Profiting From Wireless Data Traffic

by: Neil George

The shutdown of iPhone (NASDAQ:AAPL) sales in New York City during the Christmas holidays is just the beginning of the wireless data jam. But that doesn't have to be a problem for you; just invest in the companies that are going to make it possible for iPhones, Blackberries (RIMM), Androids (NASDAQ:GOOG), Palms (PALM) and every other smart phone to actually work.

Just as companies were trying like crazy to push sales of gadgets and gizmos during the holidays, AT&T (NYSE:T) decided to shut down any new sales of one of the most popular of all consumer products: the iPhone.

It happened just as folks that had some extra time off and holiday cash went to order a new iPhone - which for now is still running solely on the AT&T network. The company put a hold on sales and, reportedly, registrations for anyone based in the New York metropolitan area. The news of the restriction stayed neither local nor low key as plenty of area techies quickly began to make their ire known to the media.

After two days of silence, AT&T admitted that sales had been suspended and, in turn, announced that iPhones were once again ok to be bought and registered - even if the customers were in the five boroughs of the Big Apple.

AT&T was a bit sheepish at discussing the issue - saying only that it was part of a marketing changeover in promotions. But behind the scenes, the company has been noting that iPhones have been stressing their wireless data networks, causing major headaches for the company - not to mention their customers.

And AT&T isn't alone as other major wireless companies outside of the US with deals to sell and service iPhones, including O2 in the United Kingdom, which is part of Telefonica, have gone public with announcements that iPhones have become such hogs of wireless network systems that the phone companies can't keep up.

Wireless Traffic Jams

Even if you aren't an iPhone user, the wireless network jams either caused or intensified by these smartphones are making owners of other data-using phones, such as Blackberries, experience failures. Personally, as a heavy user of my Blackberry as well as data cards for laptops and other devices, I've experienced the woes over and over again, particularly in major US cities such as New York, and even more so in San Francisco.

In addition, you might have also heard or read that one of the year's biggest Christmas gadget success stories was Amazon's (NASDAQ:AMZN) Kindle electronic book reader. Guess what makes the Kindle work at downloading books? Yep, AT&T's wireless data network. And if iPhones and Blackberries are clogged up and shut down the same thing happens to Kindles.

And the over-stressed data networks are also used by an ever-increasing number of wireless data products ranging from the surge in netbook computers as well as data cards for traditional laptops to even several of the newer GPS navigation systems including those installed as original equipment in cars offered by manufacturers such as Ford Motors (NYSE:F), Mercedes-Benz and Audi.

All told, usage and demand for wireless data services is surging beyond what most would have planned for just a few years ago. In fact, according to the US Federal Communications Commission (FCC), data use has soared by over 700 percent in just the past four years alone. And the FCC is projecting average growth in demand running at over 130 percent each year - even without any new developments or new products.

So, as investors there must be some money to be made out of all of this.

How NOT to Make Wireless Profits

The challenge though is to get past the usual suspects of Wall Street to find the companies behind the scenes that will be making all of the bits and pieces to profit from this huge growth in wireless data.

Making a bet on AT&T (T) or Verizon (NYSE:VZ) isn't the smart move; with the exception of their heavy cash-paying minibonds (AT&T's trades under the symbol KTBB, while Verizon's trades under the symbol HYY). For the near term, these companies will be facing plenty of critics and complainers, and heavy capital expenditures as well. That's not the sort of environment that makes for soaring stock prices.

At the same time, there are plenty of gurus out there pushing cell-tower companies. But again, these are the companies under contract with the major telecoms and they'll face the same capital investment issues - which, again, aren't conducive to stock performance.

Or, perhaps we could look at the major equipment companies that will get the contracts for new circuits, switches and chips? Unfortunately, companies such as Qualcomm (NASDAQ:QCOM), ST Ericsson (NASDAQ:ERIC), Siemens (SI) and other big names still have plenty of other challenges, and wireless data is only a part of their product mix.

Where to Find Wireless Winners

This is where my concept of "nibblers" comes in.

