Replies to post #1459 on Calypso Wireless (fka CLYW)

[Michael Allard]

Slightly OT - Or is it? Wi-Fi related:

The following is lifted from SiliconInvestor - Writen by Andrew M. Seybold. We made similar comments and conclusions on this board months ago. Here is the article:



On December 9, 2002, I wrote a commentary about the formation of Cometa, a joint venture between AT&T Long Lines, IBM, and Intel. I started out that piece with the following note:

"Wi-Fi hotspots are becoming the next gold rush for the computer and telecommunications industry. But is that gold in the hills or just fool's gold? Last week three big players, AT&T, IBM, and Intel, along with two investment companies, formed a new company called Cometa. Their plan is simple: Deploy over 20,000 Wi-Fi hotspots in the 50 largest cities and wholesale wireless data to whoever wants to buy it and resell it.

Since no terrestrial network has ever made money offering data-only services, what do these folks know that the rest of the industry does not?"

Last week, Cometa closed its doors. The official party line is that Seattle was a success but no one would put in any more money! Sounds fishy to me. If Cometa was able to generate revenue in Seattle, I cannot believe that the two venture partners, as well as Intel, would not have put more money into the venture.

My other comments included:

"Okay, let's see if I have this correct. Intel, IBM, AT&T (not wireless), Apax Partners, and 3i have formed a new company called Cometa that is going to put into service and then wholesale Wi-Fi access in the top fifty U.S. cities so that Wi-Fi access is only a five-minute walk away from any city dweller and a 5-minute drive away from a suburbanite. With 20,000 Wi-Fi access points?

Let's play with some math here. Each access point today can cover a roughly circular area out to about 300 feet from the center. That works out to about 283,000 square feet per access point. 20,000 of these access points will provide about 203 square miles of Wi-Fi coverage spread out over the 50 largest U.S. cities or 4 square miles of coverage per city.

To put this in perspective, a typical 850-MHz urban cell site covers a radius of three miles or 28 square miles. This means that Cometa plans to provide coverage equivalent to less than one-fifth of a cell site per city. Access points will be scattered around the cities in locations where groups of people want and need high-speed wireless access.

The announcement didn't mention anything about airports so I assume it will leave airports to others, and T-Mobile already provides access at Starbucks coffee shops. That still leaves plenty of territory for Cometa. But it will probably run out of access points if it unwires a single university in each city. So I have to ask what the big deal is."

I was not surprised when Cometa folded its tent. There have been a number of other hotspot providers that have faded away, but none with the parentage of Cometa. Making money in the hotspot business is tough. It was then and it still is. T-Mobile, with its almost-integrated hotspots and wide-area GPRS system, along with its bargain pricing, has not released any figures regarding its cash flow situation, nor has Biongo, which is a reseller of hotspot services. But I am willing to bet that there is no profit for either of them at the end of the day. T-Mobile, however, has a better game plan than most hotspot operators since it offers voice as well as wide-area data services. An interesting aside here is that in the last six months of traveling I have yet to pay for high-speed wireless or wired access. The hotels I have stayed in, including my most recent trip to Dayton, Ohio, have included free Wi-Fi or wired broadband connections, and several of the companies I have visited offer open Wi-Fi to those who are visiting them.

Cometa was a grand concept based on the hype that Wi-Fi was (is) the next big thing. Its parents were swayed, I am sure, by this hype. They threw money at the project, made grandiose statements, and were out to prove the business model for reselling Wi-Fi services. Instead, they back-tracked almost from the beginning. If you remember, Cometa quickly changed its goal of 20,000 hotspots during the first year to an "appropriate number" and changed its top 50 cities pledge to "starting with a system in Seattle as a model and then driving that model into other cities." Obviously, that model was flawed or this company would still be around promoting its plan.

I have to believe that no one at any of these companies ever completed a spreadsheet based on real numbers. There were and are no market forecasts based on any type of reality, so if you plug in numbers you might be able to make a best-case scenario look enticing. But I bet that if you go back and revisit the forecasts for Wi-Fi adoption made in 2002 (the year of Cometa) and compare them with actual numbers for 2004, you will find that these projections were extreme and on the high side by 50% or more.

That is not to say that Intel did not accomplish its goal. It got a lot of exposure and sold a lot of Centrino chipsets to notebook vendors and others, so it can write off its investment in Cometa as a marketing expense. But what did the other partners gain? How did Cometa help AT&T? How did it help the venture folks or IBM? I don't see any gains for any of them. Just some money spent that they will not be able to recoup.

