Broadband beyond U.S. borders

Operators have recognized broadband wireless opportunities overseas and are applying their skills to new markets

There is one obvious reason that broadband wireless operators worldwide are showing interest in international markets, especially in Europe: The markets are huge.

In 1998, Europe and the U.S. had the same populations and the same telecom spending across the board, says Lynn Forester, founder and co-chairman of FirstMark Communications Europe, citing industry figures that compare Europe and the U.S. in 1998. However, the small and medium-sized enterprise telecom spending in Europe is traditionally bigger than in the U.S. In 1998, there were 2 million T-1 lines in the U.S., while all of Europe had only 300,000.

"The market potential is much greater in Europe," Forester says.

FirstMark isn't the only operator participating in broadband wireless spectrum auctions around the world, recognizing the unmet demand for high-speed data connections and the efficiency with which wireless can meet that demand. Service providers that originated in the U.S., such as Teligent, have started operations in Europe, Latin America and the Asia-Pacific region.

Nextlink Communications recently purchased 3700 route-miles of inter-city fiber and 250 metro route-miles in Europe from Level 3 Communications and says it is keeping a close eye on broadband wireless there. Other companies such as Formus Communications - which is in a quiet period because of a pending IPO - and Diveo (see sidebar on page 54) are based in the U.S. but have operations only outside the U.S.

All these companies have one thing in common: They aren't local companies in many of the markets they serve. But many have learned that the age-old adage of "when in Rome do as the Romans do" can be great advice.

First moves

Several operators are recognizing the opportunities abroad and are quickly winning licenses and moving ahead with partnerships.

FirstMark's Forester has a history in the U.S., but her company is focused on Europe. The operator currently is building a broadband landline backbone with plans to connect 170 cities in 18 countries in Europe and will use fixed wireless to reach the last mile. FirstMark owns wireless licenses in Finland, Germany, Luxembourg, Portugal, Spain and Switzerland and is working on obtaining licenses in other countries.

In addition, the operator already operates a 3500-kilometer fiber network in Germany and has plans for a 5000-kilometer network in France.

Teligent, which is building broadband wireless networks across the U.S., also has turned its eye to Europe.

"Markets in the rest of the world are more than three times the market opportunity we have here. So for us to participate in that very rapid evolution of alternative broadband networks being deployed represents an enormous opportunity for us that we can't let go by," says Alex Mandl, chairman and CEO of Teligent.

In late June, Teligent launched its joint venture company ArcTel with Mannesmann in Germany. The company plans to have broadband wireless systems commercial in 44 German markets by November. ArcTel currently has licenses to cover 40% of German business and has applied for 52 additional licenses that will increase that coverage to nearly 70% of Germany's business markets. Teligent also is building broadband wireless networks - most often with partners - in Argentina, Hong Kong and Spain and is waiting to see if it has won licenses in France.

For U.S. operators, the timing of market development here, and subsequently overseas, couldn't have worked out better. In the U.S., operators have owned licenses for several years and have gained experience with equipment options and building networks.

"The rest of the world is probably, on average, lagging behind us in opening up its markets for competitive broadband solutions," Mandl says. "As the Internet drives that reality, Teligent with its fixed wireless approach becomes a logical solution to those needs. Those opening market conditions make entry by experienced U.S. operators logical.

"Since we have developed some obvious expertise in this environment, companies around the world have, in a sense, sought us out to partner with them to help build these broadband networks," Mandl says.

In addition to demand being greater, prices for broadband connections are much higher in Europe - and even higher in regions such as Latin America - which makes the business proposition for broadband wireless service providers that much stronger.

"ISDN is prohibitively expensive in Europe," says Hatim Zaghloul, chairman and CEO of Wi-LAN. "Europe has a tolerance for higher tariffs." In the U.S. competition has driven down costs, so operators must offer services at lower cost points, resulting in smaller margins.

But operators in Europe can implement broadband wireless networks more economically than competing landline solutions and then price services just under high-cost landline connections to reap significant profits.

