Profit from the new global internet boom

Wimax - broadband signals via radio - has been heralded as the future of internet transmission. Developing economies have made huge commitments to the system, and it fits neatly with Obama's stimulus package. Eoin Gleeson examines the technology and picks the best bet in the sector.

Last week in Atlanta, a network of transmitters around the city was switched on for the first time.

A high-pitched signal, inaudible to the human ear, sounded through the metropolitan area. Police stared at their PCs as the signal was picked up. Geeks in cars cheered as their laptops registered it. Atlanta had just become the second town in the US where you can get cheap wireless broadband from anywhere in the city.

This is Wimax, a system for sending huge amounts of digital data via radio signals. It only takes a few Wimax transmitters to blanket a city with internet connectivity. It's been heralded as the future of internet transmission. Clearwire, the firm that launched in Atlanta, aims to extend its service to 80 US cities by the end of 2010. It's invested $3.2bn in the project after securing backing from heavyweights such as Comcast, Intel and Google.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

But a group of industrial titans is keen to sabotage these plans. Telecoms giants, led by Verizon and Nokia, want to bring cheap internet to cities via their existing cellular phone network. Their project, they say, won't need the investment in a nationwide network that Clearwire's proposing just a few upgrades to the existing one. The whole thing could be running by 2011, says ABI Research.

As concerns about Clearwire's project have grown in the recession, Wimax has been in danger of being squeezed out, says Priya Ganapati on Wired.

But not anymore, says Tim Beyer on Motley Fool. With Barack Obama looking to spend heavily on creating a national broadband network, 2011 is just too far away. Obama has set $7.2bn aside to bring broadband to rural towns across the US. Wimax equipment makers are already picking up major projects on the back of it. Just last week, industry leader Alvarion secured its biggest ever project a $100m deal to create a 17-state Wimax network across the US.

Wimax also fits with another major aspect of the stimulus package: the smart grid. Utilities in Costa Rica and Denmark are already using Wimax gear to read energy usage from smart meters in customers' homes. American utilities are itching to do the same, says Katie Fehrenhacher on Gigaom.

Outside the US, Wimax is thriving. Developing economies across Asia and Latin America have continued to make huge commitments to Wimax. Neither China nor India want to spend ten years digging up cities to lay fibre-optic internet cables only for them to become redundant in the meantime.

Wimax allows them to blanket their cities in cheap, reliable broadband. The state-owned Indian telecom BSNL is preparing to build a $1bn Wimax network once it secures the licence for the radio spectrum.

There are some big obstacles to a rollout. It costs about $36 for a Wimax chipset, so Indians aren't queuing around the block to buy one. And planned build-outs in Brazil and India have faced delays as telecoms monopolies who own a big chunk of the radio spectrum have been slow to relinquish control of the airwaves.

But Wimax is a system based on economies of scale. As governments build out the huge networks, the price of the equipment will fall sharply. In a year's time, chipsets will be closer to $12 a piece, Ray Bell of Grid Net told The New York Times.

Governments are wrestling back control of the airwaves, with India planning to auction off radio spectrum in a matter of weeks. It's still a small market. With 3.9 million subscribers worldwide, Gartner Research forecasts equipment sales of $432m this year in Asia and $375m in the US. But by 2013 global Wimax subscriptions will reach more than 85 million, reckons In-Stat. We look at how you can benefit in the box below.

The best bet in the sector

While Alvarion is picking up projects from Barack Obama, Israeli outfit MTI Wireless (Aim: MWE) will reap the rewards. MTI controls 28% of the $50m broadband antenna market, selling to the likes of Alvarion and Airspan.


It specialises in the flat-panel antennas used to receive the signal from the Wimax transmitter. So the group will be a major beneficiary of Wimax equipment sales in both America and emerging markets, says Paul Hill in his Precision Guided Investments newsletter.

MTI recently reported an 18% drop in revenues in the first quarter, to $3.34m, as spending on telecoms infrastructure has eased during the recession. "But the cost base is frugally controlled, and the business still has substantial net cash of $13.4m," says Hill. It's a small firm in a niche field, so there is some risk here.

But MTI could benefit once government-backed Wimax schemes are rolled out. It's also a good deal cheaper than Alvarion. Hill values MTI on a forward p/e of 6.3 and has a price target of 27.8p by December 2010, representing a 58% upside from the current price.

Eoin came to MoneyWeek in 2006 having graduated with a MLitt in economics from Trinity College, Dublin. He taught economic history for two years at Trinity, while researching a thesis on how herd behaviour destroys financial markets.