to large volume users such as businesses via point-to-point, or point-to-multipoint connections. A point-to-point link provides dedicated service to a single receiving station. Point-to-multipoint architecture is illustrated in Figure 6 below. It serves multiple clients from a single tower, but uses individual beams to each one much like boy scouts might use multiple flashlights from a central tent to signal campers in surrounding tents.

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Figure 6 Point-to-Multipoint Tower

In rural markets where there is little man-made electromagnetic background noise, WISPs may use omni-directional antennas. They essentially broadcast a 360-degree field much like a naked light-bulb. An omni-directional field for a broadcast radio station in Madison, Wisconsin is illustrated in Figure 7. The pattern is much the same for a WISP but with a considerably smaller radius owing to the lower power specifications. Figure 7 Omni-directional Field

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Mobile Device Proliferation While even the casual observer cannot fail to notice the explosive growth of video and wireless Internet traffic, Cisco Systems provides a quantitative forecast that puts the magnitude into perspective. The company predicts Global mobile Internet traffic will increase twenty-six-fold from 2010 to 2015 translating to a compound annual growth rate of over 90%. Put another way, mobile Internet traffic will rise from one percent of worldwide total in 2010 to eight percent in 2015. Wi-Fi, which is another form of wireless traffic, will grow at a compound annual rate of almost 40%, while fixed-wire traffic will increase at a CAGR of almost 25% 10 Figure 8 Global Internet Traffic Forecast

Among Ciscos other wireless Internet predictions are the following: 1. There will be nearly one mobile device per person in 2015, including machine-to-machine connections. 2. Mobile data speeds will increase from an average of 0.2 mb/s in 2010 to 2.2 mb/s in 2015. 3. Two-thirds of mobile traffic will be video. 4. More than half of Internet traffic will be over wireless devices by 2015 through a combination of Wi-Fi and cellular networks. The fourth prediction is especially germane because predicted cellular network capacity improvements will be unable to accommodate forecasted traffic. Thus carriers are expected to increasingly impose metered pricing. This already
10

Cisco Systems White Paper, Entering the Zetabyte Era, June 1, 2011.

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happened at AT&T Mobility and Verizon in the United States where they are the two largest carriers. Such traffic has already strained the AT&T network to a point where the company forbids certain popular bandwidth-intensive smartphone applications. A case in point is FaceTime video phone-calling for the Apple iPone-4 and later models. Owners of such units must find convenient Wi-Fi networks either at home, the office, or elsewhere -- when they want to use FaceTime. Cisco predicts a rapid rise for Wi-Fi and other wireless alternatives intended to offload cellular data traffic onto fixed networks. The company estimates such offload will rise from 31% in 2010 to almost 40% in 2015. Thus, future offloading will be a larger percentage of a bigger pie. Presently Cisco estimates that about 65% of mobile data use is over home or office Wi-Fi networks. The remaining 35% is mostly via cellular systems although a small percentage is by means of Wi-Fi hotspots in hotels, restaurants, and elsewhere. However, the hot spot sector is one of promising growth opportunity as indicated in Figure 9. Figure 9 Wi-Fi Offload Growth Forecast

In our analysis, Ciscos offload forecast implies a particularly rapid rise for commercial Wi-Fi networks that will evolve into large-area hot zones. An example is illustrated in Figure 10. The network is currently under construction in Manhattan by Towerstream which is a local Wireless ISP.

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Figure 10 Towerstream Large-Area Wi-Fi Hotspot Towerstream management predicts its Manhattan cellular offload network will be completed by the year-end and include about 1,500 access points. Management hopes to sell access as a wholesale service. Potential buyers might be telephone companies and cable operators who would re-sell admission to subscribers presumably for a monthly fee wanting availability to a wide ranging offload network within the city. But WISPs and Towerstream will not monopolize the concept. At the Cable Show in June both Cablevision and Comcast CEOs proclaimed intentions to vigorously build such networks as well. 11 In point of fact, Cablevison already operates one that includes tens-of-thousands of access points in areas surrounding Manhattan. Typically the APs are in restaurants, coffee shops and other locations where subscribers may temporarily dwell. Cablevision offers its wide-area Wi-Fi at no charge to premium fixed-wire ISP subscribes as a means of encouraging customer loyalty. Readers whose Wi-Fi familiarity is limited to home networks are advised that the concept as applied to Comcast, Cablevision, and Towerstream utilizes industrial-strength APs providing considerably better reliability than the typical home Wi-Fi. Declining Equipment Costs Since the Wireless ISP industry historically has been a niche business, much of the hardware required to deploy networks was provided by companies utilizing custom semiconductor chips and proprietary software. Normally custom chips are much more expensive than commercially available integrated circuits. Similarly, proprietary software is costly to develop and maintain by comparison to open source software. Despite Motorola Solutions historical dominance as an equipment vendor, two much younger companies are radically improving the economics of network deployment with much less expensive hardware. First is MikroTik, which is a Latvian company, founded in 1995 after the fall of the Soviet Union. The main product is a Linux-based operating system used in its wireless routers and related hardware. When it started to make hardware in 2002 the company chose commercially available semiconductors from Atheros.
11

Donohue, Steve, Cable MSOs Tout Wi-Fi, Interactive TV Today, June 16, 2011.

