Tel Aviv-based Alvarion ( ALVR) is betting that WiMax will become the next big thing in personal mobile communications after Wi-Fi.That's why Tzvika Friedman, Alvarion's president and CEO, made a strategic decision to direct as many resources as possible to the development of the not fully standardized WiMax technology, even if it's biting into the broadband wireless company's financials. Because WiMax devices are not even commercially available yet -- and the process telecom operators have to go through to get WiMax frequency licenses is in many cases long and difficult -- Friedman expects a few more challenging quarters before Alvarion's WiMax sales pick up. But given that this WiMax industry leader is trading roughly around $7 a share, and rumors of a possible buyout are abundant, some believe Alvarion is the right long-term WiMax play. "I am very bullish on the WiMax potential," says Laura Goldman, president of LSG Capital, which is based in Tel Aviv and owns the stock. "I can see this market only expanding, so why not buy the stock when it's cheap?" With $200 million in annual sales and operating expenses totaling about half of that, Alvarion just about broke even in the second quarter this year, after hovering in the red in previous quarters. WiMax, which stands for Worldwide Interoperability of Microwave Access, is a wireless broadband technology that provides an alternative to wired broadband such as cable and DSL. WiMax provides fixed, nomadic, portable and eventual mobile wireless broadband connectivity without the need for direct line-of-sight to a base station. (Mobile means being connected at a driving speed, as with cell phones.) In the emerging WiMax realm, Alvarion still enjoys an 80% market share. But Friedman acknowledges this situation won't last forever.
Despite Alvarion's market leadership and advantage of being among the first to break through with WiMax, big-time competition is biting at its heels. Heavy-hitters such as Motorola ( MOT), Nokia ( NOK) and Siemens ( SI) are all engaged in WiMax technology development and are likely to challenge Alvarion's top spot sooner rather than later. Friedman expects this to start within two years. Just recently Sprint Nextel ( S) announced it is working on a fourth-generation (4G) wireless network using WiMax technology, creating the largest WiMax network in the U.S. Motorola, Samsung and Intel ( INTC) will build the network. Why, then, didn't Alvarion compete for the Sprint account? As Friedman explains, "I prefer choosing the battles I can win." At Alvarion's Tel-Aviv headquarters, Friedman told TheStreet.com about his vision of WiMax and his plans for the company. TheStreet.com: In what way is WiMax different than Wi-Fi or other 3G technologies? Friedman: Wi-Fi is limited to hot spots. If you move away from it, you lose your connection, and when you return to the spot you will need to go through the whole authentication process and hope to get a connection. WiMax's strength is its quality of service. It's basically a hot-spot connection covering an entire city. The current 3G technologies are not built to carry the amount of data we need. Operators that adopted 3G will have to scale to 4G technology through a long-term evolution process.
How can you be certain WiMax will really be implemented by the masses? Could there eventually be an overcapacity problem like there was in optical fiber broadband? There is a basic, unmet need for broadband wireless access. Not only does it answer the need of half of the people in the world to be connected to broadband Internet in rural locations without cabling, it also answers the growing need of the more advanced populations for being connected anytime, anywhere and on any device, while receiving quality, uninterrupted broadband services. What does WiMax's success depend upon? The success of WiMax depends on regulation and licensing. The market is not growing fast enough because regulators are taking time in approving and allocating spectrum. But regulators are starting to see the economic benefit of WiMax -- that it could change the competitive environment. After all, because of the way WiMax works, the cost per bit is 10 times cheaper than any other wireless broadband technology. So what is the size of the market right now? Research shows that the current market size for fixed or portable broadband wireless access is roughly $600 million and is expected to grow by 15% to 30% annually. By 2012, the market is estimated to reach $6 billion. The mobile broadband market, which is nonexistent at this point, is estimated to reach $20 billion in a few years. What is Alvarion's growth strategy? We want to continue leading the broadband wireless access industry in its transformation into WiMax. This will not be an immediate transition, first there are more areas in the world that need broadband access, before going mobile. We also want to dominate the personal
devices market by working with as big an ecosystem as possible. This means that we choose the best go-to market partners that will help us compete with the larger players.
How real are the rumors of Alvarion being on the market? It's always a possibility. We are not against it, if an offer comes ... the board will have to decide if it's a positive thing for shareholders. But you can't manage a company on an exit strategy. Nokia was smaller and grew on its own success, and that is what we aim to do. Can Alvarion become the next Nokia? We are certainty trying to follow the strategic moves Nokia did. For example, when it started GSM (Global System for Mobile Communications), it didn't win the big accounts, it chose the accounts it wanted to win. I can see ourselves moving from the current $200 million range of sales to a range of $500 million and $1 billion. Our valuation will come with the results. Why didn't you go for the Sprint deal? There are certain battles that we are not in a position to win, and Sprint was one of them. It was a tipping point for the industry, the battle between 3G leaders such as Qualcomm ( QCOM), Nokia and Ericsson ( ERIC) vs. the WiMax players Intel, Motorola and Samsung. We felt that in that certain point, the concessions we would need to make to win such a large account were not something we could afford. How do you explain Alvarion's repeated earnings loss? The whole WiMax project is a big investment. It's burning our financials because we are financing it on our own. From product development to the go-to-market, everything is financed internally. But I think it's a great, worthwhile investment.