Turn it up quick

In addition to an eagerness to spread their experience to budding international markets, broadband wireless players have another reason for moving to market very quickly. Regulatory bodies in some European countries are requiring license winners to build their networks within a short period of time, often one year.

"The initial driver has been the German regulator [that specified that] the operators must be live within one calendar year of getting the license. This is really driving the market," says Andrew Shorrock, senior market manager of broadband wireless access for Nortel Networks. Each country is different, but those that demand network builds within a specific time frame usually only require a minimum of one base station and a number of customer premises equipment in each region.

"Now we're at a point where service providers are hustling and trying to deploy a minimum configuration in each area where they received licenses," says Jennifer Gibbemeyer, director of business development for OnDemand fixed wireless at Lucent Technologies. However, those rules are spurring operators to chase fewer licenses, she says. They still seem to be grabbing what they can in hopes that they can build within the specified time frame, she adds.

Operators view these rules as good and bad. "It is a large barrier, but it plays in our favor," says FirstMark's Forester. "It's a barrier for entry for people who just want to get licenses and flip them - it keeps out some competitors we wouldn't want." In addition, FirstMark plans to move aggressively anyway, so the regulations help keep the company on track.

The rules are fair in countries that have beauty contests rather than auctions, Teligent's Mandl says. In a beauty contest, a company submits a business plan proving that it is qualified to receive the licenses, including the knowledge and financial resources. "The regulators and governments are appropriately saying, `We saw your application and now we are going to hold your feet to the fire,'" Mandl says. "It's a bit of a wake-up call to some people." So companies such as Teligent are in a better position than those that may not have broadband wireless experience because it already knows how to build out networks.

However, these operators can't port the exact same networks from the U.S. to Europe. The frequencies used for broadband wireless are different on each continent, so the equipment choices operators make becomes more important.

Giganet is one vendor that offers products in a range of frequencies approved by both the FCC and the European Telecommunications Standards Institute. Therefore, it could supply products to an operator for use in the U.S. and Europe.

Imposed time limits aren't the only reason that operators are rushing to market in Europe. For some markets, the availability of fixed broadband wireless licenses may be the first opportunity for competitive service providers. In Portugal, for example, Portugal Telecom was the only provider of broadband services until the distribution of broadband wireless. Then suddenly six new operators had licenses to offer services in the market, Nortel's Shorrock says. "It's hot competition, and who can get to market first is important."

The rush to market may be affecting the way that the operators are initially building their networks. Some have begun by putting in hubs in each region that connect via point-to-point radios because it's quick and easy and can comply with regulators' time limits, says Stuart Little, director of broadband product marketing for DMC. Once the operators begin to market and win customers, they may plan to augment or potentially replace those point-to-point systems with point-to-multipoint configurations, he says.

When in Rome

While experience is surely key to entering new regions worldwide, operators must do things differently in each market from a technology and a business perspective.

Generally, European cities often have fewer tall buildings than U.S. cities. In addition, because those buildings typically are smaller, they will produce less traffic. "So you have to connect to more buildings to get the same number of business customers," Shorrock says.

But as in the U.S., operators are finding that the more pieces of the end-to-end connection that they own and control, the more economical the equation. That's why FirstMark is building a fiber backbone to span Europe.

Likewise, Nextlink has purchased fiber across Europe and may consider buying broadband wireless licenses to reach the last mile.

"To the extent that you build your own network and bypass the incumbent monopoly, the better off you are," Mandl says. "The more independence you have, the more flexibility you have to respond to customer needs."

Like U.S. operators, broadband service providers in Europe also are finding that they need to build solid service bundles; it's not enough just to offer broadband connections. FirstMark calls its product an ecosystem because it offers a full service, including access and a wide range of applications. FirstMark also claims to be the only wireless local loop provider also building a fiber network, which means that it can offer quality of service because it owns the entire network end to end, Forester says.