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Presently, specific products include pre-assembled SOHO routers, wireless 802.11n MIMO and TDMA devices for indoor and outdoor use, primarily at subscriber premises. Second is Silicon Valley based Ubiquiti Networks which was founded in 2003. It offers a broad range of wireless networking equipment in unlicensed bands for use in the infrastructure of network operators. Like MikroTik, its products utilize chips from Atheros. Ubiquiti products often under-price equipment from Motorola Solutions and other traditional suppliers by 50%, or more. 12 As evidenced by the table below, from FY-2006 to FY-2010 corporate revenues grew at a compounded annual rate of almost 190%, rising from $2 million to $137 million.
Table 2 Ubiquiti Networks Corporate Growth Fiscal Year Ended June 30th Millions of Dollars 2006 2007 2008 2009 2010 Revenues $ 2.0 $ 9.4 $ 22.4 $ 63.1 $ 137.0

CAGR % 188%

Source: SEC Form S-1, June17, 2011

Although Ubiquiti and MikroTik are both making significant price breakthroughs it should be added that one reason they are able to do so is reliance upon Wi-Fi standards. Despite the exceptional success of Wi-Fi, it should be noted that it was not originally intended for outdoor use. It works okay outdoors, but it is not optimal particularly in areas of congested radio traffic, or limited rooftop or tower space -- as compared to the proprietary standards used by traditional suppliers such as Motorola. Thus, acceptable base stations in such locations may continue to be most economically provided by traditional suppliers.

Favorable Business Characteristics

Wireless ISPs exhibit at least a dozen favorable business characteristics. Generally, most investors and bankers are unaware of them because the industry is often considered to be too obscure and out-of-the-mainstream. For example, bankers will readily lend to auto dealerships where business is sensitive to the economy, yet decline loans to WISPs who have steadily recurring revenue and subscribers who would discontinue pay TV before cutting abandoning Internet access. Recurring Revenues

12

Telephone Conversation, Turner, Brough, CEO of Netblzr, July 21, 2011

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Essentially a Wireless ISP is a utility with no rate-of-return limitations. Monthly subscriber fees are as regular as clockwork much like those of a CATV operator or telephone company. Low Subscriber Churn Since Internet access is increasingly essential, well-run Wireless ISPs normally experience low subscriber cancellation rates. For example, Towerstream -- which is the most prominent publicly-traded WISP -- reports subscriber churn at about 1.4% monthly. As the chairman of Time-Warner Cable put it, People are telling us if they were down to their last dollar, they would drop broadband (Internet access) last. 13 There no reason to believe that subscribers to fast Wireless ISP service would feel differently. High Profit Margins Unlike electric power or water utilities, theres normally little incremental cost after subscribers are added. Towerstream reports average gross profit margins of 75%. Furthermore, it achieves EBITDA margins of 50% - 70% in its most established markets like New York and Boston. Latent Demand As noted, the industrys roots are in rural areas where fixed-wire ISPs historically declined to offer service. Cable companies could not economically justify the persubscriber cost of laying cable. Similarly, many rural telephone subscribers are too distant from a central exchange for DSL service to work over existing wires. Even today a demand backlog remains for potential users presently out-of-range of WISP networks 14 . Regulatory and technological advances such as TV Band White Spaces increasingly enable the industry to profitably reach such potential users. Organic Growth Much like unsolicited consumer demand drove growth for broadband fixed-wire ISPs during the first half of the past decade, WISPs often find consumers seeking-out their services. They are less often required to artificially induce demand with costly incentives.

