It’s a simple concept. Smartphones are straining current network capacity and, with 788 million mobile-only Internet users across the globe expected by 2015, carriers are looking for some relief, which a small Rhode Island company believes it is poised to provide.
“It’s not that anyone made any big mistakes [but] the networks that are just getting deployed now were on the drawing board over five years ago,” said Jeffrey M. Thompson, president and CEO of Middletown-based Towerstream. “Five years ago there was no iPhone that destroyed networks. The tablet didn’t exist at that point. They have these huge, hungry screens. The long-term evolution network is only four times faster than the 3G network.”
Towerstream, which debuted its wireless broadband services in Providence and Boston in 2001, says the answer is in a powerful mobile network that supplements a carrier’s network, called offloading.
Hoping to prove its point, the company is building a network of 1,000 wireless routers in 7 square miles of Manhattan that is slated to be up the summer. By year-end, Towerstream plans to expand to 1,500 routers.
“If you look at the 3G and 4G speeds, even theoretically, they’re way below the 50-mbps mark. Our network has theoretical [speed] up to 350 mbps. Each user experience is different – just like it is for LTE – [but] we’re starting at a much higher data throughput, which is very exciting,” Thompson said, while noting that in recent tests, they’ve seen peak data rates closing in on 100 mbps.
Towerstream, which has yet to turn a profit, has not named any clients for the Wi-Fi-offloading network yet, but has said it will announce one by the end of the second quarter in August.
The major carriers “are launching these multibillion dollar networks, and there are going to be physical gaps that people are going to have to deal with and Wi-Fi offload is one of those ways,” explained Thompson.
In a recent forecast on global mobile traffic, Cisco said the average smartphone will generate 1.3 gigabits of traffic per month in 2015, a 16-fold increase on the 2010 average of 79 megabits per month.
It would only take “small numbers” to recover the investment in the unnamed/unbranded pilot network, Thompson said. He added the company is not closing the door to the possibility of selling directly to consumers, but it is not “looking down that road right now” so as not to compete with their potential clients.
Of the three analysts that cover Towerstream, two have placed “buy” ratings on the stock in their most recent notes.
Ilya Grozovsky of Morgan Joseph Triartisan, however, placed a “sell” rating on the stock in his May 11 note and set a $3.00 price target, saying:
“We believe Towerstream’s offloading opportunity could be a significant positive should it come to fruition, but given current valuations, we believe the opportunity is fully reflected in the company’s share price.” Towerstream stock closed at $5.02 on June 22 on the Nasdaq.
Grozovsky had previously slashed Towerstream’s rating to a “sell” from a “hold” on March 22, following the announcement of the AT&T/T-Mobile merger. He said that he believed that AT&T’s congestion may be lessened – if the acquisition goes through – as T-Mobile has more than 200 hotspots in New York City and more than 100 in San Francisco in its 45,000 nationwide hotspot portfolio.
“We believe that AT&T would likely use T-Mobile’s hotspots, if the merger closes, to offload some of its data traffic via Wi-Fi rather than Towerstream’s soon-to-be-built network,” said the March 22 note.
Thompson shrugged off Grozovsky’s analysis, noting that both companies need to relieve congestion immediately and that “no one stops doing what they’re going to do based on a possible merger.”
Echoing Thompson’s sentiment was Sanford Lee of Canaccord Genuity.
“[The AT&T/T-Mobile merger] does potentially remove one customer, but you know what? It’s not just [those two] having congestion issues, it’s pretty easy to see that,” he told Providence Business News, adding: “What [are they] going to do now to three years out? Their network is going to be so bogged down … it doesn’t matter if this deal closes.”
“There’s potential; I think the market’s waiting,” Lee said.
Similar to Lee, Scott Searle of Merriman Capital maintained a “buy” rating in his May 11 note and said he sees further upside to the $6-plus level.
“While Towerstream did not identify any potential suitors, we believe this includes players such as Google (which has been active in spectrum and broadband issues), as well as social networking and location-based advertising players,” Searle said, referencing a potential source of income that Towerstream has – almost accidentally – stumbled upon with its Wi-Fi network – selling location-based services.
“Every search on a Wi-Fi connection is inherently a location-based search because you know where they are within 500 feet anytime that you log onto the network, if [the user] opts in, they can get a more precise search,” Thompson said.
“We built the network for carrier offload – that’s the original plan, we’re sticking to it but secondly … there’s this whole other capability for these social network and group-buying capabilities,” Thompson said, noting that there is a lot of competition in the field – FourSquare, Gowalla, etc. – but they’re building apps that are phone-centric.
“What’s universal on all smartphones is Wi-Fi,” Thompson explained. “Wi-Fi is kind of the Switzerland of the smartphone. These are the technology wars, and it works the same no matter where you are in the world,” he added.
Since location-based services are still so new, however, its potential as a revenue stream is an unknown both to the company and analysts.
“I think there’s value in it [but] it’s hard to quantify,” Lee said. •