Nibblers are often found in the world of major technology changes. Whether it be in agriculture, the environment, energy tech or, as in this case, communications - big changes can mean big business and big profits.

And when it comes to improving performance for data-hogging iPhones as well as every other smarter phone, netbook, laptop and numerous other newer devices - having a better network is going to be the key.

This is why even the major rivals with night and day differences in how their networks run - AT&T and Verizon - are joining together to work on a common new network.

Rather than going down the path of limited use of CDMA or the current form of Universal Mobile Communications System (UMTS) with major systemic challenges - the solution is to move to what is termed LTE or Long Term Evolution, which is based on the underpinnings of GSM (Global System for Mobile communications).

Also referred to as 4G, this next level will provide for easier handling of more data - particularly in mobile devices - with more efficiency and hand-offs from tower to tower. In addition, LTE is also one of the better solutions for utilizing existing spectrum not just for urban areas - but also for rural needs, rivaling a much more limited technology for fixed devices known as WiMax.

The leaders that have designed and built the systems needed to run LTE are all ramping up. For not only are the big telecoms needing their stuff, but there are also some other developments beyond the current data crunch that will speed up LTE's rollout.

First, the government is finally beginning to ramp up the provisions of legislation passed and signed by the former president in 2005 providing support for rural broadband data access. With limitations on fiber and other cable as well as satellite transmission, wireless data systems fit the bill quite well for Federal dollars.

Second, the biggest phone company - AT&T - wants to get out of the traditional phone business. And get this: AT&T is actually pushing and lobbying the US Federal Communications Commission to end traditional land line phones. AT&T wants to end providing traditional phone service and in turn wants to only offer VOIP (Voice Over Internet Protocol) phones, which works by turning voice into data, further crowding existing systems.

Third, right now roughly only 10 percent of the spectrum that can carry current and LTE data and VOIP phone traffic is actually allocated for these services. Most is either not being used - yet controlled by the FCC - or is being used under license by broadcasters, satellite media companies, and by the US government.

Ramping up a common wireless data network for communication that would provide everything from simple phone calls... to streaming video... to all of those thousands of Apple Apps... as well as billions of Blackberry emails... would solve a lot of the nation's challenges.

Four Wireless Network Stocks to Nibble On

Now for the nibblers in the forefront of LTE that I want you to take a peek at.

Many of the leaders are newer to the market or are not yet publicly held. They're founded and staffed by many of the veterans of the big tech companies, but now are fully focused on their finely honed market of making the stuff to make LTE work.

On the closely-held side, you will be seeing more on the likes of WaveSat and Sequoia Communications, as well as Altair Semiconductor. But on the public side there is a selection of companies worth poking around and eventually nibbling at for your portfolio.

First you need antennas that will work with both the current systems and the newer LTE. One of the leaders isPowerwave Technologies (PWAV). This company is burning through cash, investing and developing its technologies, but with cash and capital it continues to ramp up its capabilities and continues to book current and pending contracts.

Second, after you get the antennas up you'll need the base station to process and run the network. One of the primary base station developers is Israeli-based Radvision (RVSN). This company focuses on converting and processing both voice and data into transmission-able bits that make networks actually work. Without this - no iPhone or Blackberry would work beyond being a nice paperweight.

No debt, lots of cash and eager customers at the ready.

Third in the set up of the new network will be the actual switching and processing of voice and data including all of the streaming videos that iPhone users love and demand ever more of.

One of the leaders in this market is Allot Communications of Israel (ALLT). (A second, Starent Networks of Massachusetts, was just purchased by Cisco Systems (NASDAQ:CSCO)). Allot has soaring contract sales and no debt.

And the fourth area of need to facilitate AT&T's desire for VOIP on LTE is the company that focuses specifically on the needed technology. Based in Shenzhen China, ZTE trades both on the Shenzhen exchange under the symbol 000063 as well as in Hong Kong under symbol 763, and of course over the counter under the symbol [[ZTCOF.PK]] in the US.

One to watch for a pending eventual listing would be another China-based tech company - Huawei Technology. I'll be watching this one first hand and will keep you informed.

Disclosure: No positions