13

14

Szalai, Georg, Time-Warner Cable CEO, Hollywood Reporter, June 1, 2011 Telephone Interview, Rick Harnish, Executive Director of WISPA, December 9, 2010

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Favorable Competitive Environment Often rural WISPs only compete with satellite operators who cannot offer prompt interactivity owing to the lengthy communications paths to orbiting satellites. Even at the speed of light, a round trip through a geosynchronous satellite induces a minimum theoretical half-second delay. Additionally, in urban markets, landline-ISPs frequently provide favorable price umbrellas -- particularly for business customers. For example, as a B2B specialist Towerstream normally under-prices telephone competitors by 30% 50% even though it operates in ten of the countrys biggest fifteen cities. Comparatively Modest Capital Requirements Compared to landline-ISPs which must lay cable and pay one way or another for franchise authority, Wireless ISPs require little capital investment. First, they typically employ free unlicensed bandwidth with no spectrum auction requirement. Second, they can expand service into new geographic areas merely by erecting incremental base stations. Capital Needs Linked to Subscriber Growth

Figure 11 Sectorized Antenna Beams Once a base station is put into service the capital investment required to add a new subscriber is mostly limited to customer-premises equipment. There is no need to install cable throughout new service territories before accepting addition al customers. Once subscriber growth begins to create traffic congestion, service territories can be sectorized in a manner similar to cellular telephony frequency-reuse. Normally WISPs introduce sectorization from a single base station with directional beams. A sectorized antenna pattern from three base stations is illustrated in Figure 11. Incremental Revenue Sources Many smaller WISPs are only beginning to offer VoIP and video services. Theyre starting to offer broadband, VoIP, and video triple play bundles by partnering with a satellite operator for the video. Although triple play packaging

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is a mature offering of fixed-wire providers in urban markets, it is a relatively new innovation in rural areas. Urban Development Threshold Much like the CATV industry evolved from an unfamiliar niche into a massive business by moving into urban markets from rural ones thirty years ago, WISPs are at a similar threshold today. For example, for much of the past decade Towerstream effectively competed for business customers in some of the largest metropolitan areas. However, a second potential is to provide a metropolitan bandwidth oasis to relieve cellular congestion caused by smartphones and tablet computers. The Towerstream oasis under construction in Manhattan is designed to have twenty times the capacity of fourth generation LTE cellular systems. First Mover Advantage Since WISPs use free unlicensed spectrum, competitors cannot be artificially denied market entry. Instead, incumbents with the best tower and antenna sites acquired through years of operating experience are often crucially advantaged relative to newcomers. Constructive Regulatory Environment The FCC is acutely aware of a need for improved wireless Internet service. Consequently, the Commissions five-to-zero vote for TV Band White Spaces in September of 2010 appears to be a decisive turn toward free market principles. It implies unlicensed spectrum might become a key component of future wireless broadband policy. Thus it could imply that many more bands, aside from the TV channels, could be made available for cognitive transceivers capable to detecting white spaces spontaneously.

Typical Wireless ISPs

There are essentially two types of Wireless ISPs. One category concentrates in large cities and a second is focused on small towns and rural areas. Urban Market Publicly owned Towerstream is the best-known example of an urban market WISP. Presently they operate in twelve major cities. The company has a number of well-known customers including The New York Times, Macys, Continental Airlines, Ritz Carlton, YMCA, and General Dynamics, among others. Such clients normally have high bandwidth requirements. As Figure 12 on the following page indicates nearly eighty percent of corporate revenues are derived from services

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providing a minimum of 5 mb/s data rates. Almost one-fourth of revenues are from services at over 10 mb/s. While the speeds are much faster than the typical rural WISP, so also are the monthly subscription fees. Figure 12 Towerstream Service Profile

Towerstream is also exceptional to the industry because it has done a good job of educating investors and bankers to WISP industry potential. For example, in July they raised over $40 million in equity capital by selling new shares of common stock. Their stock trades at about nine-times the companys annual revenues. Whenever possible management uses stock to acquire other privatelyowned WISPs. Their latest acquisition was purchased at only about two times the target companys annual revenues and about half the purchase consideration was in Towerstream common stock. Rural Market Cyber Broadband of Cullman, Alabama is a typical rural Wireless ISP. The companys hometown is in north-central Alabama and has a population of about 15,000. Cyber Broadband was formed seven years ago by the owner of a local computer installation, maintenance, and repair company named Advanced Computer Solutions (ACS). Today Advanced Computer Solutions provides IT consulting, network installation, point-of-sale & telephone systems, along with

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website design and hosting. Such dual-market activities are common among owners of rural WISPs. In 2004 ACS had several clients who were unable to get Internet access via the local CATV and telephone companies. Cyber Broadband was organized to provide Internet service to clients in an area about 15 miles southwest of town. Gradually other nearby neighborhoods and communities from 5 25 miles outside of Cullman were added. Presently Cyber Broadband offers Internet and digital telephone service. Subscribers get an outdoor antenna similar to a satellite dish that is attached via a cable to the users indoor computer, or router. When consumers rent routers for $5 monthly, Cyber Broadband assumes responsibility for maintenance. Home users are charged an additional $65 per month for service and radio rental, while business users are charged $85. Installation costs $100 and takes two-to-four hours. Internet service speeds are determined by the number of simultaneous users on a base station. Each base station has Internet backbone access at speeds ranging from 1.5 mb/s to 3.0 mb/s. There are nineteen base stations and about 1,000 subscribers. Many of the base stations depend upon a rural electric cooperative for electric power and have limited independent power back-up of their own. Thus, electric power outages result in Internet service outages as well.

