Fixed Wireless Business

Growing Beyond The Dock Of The Bay With NextWeb

How do you grow your wireless ISP business? According to NextWeb, keep everything hands-on, in-house, and build a upon two fundamentals—your ISP business experience and wireless expertise.

by Gerry Blackwell [March 19, 2002]

Fremont, California-based wireless Internet service provider NextWeb, Inc., recently announced with some fanfare that it had expanded its Bay Area coverage to three additional towns—Foster City, San Mateo and Belmont.

The new deployment brings to 22 the number of cities in the San Francisco-Silicon Valley region where NextWeb offers 2-to-10-Mbps Internet access services using its UNII-band local loop and 18GHz licensed-band backbone network.

The company has a footprint of over 200 square miles with 12 base stations. The network gives it access to some 10,000 small and medium-size businesses.

Conservative, yet opportunistic
What NextWeb did not say in announcing its latest conquest is that it would never have made the move into the San Mateo area if it hadn't first sold a major client on a lucrative 10-Mbps service.

It had no infrastructure in place when it made the sale. That client was the "anchor" that justified the investment in a base station and backhaul network. From there NextWeb sold other key businesses. Now it's ready to open the market to any SME in the area.

This is the way NextWeb will continue to grow.

"We're planning on growing the network during the rest of the year," says Chief Executive Officer and co-founder Graham Barnes. "But I'm not sure how many more base stations we'll deploy. It will be very opportunistic expansion. Where we see an anchor customer, that's where we'll go."

Being conservative and opportunistic in expanding its footprint is a key part of the business philosophy that has helped NextWeb find success where other WISPs—notably Teligent and Winstar which each spent millions building infrastructure in the Bay Area but never turned it on—have failed.

While its business and technology models are quite different, NextWeb has fiscal conservatism in common with another surprisingly successful WISP we looked at recently, Prairie iNet.

Like Prairie iNet, NextWeb currently has no debt and good cash reserves.

"That is a very significant point," says vice president of marketing and business development David Williams. "We built the network and paid for it as we went. We did not incur significant debt along the way. That is one of the reasons our long-term viability is very good."

Barnes adds, "If you leverage a business with high debt it allows you to do things you otherwise couldn't, but it also means there's a much greater responsibility to manage returns well. That's where a lot of people in the wireless industry have come undone."

Friendly financiers
NextWeb has managed to fund the business to this point from a relatively modest war chest of $5.8 million accumulated in three financing rounds between early 2000 and October 2001.

Seed money came from Kaiser Venture Development, a venture capital firm funded by Kaiser Permanente, America's largest not-for-profit health maintenance organization. The other major investor is Monet Capital, a Silicon Valley broadband and wireless specialist.

Today, NextWeb is very close to profitability—also like Prairie iNet in that respect. NextWeb should get there by early 2003, Barnes says.

What has the company done right to come this far so successfully? A few things Barnes and Williams say. But NextWeb has also survived some significant miscalculations, Barnes admits.

The right things start with the decision to deploy a network based on 5.8GHz UNII-band equipment from Adaptive Broadband—now Axxcelera Broadband Wireless Inc. of Santa Barbara, California—for the local loop, and 18GHz licensed band gear from DMC Stratex for the backbone.

Target practice
The company's strategy from the start was to target small to medium-size enterprises (SMEs) and provide an alternative to overpriced, telco-supplied wireline circuits between T-1 (1.55 Mbps) and DS-3 (43 Mbps).

NextWeb's value proposition is simple, says Williams. The company offers "more for less and delivers faster." Its T-1-class offering is a 2-Mbps service, which it sells for about $500 a month—30 percent more bandwidth for roughly half of incumbent local exchange carrier (ILEC) PacBell's T-1 price.

NextWeb actually provisions a 10-Mbps circuit to each customer and throttles it back to whatever bandwidth the customer requires. They can then add more as needed.

The company's 10-Mbps service costs approximately $2,500 a month—saving customers about $100,000 a year over comparable wireline offerings, Williams says.

NextWeb guarantees delivery within three to seven days—targets it never misses. And the company has provisioned customers much faster—in as little 24 hours when it was supplying ex-customers of companies like Northpoint that shut down their networks suddenly leaving customers in the lurch.

