How To Invest In WiMAX

by: Kenneth Ashworth

Recent reports have stated that 2007 will be the “year of WiMAX,” or that the leading IPOs this year will be for WiMAX network operators. Whether or not this will be the case, very few companies can be qualified as WiMAX network operators, and the challenge is how to identify them.

An analyst at a prominent venture capital firm in San Francisco remarked recently that they had reviewed more than 30 business plans in the last two months from what were purported to be WiMAX network operators, but not one had any WiMAX credentials.

Still, yet another company reportedly raised a significant amount of capital last month to build what it claims will be a WiMAX network in London, however the company neither owns nor licenses the radio spectrum necessary to operate a WiMAX network.

According to Rod Hall, Vice President, Communications Technology Research at JP Morgan, investor interest in WiMAX has increased rapidly since Sprint Nextel (NYSE:S) announced the launch of its WiMAX network, yet “understanding of the technology is low in the investor community.”

What is WiMAX?

Simply put, WiMAX is not a technology, but rather a term for specific products or services that conform to the IEEE 802.16 technical standards, and a certification process by the WiMAX Forum.

The industry that has emerged to capitalize on the 802.16 standards has adopted the name WiMAX, in much the same way that WiFi is a name specific to services that adopt the 802.11 standards.

WiMAX also utilizes licensed radio spectrum, a key factor that differentiates WiMAX from WiFi or other wireless services that use un-licensed or “free” radio frequencies. A WiMAX network operator is licensed in the same way as a radio station or GSM network. The license permits operation without interference from other transmissions.

Thus a WiMAX network operator provides broadband Internet connectivity via licensed radio spectrum, and will have deployed or is planning to deploy a network that uses certified WiMAX equipment.

However the criteria for equipment is flexible. Adlane Fellah, CEO of the research firm Maravedis, notes that many network operators are now migrating their platforms to certified WiMAX equipment, as certification is available only recently. Moreover, some operators also employ proprietary equipment in their networks that is not certified.

Mobile and fixed WiMAX

The fixed version of WiMAX provides Internet broadband connectivity, much like DSL. It is also referred to as “nomadic” because a laptop computer can be moved around the home, office or café and remain connected.

Mobile WiMAX is geared to mobility. With full support from manufacturers such as Intel (NASDAQ:INTC), Motorola (MOT), Samsung and Nokia (NYSE:NOK), the use of mobile WiMAX will become ubiquitous in personal devices such as laptop PCs, PDAs, mobile telephones, MP3 Players, etc.

Often cited as a competitor to 3G technologies such as EVDO and HSDPA, WiMAX differs from these technologies in that it is built upon open standards, offers up to 4x greater bandwidth, and is significantly less expensive.

When Sprint Nextel announced its 4G network would deploy WiMAX instead of EVDO, its CEO Gary Forsee reasoned that WiMAX “will be four times faster than today’s EVDO network, and one-tenth the cost.”

Sprint is not the only telecom carrier investing in WiMAX. NTT DoCoMo (NYSE:DCM) and SoftbankMobile are testing WiMAX in Japan, and KT and SK Telecom (NYSE:SKM) have already launched networks in Korea. Vimpelcom (VIP) was recently awarded WiMAX spectrum in Russia, and many Vodafone (NASDAQ:VOD) partner networks, such as SFR in France and MTC-Vodafone in the Middle East, already own WiMAX spectrum licenses.

Why is WiMAX spectrum important?

Licensed radio spectrum is the prime asset of a WiMAX network, and according to David Spence, CEO of Unwired, “spectrum is the Holy Grail for WiMAX.” Its value is determined by many factors, including its frequency, capacity and whether it is fixed or mobile.

Fixed WiMAX operates in frequencies of 3400 ~ 3600 Mhz, often referred to as BWA (broadband wireless access).

Mobile WiMAX operates under two frequencies: 2300 ~ 2400 Mhz, and 2500 ~ 2690 Mhz. The later is identified for mobile services in the three global regions of the ITU (International Telecommunications Union), and is aligned with IMT-2000.

IMT (International Mobile Telecommunications) is a term used by the ITU to define globally recognised 3G technologies for use in IMT-identified frequency bands. The technologies presently recognised by IMT are WCDMA, CDMA2000, TD-CDMA, and EDGE.

The historically high value for so-called 3G spectrum, among other things, was related to its classification as IMT-2000, which defined the spectrum as “mobile”. WiMAX is not presently included in IMT.

But this will change in 2007. It is expected that the World Radio Conference will include all WiMAX frequency bands for IMT in November 2007. Furthermore, it is expected that the ITU will incorporate the IEEE 802.16 standard into IMT so that WiMAX obtains the same international status as other IMT technologies.

In addition, it is expected that the next evolution of WiMAX will qualify as a prime candidate for classification as “IMT-Advanced” by the ITU-R, which is what many refer to as “4G”.

When this happens, owners of WiMAX spectrum will become the first 4G operators, and when classified as IMT and IMT-Advanced, the value of WiMAX spectrum will increase ten-fold.

Spectrum drives economies of scale

According to Maravedis, as many as 500 companies worldwide own BWA licenses in the 3400 ~ 3600 Mhz frequency bands. It is expected that when this frequency is recognised as IMT, it will significantly increase in value, and more of this spectrum will come on the market.

For 2500 ~ 2690 Mhz frequencies, very few companies have licenses for this spectrum. Those companies that do, such as Sprint and Clearwire, will realise a substantial increase in the value of its holdings. Likewise, licenses for 2300 ~ 2400 Mhz are less common, but for those companies that do own this spectrum, such as Unwired Australia, AT&T (NYSE:T), KT, and SK Telecom, the value of this spectrum will also skyrocket when the frequency is included in IMT.

The WiMAX business model relies heavily on licensed radio spectrum. As Barry West, President of Sprint Nextel 4G Mobile Broadband observed last year, “without the spectrum, you won’t hit the economics.”

When coupled with the standards that support the technology, and certified equipment that adheres to those standards, this well-planned architecture will deliver the economies of scale necessary for WiMAX to grow into a global industry. But without the spectrum, few companies can lay claim to being a WiMAX network operator.

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