Forecast
Our forecast of the Wireless ISP industry is composed of two parts. The first is for Internet access to subscribers with fixed customer premises transceivers from fixed base stations. The second is for cellular offload networks typically using WiFi over unlicensed frequencies and TV Band White Spaces. Fixed Stations The projection for fixed-station subscribers is provided in Table 3. It is derived in the following manner: First, the number of both residential and business subscribers is projected. Second, the average monthly subscription fee for each category is estimated and forecast. Third, annual subscription revenues are derived by multiplying the figures in the first step by those in the second and applying a multiplication factor of 12 to adjust for the number of months in a year. Presently Wireless ISPs serve about two million subscribers mostly in rural areas of low population density. There are about 2,500 providers thereby implying that the typical WISP serves only 800 subscribers. About ten percent are commercial businesses and the remaining ninety percent are residential.

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However, the typical business requires a higher level of service and reliability that necessitates more features and equipment redundancies thereby resulting in a higher monthly subscription fee. Thus, businesses pay an average of about $100 monthly whereas the typical residential fee is $40 a month. As a result of the higher rates, commercial businesses account for over twenty percent of the industrys revenue which is more than double its fraction of subscriber percentage 15 .
Table 3 Forecast Fixed Station Wireless ISP Service - USA Calendar Year 2010 2011 2012 2013 Subscribers - (000) Business Residential Total Revenues - (Millions of $) Business Residential Total Monthly Revenue/Subscriber Business Residential
Source: Inside Digital Media, Inc.

2014

2015

200 1,800 2,000

230 2,000 2,230

275 2,350 2,625

340 2,800 3,140

425 3,500 3,925

535 4,500 5,035

240 864 1,104

304 1,020 $ 1,324

413 1,269 $ 1,682

592 1,596 2,188

867 2,100 2,967

1,316 2,835 4,151

$ 100.00 $ 40.00

$ 110.00 $ 42.50

$ 125.00 $ 45.00

$ 145.00 $ 47.50

$ 170.00 $ 50.00

$ 205.00 $ 52.50

15

Telephone Conversation, Rick Harnish, Executive Director WISPA, July 13, 2011.

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Table 4 Forecast - Growth Rates Fixed Station Wireless ISP Service - USA Calendar Year 2011 2012 2013 Subscribers Business Residential Total Revenues Business Residential Total Monthly Revenue/Subscriber Business Residential
Source: Inside Digital Media, Inc.

2014

2015

15% 11% 12%

20% 18% 18%

24% 19% 20%

25% 25% 25%

26% 29% 28%

27% 18% 20%

36% 24% 27%

43% 26% 30%

47% 32% 36%

52% 35% 40%

10% 6%

14% 6%

16% 6%

17% 5%

21% 5%

During the next five years businesses will represent a steadily increasing proportion of industry revenues for three reasons. First, the most economical rates offered by landline ISPs provide faster download than upload speeds, yet businesses have a greater and growing need for symmetrical speeds. For example, while consumers may download videos more frequently than they upload them, businesses typically exchange large files with customers, suppliers, and other organizations thereby requiring more balanced download and upload speeds. In contrast, Wireless ISPs are often more flexible and will offer balanced upload and download speeds to commercial accounts at economical rates. The second reason commercial accounts will represent a growing share of industry revenue is because Wireless ISPs will steadily encroach into urban markets from their rural base. During the past fifteen years most of the rural areas that were without Internet service have been reached. While TV Band White spaces will enable operators to get to even more remote locations, the typical WISP will need to turn attention to nearby towns and cities in search of dissatisfied wireline subscribers. Because commercial accounts even in small towns are witnessing a growing need for symmetrical speeds, such subscribers are likely to be the low-hanging-fruit for WISPs entering those markets. Third, businesses will need increasing Internet services, versatility, reliability, and bandwidth to remain competitive. All ISPs -- whether fixed-wire or wireless -- will require at least some additional fees for added capabilities. Not all of the