Given the target market, NextWeb felt the by now more familiar strategy of using 2.4 GHz for local loop and 5.8 GHz UNII-band for backhaul wasn't good enough. "This is a whole leap ahead [of 2.4/5.8GHz networks]," Barnes says of his network. "It's a much truer carrier-class design."

The OC-3 (155.52 Mbps) Asynchronous Transfer Mode (ATM) backbone is higher capacity and more reliable than other WISPs' backbones because it runs over licensed spectrum, Barnes notes. "We have zero issues with interference."

Companies that built UNII-band backbone networks either can't match the bandwidth NextWeb has or are constrained in what they can offer end customers. "One thing you need to be 100-percent reliable," Barnes says, "is the backbone."

He believes the company's hands-on, nuts-and-bolts management approach—its decision to delegate nothing to partners and keep control of the network from end to end, along with all customer interactions—is another key to NextWeb's success.

"It means we can maintain the quality and make sure what we deliver is the very best possible product."

Pain relief
The hands-on approach has made for occasional tough sledding, though. The company went through a "painful" time with the Adaptive Broadband gear at first, working through software fix after software fix and having to learn new network engineering skills.

"A lot of people started with products like the Adaptive Broadband equipment and just could not make them work," Barnes says. "But our engineering team was able to get their hands around it and work through the problems of how you make it work."

Today the Adaptive Broadband equipment—or at least NextWeb's deployment of it—is very reliable and stable, he says.

And supply is not an issue, despite Adaptive running into financial difficulty last year and being purchased by Santa Barbara, California-based Moseley, which formed Axxcelera.

Just to be on the safe side, though, NextWeb has been an alpha and beta tester for Axxcelera competitor Aperto Networks. It will also try out point-to-multipoint UNII-band equipment from Sunnyvale, California-based Western Multiplex Corp. when it's ready.

As well as the hands-on, keep-everything-inhouse approach, the NextWeb team that built the business had a strong mix from the start of both ISP and wireless experience and expertise, Williams points out.

"Some companies have come from just the wireless side and tried to learn the ISP business on the fly, or the other way around," he says. "Either way, you can run into problems. But the team we have here is very well rounded."

Self-adjustment
NextWeb did make some wrong assumptions. It thought broadband applications such as voice over IP to support distributed enterprises and corporate telecommuters would grow in popularity faster and drive high demand for bandwidth.

It initially estimated average customer bandwidth would top 3 Mbps by this point. In fact it's closer to 2 Mbps. Despite this, though, average revenue per customer remains high—at about $600 per month, Barnes says.

NextWeb also believed marketing campaigns would be enough to bring customers in the door. But it has found there's nearly always some direct selling and hand-holding required to acquire a new customer.

And finally, it assumed wrongly that reliable non-line-of-sight (NLOS) equipment that would allow it to increase its coverage density would be available by now. It's not. Mesh is the best hope for NLOS, Barnes believes, but available technology is not up to snuff yet for enterprise services.

Perhaps the best thing NextWeb did was to forge a relationship early on with Kaiser Permanente. Whether this was entirely by design or partly luck is not clear. NextWeb made deals that exchanged service and a stake in the company for rooftop access rights. It was a cagey move.

Kaiser is the second largest real estate owner in California and has holdings in many other areas as well. NextWeb now has guaranteed access to almost 1,000 buildings in 22 states. The Kaiser connection also led to the seed capital from Kaiser Venture.

And it has led to similar rooftop rights deals with other companies including Tenet Healthcare Corp.. The Tenet deal gives NextWeb exclusive access to some 90 buildings in the Los Angeles area.

Growing forward
As much as NextWeb is focused on growing its network in the Bay Area—and growing it gradually, opportunistically—more dramatic expansion is possible in the short term, and a definite part of the plan in the longer term.

The company has recently been involved in negotiations for acquisitions—to this point without success—and may go looking for capital to fund a strategic acquisition sooner rather than later.

But the more likely scenario, Barnes says, is for NextWeb to hold off raising more funds until it reaches profitability; "so as not to suffer market dilution when we get additional capital."

Then the plan is to move outside the Bay Area, probably first to Los Angeles.

"The five-year plan," Barnes says, "is to take the service out to other locations. And we have the rooftops. Right now we're focused on the immediate task. But what's great is that we can see some very logical steps forward."

Are there lessons here for other WISPs? We'd say so. Grow slow, stay out of debt, look for strategic investors, and then grow.

—End

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