If you are a Blackberry (RIMM) user, you are familiar with the fact that emails containing HTML links (graphics) don’t display the graphics, but rather cause you to have to scroll down past that jibberish HTML text. It’s ugly and annoying, but those of us who are engineering-minded know the reason we have to suffer through this sub-optimal experience: bandwidth. By stripping each email of all of those colors and pictures, less bandwidth is utilized.
This goes to the heart of Blackberry’s main argument to the carriers, such as T-Mobile USA and AT&T. Unlike other email-capable handhelds, Blackberries provide for a more predictable – and lower – bandwidth utilization, putting less strain on the already-congested cellular frequencies. This is why the price of unlimited Blackberry use, which can mean many hundreds of emails every day, is very low compared to many other devices. In the case of T-Mobile USA, unlimited Blackberry email is $10 per month and in some places in Europe it’s 5 Euros per month.
Other devices, such as Apple's iPhone (NASDAQ:AAPL), are making some people expect that email on the handheld will incorporate HTML just like it does on the PC. Blackberry has long had a path to enabling this technology as well, but it’s finally happening this Summer. Version 4.5 of the various required software in the network and on the handheld, are starting to be rolled out now. You can already download the 4.5 version of the Desktop Manager software by going to www.blackberry.com/support. Starting as early as late July, 4.5 software for the handhelds will start to become available, and be phased in throughout the second half of the 2008.
Depending on the nature of the email, including HTML can consume 10x as much bandwidth as a “plain text” email. You know this from signing up for daily/weekly email alerts for news summaries, airline specials, etc. Plain text emails can be 5K whereas HTML can often be 50K.
In the US alone, there are close to 10m Blackberry users, receiving probably 100 emails per day, or one billion emails. Within a few short months from now, we could see these one billion US emails more than double in terms of the average size of the packets that are transported over the cellular frequencies. This could cause an acute form of congestion, at which point the carriers could either retract/block the feature, or buy new spectrum to continue offering the service.
If the carriers choose the latter path, NextWave (OTC:WAVE) is a likely beneficiary because it has attractive spectrum for sale. Investors already know that WAVE announced publicly in April that it was putting in motion some form of an auction process for these assets. In the meantime, Apple announced the iPhone 3G, which should cause a greater use of this spectrum, and now with Blackberry turning on HTML in billions of emails per day, the demand for this spectrum may be reaching an all-time high. While the exact timing is always uncertain, it therefore seems clear that the NextWave spectrum sale is looking more beneficial to the seller today, than it seemed some 2.5 months ago when the process was publicly announced.
NextWave offers the most attractive – and fastest – way for all the cellular carriers to remedy their expected bandwidth crisis, with its 947 million MHz POPs of AWS spectrum. Using the 2006 U.S. price of $0.54 per MHz POP, this implies a $511m value. However, as the other carriers rush to save their iPhone 3G bacon, using the $1 or higher price paid in Canada in recent weeks, this implies a billion dollars of value. In addition, keep in mind that the U.S. spectrum typically would trade at a premium to the Canadian spectrum.
At the current stock price of approximately $3.40, WAVE stock implies a $347m market cap using 102m shares. Add $350m in debt and $375m in convertible debt and you have an enterprise value of about $1.072 billion. Amazing as it may sound, if WAVE sold only its 947 million MHz POPs worth of U.S. AWS spectrum for the $1 price in the current Canadian auction, it could retire all its debt (including the convertible) plus be left with $222m, enough to pay a $2 per share dividend if it should so desire.
Obviously, WAVE would not pay such a dividend unless it also sold some or all of its WCS and 2.5/2.7 GHz spectrum, but it goes to show that the company seems to be shockingly undervalued at the current stock price.
For these key reasons, it is reasonable to believe that WAVE is the most leveraged play on the Blackberry enabling of HTML in emails.