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incremental costs can be absorbed by the improving price-to-performance ratios for new infrastructure equipment. For example, today a typical WISP can offer 10 megs-up/10 megs-down for about $800 per month 16 . Although declining bandwidth costs might enable such a service to be priced at perhaps $400 monthly five years hence, a great many more commercial accounts will require such speeds in order to remain competitive. Thus, the average monthly fee shall rise. Residential subscriber rates will also gradually increase. Incumbent WISPs have considerable low capacity equipment in their legacy networks. In the face of rising video consumption among home Internet subscribers incumbents will seek to either increase rates or impose consumption-based pricing. In areas where they have no competition, or where fixed-wire competitors also adopt such pricing, the changes will stick. The forecast in Table 3 implies domestic Wireless ISP subscribers will increase at a compound annual rate of 25% from 2010 to 2015 as they rise from two million to over five million. Despite the rapid growth they will still represent only about five percent of all domestic Internet subscribers. Industry revenues are projected to rise more swiftly owing to increasing average monthly fees. Thus domestic WISP revenues are projected to grow from $1.1 billion in 2010 to $4.2 billion in 2015, translating to a 30% compound annual growth rate. Cellular Offload According the Jiwire, there are presently about 90,000 commercial Wi-Fi hotspots in the United States. About 55% of them are free and unlike the rest of the World the free percentage is growing domestically 17 . Typical hotspot locations include airports, hotels, coffee shops, shopping malls, arenas, stadiums, and quick service restaurants. While such locations are likely to utilize many access points, there are comparatively small numbers of such venues. Thus, the great majority of hotspots are small shops or locations with few access points. Readers may normally verify the profile by inspecting the spontaneous results of a hotspot location finder. (Click this link and enter your zip code.) Thus, it seems likely that the average hotspot has no more than five access points thereby indicating a total of about 450,000 hotspot access points currently available domestically. Presently there are approximately 25 million devices in use on domestic cellular systems capable of connecting to the Internet 18 . About 70% go online in a typical

Towerstream offers 8mb/s up-and-down service at $900 monthly and Rapid Systems provides 10mb/s up-and-down service for $800. 17 JiWire Mobile Audience Insight Report for First Quarter of 2011 18 Sharma, Chetan U.S. Wireless Data Market, First Quarter of 2011, Chetan Sharma Consulting

16

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day 19 . Nearly all of them are Wi-Fi enabled, and practically all connect to the Internet via Wi-Fi at least weekly 20 . Most recently Wi-Fi equipment maker Meraki reported such devices account for the majority of Wi-Fi traffic whereas several years ago laptop computers were the prime source 21 . However, the vast majority of Wi-Fi networks are located in homes and offices, dwarfing the number of public hotspots. Thus it is likely only a small percentage of Wi-Fi Internet sessions are via public zones. For example, in a presentation at the Cable Show in June a Cablevision executive disclosed that 0.5 million customers have used its public Wi-Fi network. 22 Given about 15,000 hot zones in the Cablevision network there are an average of about 25 users per hotspot. 23 Application of the Cablevision average to the Jiwire estimate of hot zones suggests there are about 2.3 million regular users of public hotspots. If public hotspots were only available to fee-paying subscribers, an estimate of monthly service revenues could be derived by multiplying the number of users times an average monthly subscription rate. But, as noted, over half the zones are free to the consumer. Thus, it is necessary to impute a composite subscription value applicable to all users. Two leading providers with published rates for Wi-Fi hotspot access are AT&T Mobility and Boingo. Rates at AT&T range from $20 per month to free. The free service applies to locations like Starbucks or is associated with bundled pricing offering some combination of (1) pay TV, (2) fixed-wired Internet, and (3) telephone services. Similarly Boingo rates range from $18 a month to free. Boingos free plans are provided by wholesale customers such as Verizon who offer the service as a packaged component much like ATT. Since about 55% of hotspots are free a weighted average of the preceding rates yields a composite monthly rate of about $8.50. Over the next five years it is likely the number of hot zones will increase steadily as a natural consequence of rapid growth for smartphones, tablet computers, and similar devices. However, we expect an even quicker growth in the number of users active in each hotspot for two reasons. First, consumers will increasingly rely upon such devices for Internet access when away from the home or office. Second, theyll want to find Wi-Fi zones in order to avoid the slower speeds and metered rates of cellular access. Finally, we expect the average composite rate to gradually fall as the migration toward free access continues. However, the

Smith, Aaron, 35% of American Adults Own a Smartphone, Pew Research Center, July 11, 2011 20 Smartphone Users Want More Wi-Fi, eMarketer Blog, August 4, 2010. 21 McCracken, Harry, For Wi-Fi, PCs and Macs are Now a Minority, Technologizer.com, PC World, June 25, 2011 22 Curran, Kevin, Senior Vice President, Cablevision Cable Wi-Fi: Broadband to Go, The Cable Show, June 14 16, 2011 23 Plunkett, Craig, CEO of Cdex, eMail, July 20, 2011

