By Kenneth Leon You can't blame Internet users for wanting something better. Say you're sipping a latte and surfing the Web wirelessly at your favorite Starbucks (SBUX). Then you think to yourself: What would it be like if I could use broadband wireless anywhere anytime?
It's easy to see why the prospect of ubiquitous, always-on, wireless Internet can stir caffeinated reveries. While the traditional cellular industry moves ahead with third-generation (3G) technologies for broadband wireless, it will likely take many years before consumers see those offerings over large geographic areas. In the absence of alternatives, the wireless carriers may keep pricing high where they do make it available.
HELP ON WAY. But the appeal of anytime-anywhere wireless could reach beyond existing customers. Perhaps you're a frustrated cable subscriber whose modem pushes broadband data rates at slower and slower speeds thanks to multi-tenant or neighborhood congestion on the shared networks. Or maybe you're too far from your local phone company's central office to get high-speed DSL service. Are you really willing to wait for the telco to deploy fiber to the home (FTTH) in the next decade? We believe the major telcos are facing a range of delays in this effort.
Fortunately in the near future, the broadband-starved may receive help via a new wireless technology named WiMAX, which stands for worldwide interoperability for microwave access. Several years in the making, WiMAX provides the IEEE 802.16 technology standard for 2 gigahertz to 11 Ghz within a wireless metropolitan area or rural location. It supplies broadband wireless connectivity to fixed and mobile users.
Leading companies have made several major announcements this year that, in our view at S&P, suggest commercial service starting sometime in 2006. In our opinion, WiMAX is the ultimate complement to Wi-Fi.
SUPPORTIVE FORUM. WiMAX gives a wireless alternative to cable and DSL for last-mile broadband access. It has a service range of up to 50 kilometers and supplies data rates of up to 280 megabits per second per base station.
For those wishing to keep up with the latest WiMAX developments, a visit to Wimaxforum.org may be in order. Founded in June, 2001, by equipment and component suppliers, the WiMAX Forum comprises more than 100 companies committed to open interoperability of all products used for broadband wireless access. The association's primary goals are to support the 802.16 standard, propose and promote access profiles for the 802.16 standard, test and certify interoperability levels both in network and the terminal devices, and achieve global acceptance for the technology.
The group's WiMAX Forum Certified designation means a service provider can buy equipment from more than one company and rest assured that everything works together. Certification should mean a more competitive industry with lower costs for network service providers and end users.
EVERYBODY'S DOING IT. In April, 2005, the WiMAX Forum announced a formal agreement with the European Telecommunications Standards Institute (ETSI) that ensures a single global standard for wireless metropolitan area network (MAN) technology. The Forum also announced that all Korean WiBRO operators have joined the WiMAX Forum, along with Samsung and LG Electronics. With WiBRO, a high-speed Internet service at 2.3 Ghz, brought into the WiMAX fold, we believe WiMAX would stand secure as a global standard for broadband wireless communications even more open than 3G.
Some big tech industry names are beginning to step up to the plate. Intel (INTC
; S&P investment ranking 3 STARS, hold; $27) plans to begin shipping its new WiMAX chip, known as Rosedale, to customers in late 2005. In March, 2004, Intel entered into a nonexclusive alliance with Alcatel (ALA
; 3 STARS; $12), the market leader, to deliver WiMAX equipment by the second half of 2005. Trials of WiMAX by telecommunications carriers around the world are under way, with more than 75 expected before the end of 2005.
In addition to Intel, Japanese chipmaker Fujitsu announced in early 2005 that it had begun developing a chip similar to Rosedale, which it hoped to launch in 2006. Select members of the WiMAX Forum -- including Airspan Networks (AIRN), Alvarion (ALVR), Aperto Networks, Ensemble Communications, Navini Networks, Nokia (NOK
; 3 STARS; $17), Proxim, and Wi-LAN (TWIN) -- plan to start shipping in late 2005 or 2006.
INSIDE A LAPTOP. Aperto Networks expects shipment pricing to be $300 for customer premises equipment (CPE) once the 802.16 chips and cards hit the market. The price should eventually drop to around the $30 charged for today's LAN Wi-Fi cards. Many WiMAX vendors plan to offer CPE that can be self-installed with window-mounted antennas as well as rooftop equipment. We would expect Cisco Systems' (CSCO
; 5 STARS, strong buy; $19) Linksys division, Netgear (NTGR
; 4 STARS, buy; $19), and others to be very active through consumer-electronic channels with WiMAX products.
