Will Wimax win out over 3G?

Emerging market economies are bypassing fibre-optic internet cables and heading straight for wireless technology. The question for investors is: which of the rival systems vying for business will prove the new VHS, and which will go the way of Betamax.

By Eoin Gleeson

published 24 October 2007

in Features

Emerging market economies have gone on an unbridled building frenzy over the last decade. The development path has been clear so far you lay water pipes, pave the roads and watch the skyscrapers stretch into the skyline. But the next stage of development the telecommunications infrastructure will be much harder. Neither China nor India wants to spend ten years digging up cities to lay fibre-optic internet cables if these become redundant in the meantime. And that's why developing countries are turning straight to wireless systems, such as Wimax, to plug their cities into the web.

Wimax is a system for sending huge amounts of digital data via radio signals. It has been heralded as the replacement for mobile phone and wi-fi broadband networks. Unlike wi-fi (the system found in airports and cafes for internet access), which sends signals no further than 300 feet, only a few Wimax transmitters are needed to blanket an entire city with internet connectivity. It's "wi-fi on steroids", as Barry West of telecom Sprint Nextel puts it. Wimax is also meant to offer faster download speeds than competing third-generation (3G) networks, and delivers wide area telephone networks supporting internet and video telephony at a tenth of the cost. And because you don't have to dig up pavements to lay cables to every home, it's also far cheaper (about 40%) to deploy. The plan is to build Wimax chips into TVs, laptops and mobile phones, so you can download films within seconds to watch in your car, for example, or video conference while you are out of the office. Dozens of global telecoms groups have placed bets on Wimax and plan to spend $13bn over the next few years to build 300 such networks, says Cliff Edwards in Business Week.

It sounds exciting. But in the West, Wimax is struggling to live up to its promise. There are echoes of the battle between VHS and the ill-fated Betamax format to become the videotape standard in the 1980s. A lot of money has already been sunk into establishing 3G as the preferred system for mobile use. In America, the success of Wimax depends hugely on struggling wireless operator Sprint Nextel, whose plans to build a $5bn national Wimax network were set back six to nine months last week after the group's poor performance forced the chief executive to resign.

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But outside the US, Wimax's signal is a lot stronger. In the developing parts of eastern Europe, South America and Asia, with large concentrated populations and poor fixed-line communications, Wimax's fast, cheap deployment makes it a "home run", says Paul Hill in his Precision Guided Investments newsletter. China's government already plans to pepper its cities with 150 Wimax base stations before its Olympic showcase in 2008. The Indian government has set a target of 20 million broadband users under its system by 2010. In fact, global Wimax subscriber revenues are expected to explode to $30bn by 2012, from $9bn last year. Research firm IN-Stat says that Wimax infrastructure equipment and devices alone will become a $5bn market within four years, says Hill. Even if Americans turn their nose up at it, the developing world won't quibble about using the broadband-Betamax if it brings their cities online cheaply and reliably. We have a look at some of the companies bringing Wimax to the developing world below.

"Rather than fostering lofty ambitions to replace 3G", says Tim Bradshaw in Investors Chronicle, Canadian Wimax equipment maker Redline Communications (Aim:REDL) sees Wimax as the cheap option for broadband in developing countries, which represent an opportunity that could be worth $2.45bn in three years. The group's fixed-line replacement equipment it develops broadband base stations as well as equipment for end users is already being installed in over 80 countries (largely in Latin America and southeast Asia), says Bradshaw. Redline is loss making, but revenues increased by 57% in the first half to $2.8m and it aims to improve liquidity in its shares by listing in Toronto this year.

Israeli group Alvarion (Nasdaq:ALVR) has also been building out Wimax on a global scale. The company develops Wimax equipment and has just moved into profitability, with revenue up 31% to $57.5m last quarter. It has a substantial number of contracts with local telecom operators in the developing world, says Sholmi Cohen for Seeking Alpha, and has solid relationships with blue chips such as Cisco and Alcatel-Lucent. The shares have see-sawed after speculation about a buyout by Cisco fizzled out, but the Alvarion remains a good play on Wimax growth in the developing world.

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.