19

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higher equipment costs associated with more powerful and versatile access points will moderate the pace at which the composite monthly rates decline. A summary of our forecast for 2010 2015 is provided in Table 5. At the end of the period we project the number of hot zones will increase to about 230,000 from 92,000 translating to a 15% CAGR. However, the number of average users per hotspot will also gradually increase from 25 to over 60 as the practice of using such hot zones becomes more common. Thus, the total number of regular users is projected to increase from 2.3 million to about 14.2 million yielding a CAGR of 44%. Finally, since a growing percentage of such networks will be offered as free amenities for other packaged services (such as triple-play Cable subscriptions) the aggregate of imputed and discrete collected revenues shall rise at a slightly slower pace and grow from $235 million to over $1.1 billion for a CAGR of 37%.
Table 5 Domestic Cellular-Offload Wi-Fi Forecast Calendar Years 2011 2012 2013 2014 110,400 3,312 $ $ 8.08 321 $ $ 132,480 4,769 7.67 439 $ $ 158,976 6,868 7.29 601 $ $ 190,771 9,890 6.92 822 $

2010 Number of Hotspots Number of Regular Users (000) Composite Monthly Subcription Fee Composite Annual Offload Revenues ($ mil)
Source: Inside Digital Media, Inc.

2015 228,925 14,241 6.58

92,000 2,300 $ $ 8.50 235

$ 1,124

Speculative Developments
Our forecasts assume no radical shifts in the industrial order other than those noted earlier. However, unpredicted scenarios are always possible and important contingencies should be considered. Two such factors meriting analysis are (1) unexpected market entrants and (2) regulatory shift. Surprising New Entrants Historical precedent suggests that vital industries tend to naturally evolve toward integrated monopolies. The petroleum and telephone industries are but two examples. Similarly, the future of the Wireless Internet is imperative to a number of powerful companies that are not ISPs. Among them are Apple, Google, Microsoft, and Amazon, among others. All four have gigantic financial resources, but Apple is the paragon case. There are four reasons Apple may eventually launch a Wireless ISP subsidiary.

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First, the market for Apples portable hardware cannot achieve full potential without significant improvement in Wireless Internet access. The exceptional iPhone and iPad successes are forever changing user expectations about network connectivity. Twenty-five years ago when Sun Microsystems inaugurated the slogan The Network is the Computer office workers without LANs were puzzled. But once everybody started using LANs, the connotation became obvious. Instead of being independent tools, our personal computers became workstations that shared office-wide data processing assets ranging from printers to centralized storage. The network itself became our computing resource. During the past five years users similarly came to rely upon assets distributed within the Internet. As bandwidth improved, the Internet began to resemble a massive LAN. In point of fact, our CPUs really cannot tell the difference between a LAN and the Internet, except the latter retrieves information more slowly. Although the experience is nothing other than a more highly evolved form of Suns network is the computer concept, to earn their fees consultants applied a new moniker, to wit, Cloud Computing. More recently, its become obvious that constant wireless connectivity will be the future expected standard. As Chetan Sharma put it, mobile will become the platform of everything. Anything that can be connected, will be connected 24 In short, consumers will come to presume the existence of an ever-present electromagnetic field tuned to their mobile device transceivers thereby enabling them to get wireless Internet access as routinely as those of us with gray hair check the time-of-day on our wristwatches. Cisco Systems discovered that smartphones generate about twenty-five times the data traffic of standard mobile phones. Tablet computers compound the problem since each one generates almost five times the network traffic of a smartphone. Cellular systems alone are unlikely to meet the bandwidth needs of the iPhone, iPad, and competing devices. Although Verizon reports its 3G-to-4G upgrade will increase capacity four-fold, that still leaves a considerable unsatisfied demand gap. Consequently, Deloitte predicts that Wi-Fi will steadily increase its share of the mobile data load and become the default connection for Internet video. Ultimately, massive Wi-Fi networks like those of Cablevision must be deployed. Such networks will use a combination of WiMax, TV Band White Spaces, and landline facilities for connecting clusters. The latest dot-11n version of Wi-Fi is a key enabling factor. Dot-11n raw data speed is 450 mb/s which is over eight times faster than the theoretical maximum for the previous dot-11g version at 54 mb/s. It will easily handle video as most any homeowner using it can verify.
24