The first WiMAX Forum certified products are targeted for fixed WiMAX, not mobile. The initial certifications will cover equipment in the 3.5-Ghz frequency band. The forum is to make sure all future enhancements to the baseline profiles support backward compatibility. The group plans to certify IEEE 802.16e for mobile wireless access from laptops and handhelds, probably by early 2007. We believe Dell (DELL
; 5 STARS; $41) and other major PC makers are already talking with Intel and other chipmakers about their design requirements for WiMAX inside a laptop.
Telecom service providers are also taking steps to roll out WiMAX. In June, 2005, BellSouth (BLS
; 2 STARS, sell; $27) said it would begin a trial deploying wireless broadband service in Athens, Ga., using WiMAX equipment from privately owned Navini Networks. BellSouth may eventually allow existing DSL subscribers to take their service with them via WiMAX in areas where BellSouth provides no broadband DSL service.
FAR FROM CLEAR. Also in June, Nokia and Intel announced a nonexclusive partnership to collaborate on several areas in support of mobile WiMAX technology (IEEE 802.16e) including mobile devices or clients, network infrastructure, and market development. Although Nokia and Intel remain technology-agnostic in regard to the wide range of 3G technologies, the two companies plan to show wireless service providers how they can interoperate with their 3G wireless platforms. Both Nokia and Intel belong to the WiMAX Forum.
While the equipment suppliers and chipmakers see win-win scenarios for deploying WiMAX solutions, we believe the picture is far from clear on the service-provider side of the business. Right now there's no authorized radio frequency spectrum from the Federal Communications Commission for the issuance of WiMAX licenses -- licenses that are normally needed for startup outfits to get funding from the capital markets besides private-equity firms. So far, Craig McCaw's Clearwire, which is privately owned, is moving ahead with more than 15 test trials in the U.S. market with its own WiMAX-type technology.
So how can WiMAX be a good thing for the broadband wireless businesses of the major carriers -- and provide a decent return on invested capital -- after they paid billions of dollars to the FCC for authorized 3G licenses or additional radio frequency spectrum?
CONSUMERS RULE. In our opinion at S&P, if you can't fight 'em, join 'em. In the near term, we believe the major carriers will try to delay the WiMAX expansion through regulatory and marketing maneuvers, but their efforts will likely fail. Not only do consumers benefit from WiMAX but for the large companies that have embraced Wi-Fi applications, we believe WiMAX is a natural next step.
We doubt that in the next two years any wireless vendor or service provider will stay tied to only one broadband technology or a single network platform. What matters is what the customer wants. That simple truth may be the principal force behind WiMAX's future success.
S&P STARS: Since January 1, 1987, Standard & Poor's Equity Research Services has ranked a universe of common stocks based on a given stock's potential for future performance. Under proprietary STARS (STock Appreciation Ranking System), S&P equity analysts rank stocks according to their individual forecast of a stock's future capital appreciation potential versus the expected performance of a relevant benchmark (e.g., a regional index (S&P Asia 50 Index, S&P Europe 350 Index or S&P 500 Index), based on a 12-month time horizon. STARS was designed to meet the needs of investors looking to put their investment decisions in perspective.
S&P Earnings & Dividend Rank (also known as S&P Quality Rank): Growth and stability of earnings and dividends are deemed key elements in establishing S&P's earnings and dividend rankings for common stocks, which are designed to capsulize the nature of this record in a single symbol. It should be noted, however, that the process also takes into consideration certain adjustments and modifications deemed desirable in establishing such rankings. The final score for each stock is measured against a scoring matrix determined by analysis of the scores of a large and representative sample of stocks. The range of scores in the array of this sample has been aligned with the following ladder of rankings:
S&P Issuer Credit Rating: A Standard & Poor's Issuer Credit Rating is a current opinion of an obligor's overall financial capacity (its creditworthiness) to pay its financial obligations. This opinion focuses on the obligor's capacity and willingness to meet its financial commitments as they come due. It does not apply to any specific financial obligation, as it does not take into account the nature of and provisions of the obligation, its standing in bankruptcy or liquidation, statutory preferences, or the legality and enforceability of the obligation. In addition, it does not take into account the creditworthiness of the guarantors, insurers, or other forms of credit enhancement on the obligation. The Issuer Credit Rating is not a recommendation to purchase, sell, or hold a financial obligation issued by an obligor, as it does not comment on market price or suitability for a particular investor. Issuer Credit Ratings are based on current information furnished by obligors or obtained by Standard & Poor's from other sources it considers reliable. Standard & Poor's does not perform an audit in connection with any Issuer Credit Rating and may, on occasion, rely on unaudited financial information. Issuer Credit Ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances.