Some say that operators in Europe must offer a broader array of services than they do in the U.S. "In the States, since they buy the frequency, there is less competition," says Shlomo Tenenberg, vice president of marketing and sales for Giganet. In the U.S., there are typically only a couple broadband wireless competitors in a market. In Portugal, five companies were awarded licenses and they are all quickly building networks. "They have to compete on services and be very creative," Tenenberg says.

One way for non-local companies to gain access to more network components is to partner with incumbents or local companies with a backbone already in place. In some markets, Teligent chooses local partners that have local credibility, experience and infrastructure. "It's a much quicker way to get to market as opposed to starting from scratch," Mandl says. In addition to the partnership in Germany with Mannesmann, Teligent also has a relationship with Jazztel in Spain.

Local partners also can help with any necessary interconnection because regulatory requirements are different from country to country.

In markets where licenses are distributed in beauty contests, FirstMark has a strategy of partnering. "In most countries in Europe, you really need local guidance as to the marketplace, as to the rules and regulations and simply as to the culture," Forester says. The exception for FirstMark is Germany, where it went it alone and came up the largest non-German license winner. "That has to do with the way Germany has opened up its telecom market. It has been more transparently deregulated then the rest of Europe," she says.

Partnerships usually benefit both parties. Says Tenenberg: "[U.S. operators] come with the technical know-how and the investment, and they need the local partner to bring their own experiences."

At first glance, some might assume that Latin America wouldn't have the greatest demand for broadband services, but operators are finding the opposite to be true. In some countries, the infrastructure is weak, yet the demand is there.

"Whenever you see demand far exceeding supply, you see a good opportunity for revenue and profits," says John Holmblad, executive vice president and chief technology officer of Diveo. Using fiber and fixed wireless, Diveo currently operates in Argentina, Brazil and Colombia and is building networks in Panama, Peru and Uruguay.

Deregulation in many Latin American markets is allowing competitors to offer service to users much quicker than the monopoly could. And the demand is there - Diveo recently supplied a 155 Mb/s connection to one company in Brazil.

Diveo's initial focus has been on data, but that's mostly because data in many countries is the first segment to be deregulated. "Our first focus has been on the data market, which is where the biggest growth potential is," Holmblad says. "Having said that, voice is still a growth business in a lot of these markets." Diveo builds multiservice networks so it can offer voice and data.

Teligent is one U.S.-based operator that has ventured into Latin America. Along with Telcom Ventures, Teligent is deploying point-to-multipoint networks in Argentina, beginning with Buenos Aires. The partnership aims to launch service in 11 markets in Argentina by the end of the year.

In addition to the local multipoint distribution service-type spectrum that Latin American countries now are auctioning off, some countries in the region also are taking another look at multichannel multipoint distribution service (MMDS).

"A lot of developing countries take a regulatory lead from the U.S.," says John Griffin, general manager and president of ADC's broadband wireless group. Mexico, for example, recently approved two-way use of MMDS spectrum. ADC is involved in trials in Mexico that will allow the government to create service rules for the spectrum.

Broadband connections in Mexico are extremely expensive - more so than in Europe. Therefore, any operator that can use frequencies such as MMDS to quickly and easily offer access tocustomers can build a solid business. "The margin of opportunity for a new entrant is huge," Griffin says.

The change in MMDS usage rules in Mexico could have similar results as the U.S. "We'll see consolidation like in the U.S.," says Peter Jew, director of marketing for broadband wireless access for ADC.

Currently in Mexico, numerous small companies use the MMDS frequencies mostly to offer broadcast TV service. They have healthy businesses but aren't very well funded, Jew says. Consolidation could come from across the border in the form of a U.S. company eager to access local markets in Mexico.

Or a Mexican company could do some consolidation and might have an easier time getting funding. Investors may look to the U.S. and see heavy-hitters such as WorldCom and Sprint chasing MMDS and become eager to back local companies moving along the same route.

In addition, investors are sometimes wary of backing operators trying to lay fiber because if the business fails, money already has been spent digging up the streets, Jew says. With broadband wireless, the investment goes into actual equipment.