Sharma, Chetan, The Next Ten Years, Always On Real-Time Access, April 5, 2011

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Figure 13

Source: Meraki

Second, regulatory roadblocks commonly employed by FCC-licensed incumbents cannot prevent Apple from entering the market because Wireless ISPs typically utilize unlicensed frequencies. Wi-Fi is commonly used in 2.4 GHz and 5 GHz bands where no licenses are required. Presumably most readers can verify the point since they didnt consult the FCC before setting-up a home Wi-Fi network. But more importantly, FCC licenses are not required for WiFi networks of any size. Finally, the Commission appears to be further endorsing open competition by its five-to-zero vote permitting TV Band White Spaces for unlicensed use as well. Third, Apple can adequately finance gigantic Wi-Fi networks capable of transforming wireless Internet connectivity -- within population centers -- into a semblance of an ever-present universal access field. Such networks can provide users high speed wireless Internet as routinely as turning on a car or portable radio. Cablevision set aside $0.3 billion to build its Wi-Fi network which already has about 15,000 hot zones deployed and will have many more when completed. 25 In contrast, with $76 billion of cash, Apple has enough money to buy whatever

25

Curran, Kevin, Senior Vice President, Cablevision Cable Wi-Fi: Broadband to Go, The Cable Show, June 14 16, 2011

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technical and business talent might be needed to transcend Wi-Fi availability as presently experienced. Fourth, historical examples suggest technological leaders might naturally evolve in such a manner. For example, originally RCA was a leading radio set manufacturer, but it formed the NBC Broadcasting subsidiary to provide programming in order to create demand for radios. In a virtuous cycle, the growth of NBC led to expanding radio set demand. Similarly, in 1927 Boeing Aircraft established an airline subsidiary Boeing Air Transport -- to bid for a Post Office contract. Upon winning the contract the airline subsidiary immediately placed an order for 25 Boeing aircraft. Later Boeing Air Transport acquired other carriers and evolved into United Airlines. In a like manner, as a maker of aircraft engines, General Motors formerly owned major stakes in North American Aviation and once prominent airlines such as TWA and Eastern. Consequently, if Apple can facilitate growth in wireless connectivity, it can feed demand for its mobile devices. In point of fact, Apple may not even be able to reach its full potential if the wireless Internet remains hostage to the increasingly concentrated cellular telephone industry. Regulatory Shift While the FCC attempts to maintain a level competitive playing field, its policies are sometimes put at the mercy of the biggest constituents. Regrettably, despite good intentions the FCC is sometimes forced to adopt measures that are harmful to smaller competitors. The demise of the Radio Common Carrier industry is an example. Prior to the advent of cellular telephony about thirty years ago, a limited form of mobile telephone service was provided by two categories of FCC-authorized common carriers. First, and most familiar, were the telephone companies dominated by Bell. Initially the phone companies were reluctant to provide mobile service. They were prompted into action by a second type of mobile carrier almost forgotten today termed the Radio Common Carrier (RCC). RCCs were small operators who were not permitted to offer landline service. Typically the businesses evolved as a branch of even older family-owned companies involved in telephone answering or two-way radio dispatch services. At the dawn of cellular telephony radio paging was their main revenue source because the available frequencies could accommodate thousands of paging units, but each channel could handle only a single simultaneous telephone

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conversation. In the pre-cellular era, mobile telephone service was much like the party-lines common in rural areas during the 1930s and 40s. Telephone and Radio Common Carriers both realized cellular telephony was a game changer. The frequency reuse architecture would enable RCCs to expand their mobile telephone businesses by ten-to-one-thousand-fold, or even more. Both lobbied the FCC for priority licensing whenever cellular was sanctioned. The Commission responded by authorizing two cellular operators per market. One was reserved for the telephone companies serving the applicable geography and the other was set-aside all other qualified applicants. Many RCCs erroneously assumed theyd get licensing priority for the qualified applicant set-aside in their home territories. They assumed their operating histories would decisively demonstrate superior qualifications relative to interlopers. Some also believed few outside the industry would recognize cellulars potential since most investors, and bankers, had previously categorized mobile telephony as a niche business. Consequently, most RCCs profited little from the cellular revolution. Instead they were crowded-out by enterprising entrepreneurs and moguls with good political and financial connections who sensed the FCC could be forced into arbitrary licensing. An example of the former is Virginias Senator Mark Warner. John Kluge who owned a chain of TV stations that ultimately became the core of the Fox Network is the classic mogul example. Such men organized companies to file for cellular licenses in over a hundred geographic markets. Although RCC operators regarded the intruders as carpetbaggers ultimately the FCC was forced to award licenses by lottery below the top thirty markets. Even in the top thirty the Commission encouraged applicants to settle on terms that rarely gave priority ownership shares to the pre-existing RCC. Admittedly, a few well-managed RCCs successfully capitalized on the advent of cellular. Two examples are Communications Industries and Mobile Communications Corporation of America (MCCA). Both had the foresight to raise funds and get Wall Street connections via public stock offerings before cellular technology made newspaper headlines. Communications Industries was eventually acquired by Pacific Telesis which is now, once again, a part of AT&T. Similarly, MCCA was acquired by Bell South which also became a part of the current AT&T. Ironically, the Wireless ISP industry appears to be entering into an experience that echoes that of the RCCs thirty years ago. First, Wireless ISPs are at the threshold of a game-changing opportunity, to wit, cellular offload.

