By Sam Jaffe Over the past year, the stock market has been chock-full of hard-knock stories. One of the most searing, though, is Metricom (MCOM). The San Jose (Calif.) company wanted to build a wireless network for Internet access, so it issued a massive secondary stock offering last February, at the height of the bull market. Its stock price spiked to $87, giving it a market capitalization of $500 million. Plans were immediately put in place for a nationwide rollout of its network, to be completed by the end of 2001.
Fast-forward to Thursday, Feb. 8: Metricom's stock price dropped to $4.62, and management is furiously trying to soothe investors. With a little penny-pinching and good fortune, its founders say, the company might still be able to survive through the end of the year -- even though the stock has lost 95% of its value in the past year.
There's good reason not to count out Metricom -- at least not yet. This company has technology that could be especially valuable in the coming years. The key to its survival is finding additional financing, which is not an easy task in this capital-starved environment. Nevertheless, there's a good chance that a deal will soon be worked out. "There are two things that could happen," says analyst David Walrod of McDonald Investments, who has a "hold" rating on the stock. "Either people will be slapping their foreheads five years from now saying, 'I could have bought that thing for $10 back in 2001,' or the company will go bankrupt in a year."
Hmmm. In other words, any investment in Metricom right now is an extremely speculative move. Despite its historically cheap price, the risks involved are enormous. Essentially, it's a pull on a slot machine. Buy the stock and wait for the wheels to stop spinning. Of course, you could lose everything. But if the company finds a new investor to pump a billion dollars into its network, you could win the jackpot.
FREE SPECTRUM. Underlying this gamble is an ingenious wireless technology that Metricom has created and patented. The company's network uses the 900-Megahertz portion of the spectrum to send packets of data between a user's laptop computer and radio antennae affixed to light poles. The 900-MHz band is open to the public and used by everything from your cordless telephone to military radios. But Metricom's network, called Ricochet, uses an advanced scrambling technology that optimizes the use of that band. That allows the company to get free spectrum, rather than paying billions of dollars for proprietary licenses.
The drawback is that the company needs to install five poletop antennae for every square mile of coverage area, rather than building one cell tower for every five square miles, as cellular phone networks do. Nevertheless, it still costs half as much to build the Metricom network as it would for a comparable cell-phone system. And Metricom's modems provide Internet access speeds that are comparable to landline DSL or cable modems, whereas trying to access the Web using a cell phone is about as fast as handwritten notes.
I tested out the service and was pleasantly surprised. I found that it works as advertised. It provided wireless broadband access both from my home in Philadelphia and in my office in Manhattan. I had no disruptions in service and never saw the blazing speeds of my connection falter.
So if this company has really created the holy grail of wireless Internet access, why is it on the verge of bankruptcy? Because after its successful secondary offering, the company decided to go for broke and build a national network. It has now completed phase 2 of that buildout and covers 13 major
metropolitan areas. Phase 3, which was supposed to wrap up by yearend, would have put the service in 46 cities, enough to cover 80% of Metricom's target audience: professionals who travel frequently.
FIRST-RATE INVESTORS. The company was counting on getting an additional billion dollars from the capital markets to go from Phase 2 to Phase 3. But now that the days of plentiful capital resources are over, that's not an easy task. Because of the lack of capital, the company announced on Feb. 8 that it would temporarily halt its rollout plan until a financing deal could be done. "We understand that if we don't find new financing, it's all over," says CEO Tim Dreisbach.
The company already has a pool of first-rate investors, most notably WorldCom (WCOM) and Vulcan Ventures, the investment firm of Microsoft co-founder Paul Allen. WorldCom is a large shareholder and is also the largest reseller of the Ricochet service. It has already trained several thousand salespeople to sell the service and is just waiting for it to appear in the cities that it covers. It already has started a multimillion-dollar advertising campaign in Atlanta, which it says will be the test case for a national campaign once the complete network is in place.
Vulcan's investment is more intriguing for the company's future. "The chances are that new financing will involve Vulcan in exchange for an even larger equity stake," says Merrill Lynch analyst Tom Watts, who rates the stock a "hold." "The negotiations are probably centering on how much equity the company is willing to fork over in exchange for new financing from Vulcan."
In fact, a deal might have already been done. That was suggested by an oblique remark Dreisbach made at the end of a conference call on Feb. 8, when he said: "We didn't say that we haven't made any financing deals, we just haven't announced any. That's why this is such a difficult call for us." He refused to elaborate, and his ambiguity only added to the confusion surrounding his company's stock.
Even if Metricom does find financing, that doesn't mean all of its troubles are over. Right now, with no marketing or sales effort, it has signed up 34,000 subscribers. Once the nationwide network is in place, the company needs 1 million subscribers to break even. Analysts fear it may have only about 100,000 by yearend.
While there's a proven need for high-speed wireless Internet access, that doesn't settle the question of how much most people would be willing to pay for it. Right now, Metricom's resellers are charging as much as $80 a month, a figure that seems awfully high.
3G THREAT. Another cloud hanging over Metricom is a competing wireless network called 3G that most major wireless phone companies are planning. But there are still serious questions about 3G's viability, considering that the cost of licenses for the new network could be as much as
10 times the cost of the entire Metricom network. The actual construction costs for 3G would also dwarf Metricom's costs. In addition, 3G won't come close to matching the speeds available to Metricom users. If 3G does make it to the U.S., it won't get here until at least 2003, and 2005 is a probably a more realistic date. In the meantime, Metricom can establish itself as the brand of choice for high-end customers willing to pay the price for quality mobile Internet access.
If Metricom can't come up with financing immediately, it won't have to worry about 3G, or any other threat for that matter. If financing does arrive, shareholders could win big. Otherwise, the casualty list of this bear market will just have gotten bigger. Jaffe writes about the markets for BusinessWeek Online in our daily Street Wise column
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