ERF Wireless’s vertical plan for rural broadband

ERF Wireless (OTC BB: ERFW.OB) is rapidly expanding wireless broadband in rural areas of the south using a methodical approach of targeting business customers in specific industry verticals and adding residential consumers along the way. And it is now poised to expand more broadly throughout the country thanks to a single deal with a giant in the oil and gas industry.

ERF originally formed in 2004 with a plan to roll up wireless ISPs (WISPs). The problem it soon discovered was that very few WISPs were making money. So it developed a model to grow by targeting certain industry verticals that are common in rural areas as anchors that help justify the costs of the network.

“It’s something you build like a pyramid,” said H. Dean Cubley, ERF’s chief executive officer. “The base is the basic network that starts as a WISP network, but then you layer these capabilities on top of it, and you overlay these vertical markets on top of the base.”

The first vertical ERF found prevalent in rural America was local and regional banks. In three years, the company has connected over 150 of them, using the excess capacity on its networks to serve area consumers as well. The company also has its eye on education and health care, but it was the energy industry that gave ERF is biggest boost so far.

Last year, ERF was approached by Schlumberger (NYSE: SLB), an international supplier to the oil and gas industry that competes with the likes of Halliburton.

“They told us that everywhere they went, they were seeing our networks,” Cubley said.

Schlumberger (pronounced shlum-ber-ZHAY) had been using satellite service to provide communications at its customers’ oil-drilling sites. But as the oil industry developed more bandwidth-rich data applications – for example, 3D modeling software that analyzes drilling areas and reports data in real time to geologists not on-site – satellites were either not providing enough bandwidth or were too expensive per bit.

In an exclusive deal announced earlier this year, Schlumberger agreed to resell ERF’s wireless services to its oil-drilling customers throughout North America, allowing ERF to serve adjacent rural markets using the same network. Schlumberger will use ERF’s gear to connect to its own private global network, not the public Internet, in a three-year contract that requires ERF to provide a minimum of 1077 1.5-Mb/s circuits annually. Though ERF had thus far been concentrated in the south, the Schlumberger contract includes Alaska, Canada, Mexico – even offshore sites.

One catch: Drilling sites often change location, typically every two weeks. ERF uses a mobile trailer to deliver the wireless last mile, but to secure backhaul, the contract allows ERF three choices: ERF can lease network capacity from a carrier, but only if the carrier can accommodate its service level agreements (SLAs). If the SLAs can’t be met, ERF can buy the network and upgrade it.

“We’re trying to buy networks all over North America,” Cubley said. “We’ll probably close on another 10 networks in the next 18 months.”
This week, ERF closed its 16^th WISP acquisition in five years.
Where there are no existing networks available, ERF can build one from scratch, as it must do in a rocky stretch of East Texas and Louisiana rich with natural gas known as Haynesville Shale. There ERF will build a new network covering some 10,000 to 15,000 square miles.

As ERF spreads throughout the continent on the back of the Schlumberger deal, it will expand its current base of about 10,000 residential and non-vertical business customers that are now confined to Texas and Louisiana.
ERF sees education as another fertile rural vertical, but next the company plans to apply its formula to the health care sector in particular.

“Health care has expanded in rural America much like the regional banking industry has,” Cubley said. “The larger hospitals in the major cities establish clinics in small towns that serve rural populations but have the same communication needs as banks or oil and gas [companies]. They do x-rays and CAT scans and generate tremendous amounts of data. That data is needed back in the major hospitals where the experts are because the doctors who can analyze x-rays and CAT scans are not out in rural clinics. So it generates a need for data transmission.”

Meanwhile, ERF has also secured a foothold in another vertical unconfined to big cities: government. In Louisiana, the company is two years into building a statewide network (with 18 months to go) in connection with a deal it brokered with the state government. The state police had 50 to 100 wireless towers, each with a T-1 at the base (more towers in the state than any other entity), but not enough funding to interconnect them. ERF is building a network on the towers and interconnecting them in exchange for free backup power on the towers and the right to use part of its capacity to sell broadband. ERF is giving the state 1.5 Mb/s of connectivity between the towers. And in cases of emergency, ERF agrees to open up the network to 20 Mb/s and let the state use it as needed. ERF is even putting zoomable cameras on the towers that will enable the police to see the surrounding areas.

Cubley is hoping to secure federal broadband stimulus funds to help extend ERF’s network to more rural areas, but he argues that it will take sustainable business models like his – not just federal grants – to wire rural America.
“It’s one thing to get stimulus money to build a network,” he said. “That’s great, but that’s only part of the equation. You build a network, you’ve got to have continuing revenue to maintain it.”