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Second, most Wireless ISPs dont realize the industrys future business opportunities are attracting far bigger competitors who threaten to overwhelm incumbent WISPs much like the marginalized RCCs thirty years ago. Cablevision, Time-Warner Cable, and Comcast are just three examples noted earlier. Third, steady organic growth provides incumbent WISPs with a false sense of security. Like RCCs whose progressively expanding radio paging revenues distracted them from the threat of outsiders attracted by cellular telephony, too many WISPs fail to appreciate the impeding arrival of a new wave of carpetbaggers. During the first quarter of 2011 more than half of cell phones sold were smartphones. Similarly tablet computers are moving into the mainstream and over 60 million could be in use by 2015. There cannot be a shadow of doubt that entrepreneurs, moguls, cable operators, telcos, and others will build the necessary cellular offload networks if the WISPs fail to act promptly. Yet the WISP industry does little to educate investors and bankers thereby denying themselves access to the funds needed to compete in the brave new world of Wireless Internet. Despite its overuse, the clich applies, Those failing to learn from the past are doomed to repeat it. Fourth, the telephone industry gets $8 billion a year to spend on providing telephone service to rural subscribers when it collects a mandatory Universal Service Fund (USF) fee on phone bills of all domestic users 26 . The fund is wasteful since in focuses only on voice telephone service and provides a direct subsidy for multiple carriers to offer overlapping service. The FCC Chairman acknowledged the fund pays some phone companies up to $2,000 a month per subscriber to provide ordinary voice service. Earlier this year the FCC finally announced it will revamp the fund to ultimately focus resources on providing broadband Internet access 27 . An eight billion dollar annual gift from rate payers is a lot of money that the telephone industry is not going want to share with others, no matter how deserving. Thus, telephone companies are lobbying to keep the fund available only to telcos even if the spending shift is to rural Internet access where WISPs might otherwise be suited to share in the subsidy. If telcos are permitted to use the $8 billion annual subsidy as a means of deploying wireless broadband Internet service, they will become a massive new competitive threat to traditional WISPs who get no subsidy.
Badger, Emily, Hanging Up and Logging Into Universal Service, Miller-McCune, February 9, 2011. 27 Press Release, FCC Proposes Modernizing & Streamlining Universal Service, February 8, 2011
26

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Fifth, despite authorizing TV Band White spaces for wireless data networks last year, the FCC is also encouraging TV stations to auction spectrum which presumably would end up being once again concentrated with Verizon and AT&T. Spectrum removed from TV Bands and licensed exclusively for cellular use will become unavailable as white space. The fact that such auctions help reduce the Federal deficit also works against the interests of those wanting to use white spaces. WISPs are among the top-of-the-list of companies that could put TV Band White Spaces to productive use, but their interests could be overwhelmed by deficit-cutting imperatives and the gigantic lobbying efforts of cellular carriers.

Conclusion
Although the Wireless ISP industry is not well-known, it has numerous attractive business characteristics and appears to be on the threshold of major growth. Declining hardware costs, TV Band White Spaces, and price umbrellas provided by incumbent fixed-wired ISPs are creating an opportunity for WISPs to move into urban markets where the number of potential customers is much greater than in the rural sectors where it previously focused. Simultaneously the advent of smartphones and tablet computers is likely to lead to an enormous need for Wi-Fi and White Space unlicensed networks to accommodate traffic that cellular carriers simply will be unable to adequately service. Despite its favorable growth opportunities and attractive business characteristics, the industry is in danger of becoming overwhelmed by better financed competitors. The cellular offload market alone is already attracting CATV and telco providers who have deployed more such networks than the WISPs. Others are likely to be drawn into the market as well. If Wireless ISPs do not sufficiently educate bankers and investors about the merits of their businesses, they will not have the funds needed to take advantage of present and anticipated opportunities. They are in danger of repeating the experience of Radio Common Carriers who pioneered mobile telephony, but were overwhelmed by outsiders once cellular technology became the industry standard.

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Inside Digital Media, Inc. 3911 San Pedro Tampa, FL 33629 813.837.3631