S&P Core Earnings: Standard & Poor's Core Earnings is a uniform methodology for calculating operating earnings, and focuses on a company's after-tax earnings generated from its principal businesses. Included in the Standard & Poor's definition are employee stock option grant expenses, pension costs, restructuring charges from ongoing operations, write-downs of depreciable or amortizable operating assets, purchased research and development, M&A related expenses and unrealized gains/losses from hedging activities. Excluded from the definition are pension gains, impairment of goodwill charges, gains or losses from asset sales, reversal of prior-year charges and provision from litigation or insurance settlements.
S&P 12 Month Target Price: The S&P equity analyst's projection of the market price a given security will command 12 months hence, based on a combination of intrinsic, relative, and private market valuation metrics.
Standard & Poor's Equity Research Services: Standard & Poor's Equity Research Services U.S. includes Standard & Poor's Investment Advisory Services LLC; Standard & Poor's Equity Research Services Europe includes Standard & Poor's LLC-London and Standard & Poor's AB (Sweden); Standard & Poor's Equity Research Services Asia includes Standard & Poor's LLC's offices in Hong Kong, Singapore and Tokyo.
In the U.S.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 30.8% of issuers with buy recommendations, 56.7% with hold recommendations and 12.5% with sell recommendations.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 29.2% of issuers with buy recommendations, 50.5% with hold recommendations and 20.3% with sell recommendations.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 34.3% of issuers with buy recommendations, 48.0% with hold recommendations and 17.7% with sell recommendations.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 31.0% of issuers with buy recommendations, 55.2% with hold recommendations and 13.8% with sell recommendations.
5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis.
4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis.
3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis.
2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain.
1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.
Relevant benchmarks: in the U.S. the relevant benchmark is the S&P 500 Index, in Europe the S&P Europe 350 Index and in Asia the S&P Asia 50 Index.
For All Regions:
All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.
Additional information is available upon request to Standard & Poor's, 55 Water Street, NY, NY.
This report has been prepared and issued by Standard & Poor's and/or one of its affiliates. In the United States, research reports are prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"). In the United States, research reports are issued by Standard & Poor's ("S&P"), in the United Kingdom by Standard & Poor's LLC ("S&P LLC"), which is authorized and regulated by the Financial Services Authority; in Hong Kong by Standard & Poor's LLC, which is regulated by the Hong Kong Securities Futures Commission, in Singapore by Standard & Poor's LLC, which is regulated by the Monetary Authority of Singapore; in Japan by Standard & Poor's LLC, which is regulated by the Kanto Financial Bureau; and in Sweden by Standard & Poor's AB ("S&P AB").
The research and analytical services performed by SPIAS, S&P LLC and S&P AB are each conducted separately from any other analytical activity of Standard & Poor's.
This material is based upon information that Standard & Poor's considers to be reliable, but neither S&P nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. With respect to reports issued by S&P LLC-Japan and in the case of inconsistencies between the English and Japanese version of a report, the English version prevails. Neither S&P LLC nor S&P guarantees the accuracy of the translation. Assumptions, opinions and estimates constitute Standard & Poor's judgment as of the date of this material and are subject to change without notice. Neither S&P nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.
This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested. Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.
For residents of the U.K.: This report is only directed at and should only be relied on by persons outside of the United Kingdom or persons who are inside the United Kingdom and who have professional experience in matters relating to investments or who are high net worth persons, as defined in Article 19(5) or Article 49(2) (a) to (d) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001, respectively.
Readers should note that opinions derived from technical analysis might differ from those of Standard & Poor's fundamental recommendations. Analyst Leon follows shares of telecom services companies for Standard & Poor's Equity Research Services