If you want to read the entire commentary I wrote on December 9, 2002, it is on our website under commentaries in the archive section. You just need to scroll down until you find the date. Here's another paragraph out of the same commentary:

"One of the keys to Cometa's success or lack thereof will be how cost effectively it can set up this business and how lean it can run. The company will be located in two locations, one on the East coast and one on the West. Even if AT&T gives away its backhaul (which I doubt), I can't see how Cometa can make a profit. None of today's hotspot providers are making any money and there have already been a number of failures (T-Mobile bought MobileStar at pennies on the dollar). I have to wonder what secret sauce Cometa has that the others don't."

Two years plus later, I have yet to find a hotspot provider that has publicly stated that it is making money. If there is one or more out there, I would like to know about it. Until I learn of one I will remain convinced that there is no way to make money in the hotspot business. There are ways to offer services to your customers if you already have back-haul installed, but if you deploy hotspots and have to pay for new back-haul, even if you expect to make money from a hotspot location, I think you are in the wrong business. Wayport might be an exception. But Wayport provides both wired and wireless broadband access. In many of the places where its services are offered, they are paid for by the hotel and given away to consumers as a "business perk." I would not be surprised to learn that Wayport is doing okay with this business model.

I also issued this challenge in my previous commentary:

"Someone at Intel or IBM or AT&T or all three must believe that there is money to be made as a Wi-Fi hotspot wholesaler. I welcome any of them or the folks at Cometa to share their business model with me and prove to me that it can make money as a standalone business for the partners that have invested in it."

Oddly enough, I received two phone calls from the Cometa folks saying that they would be happy to set up a meeting with me to discuss their business model. They never followed up and my attempts to schedule a meeting were put off. I wondered why at the time, since they claimed that they did have such a model and that it would make money for its investors. Now I know why the meeting never happened.

What Now?

How much of an impact will Cometa's demise have on the Wi-Fi hotspot market? What will happen to the hotspots it has installed and those it was managing for Toshiba? Cometa's website provides no clue except that it will "work with customers to determine how they wish to proceed"--which could mean anything. It also states that its demise should have no impact on the Wi-Fi hotspot marketplace. Hah! If I were a venture firm I would be concerned about any investments I had made and certainly would not make any more in the hotspot market! If these folks, with economies of scale, access to AT&T backend broadband, and brand recognition cannot succeed, how will a smaller, unknown company survive?

I do believe in hotspots when broadband is already available and when it makes sense to provide customer service. I can even see how T-Mobile's model might work. But I think that its long-term success will be based on offering a combination of T-Mobile hotspot access and wide-area wireless data services. Will VoIP save the day for hotspots? Don't bet on it. Combination phones for Wi-Fi and wide-area networks are coming to be sure. But I don't believe they will represent even a blip on the charts over the next few years.

So we are left with an industry that is struggling and the big names have failed in the marketplace. Microsoft has stopped making Wi-Fi equipment and Verizon has stopped talking about Wi-Fi-enabling payphones in New York City. I have to ask, yet again, how big the market is for hotspots and how much people will pay for access. The bottom line is that I believe that going forward, the T-Mobile model of bundling wide-area with Wi-Fi will be the way to go. But I am not sure that it will work in areas other than airports, perhaps hotels, and conference centers.

That sure leaves a lot of Wi-Fi hotspots and the companies that run them in limbo! Chapter one of the Wi-Fi bubble has ended but there are more chapters to come! Stay tuned.

Andrew M. Seybold

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[Michael Allard]

Nice analogy.

It is in the 6th Epoch that this stock will take off. In the meantime, we should be evaluating the risks involved with getting from Epoch 2 to Epoch 6. The risks include:

Technical:

Getting their phones produced (already a 12 month delay from their estimate. Then getting consumer phones produced (high enough quantity to make them affordable. Will they meet the battery life, size, power emittence limitations and price that consumers are willing to tolerate?

Financial:

They have said they need 5 Million to get through filed trials (Epoch 5)

Competitive:

Direct and indirect technologies that accomplish the same thing. (this is where you come in T!)

Market Verification

Even if field trials work, is there a market for ASNAP? Will Cable Companies, Wireless Carriers and Phone Manufacturers, Chip manufacturers embrace this technology and when?

This is the real world folks! For those of us (investors) willing to stomach this process, the rewards will be great IF and WHEN we get to Epoch 6.

[charlesfinney_99]

Plaintiff

At what epoch are we at now(and where within the epoch)

Would appreciate if you can give estimate price range for each epoch

Thanks