LMDS turns attention to T-1: New models let long-distance carriers, entrepreneurs slice into cash cow

With the auction of the local multipoint distribution services spectrum set for early next month, a number of players are refining their strategy in an effort to see quicker returns on their investments.

Instead of focusing their efforts on the Internet access business, a new model is emerging that puts greater emphasis on using LMDS to connect Internet service providers to Tier 1 carriers and the Internet backbone. Such a model would position the new LMDS carriers as full service providers and allow them to pick off local exchange carriers' revenues from T-1 services.

"The quiet application is hooking together networks or trunking," said Carlton O'Neal, vice president of marketing for Bosch Telecom, an LMDS vendor. "I don't think it's the first thing that pops into your head, but it's out there."

Indeed, chasing after ISP revenues and not consumers may be the easiest way for the new carriers to break into the market.

"In the initial years, they're going to have very low penetration" in the consumer Internet access market, said Daniel Ernst, an analyst with The Strategis Group. "If you think of a customer in terms of total capacity, it doesn't matter if one is using it in the telecom industry and another is using it in the gas and oil industry."

At stake starting Feb. 10 is the biggest chunk of spectrum ever auctioned off by the FCC. In each market, companies will have the rights to bid on an "A" block of 1150 MHz located in three bands from 27.5 to 31.3 GHz. Companies also can bid on a "B" block license consisting of two bands of 75 MHz each within the 31 to 31.3 GHz spectrum.

With that much bandwidth available, winners will have more than enough capacity to edge into the traditional T-1 markets and have plenty of bandwidth left for other applications, including the Internet access market.

"A communications business plan cannot be that dedicated. You have to be flexible," said Ernst. "In order to just gain revenue, they're going to have to go after a lot of different end users."

One bidder, in fact, already is testing the technology to provide high-speed data, voice and Internet access to multiple user groups. JATO Communications Group, a spinoff of international LMDS provider Formus Communications, will reportedly use subscriber terminal units and network interface units from Stanford Telecom to deploy service in Denver.

Operating under an experimental FCC license beginning next month, JATO will deploy a network of point-to-multipoint equipment in overlapping nodes. The network will use transmission equipment provided by Millitech Corp. and will be supported by an asynchronous transfer mode/frame relay backbone from Newbridge Networks.

While aiming at the access side of the market, the trial could point to likely targets for LMDS carriers, including smaller businesses that traditional facilities-based carriers can't effectively serve, said Ernst. "It's places like the 100-person accounting firm. Those are the customers that don't have a choice of competitors."

"It's a viable alternative in places where there's not a lot of fiber in the ground," added Dan Taylor, a senior analyst with Boston-based Aberdeen Group.

The opportunity to provide services in fiber-deficient markets likely will draw non-traditional carriers, said O'Neal. Most bidders are holding off on announcing plans until the last minute. "It's people looking for competitive local access. Who is that? The long guys and entrepreneurs," he said.

Ironically, though, it's the incumbent telcos that may wind up with the biggest slices of spectrum after all is said and done. Under current rules, telcos or cable operators may not own licenses within their service territories for three years. However, they may own up to a 30% stake in any company that wins a bid, which could lead to telco-backed bidding.

"I would boldly state that the existing carriers will have a play in LMDS because it is an access technology and their business is access technology," said O'Neal.

The local loop nature of the LMDS business model probably also precludes ISPs from entering the fray, added Taylor. "The opportunity for a CLEC with an ISP is endless." Standalone ISPs "have so many other things on their plate that getting into the infrastructure business pulls them away from their core business."