Monday, July 26, 2004

Daiwa EuroTelcoblog No. 61: Monday 26th July, 2004 - Flarion's European puzzle piece
 
On Friday afternoon our US and European analyst mega-teams had a one-hour conference call with Flarion Technologies, to discuss the company, its technology, and future prospects. Based on the discussion, we think that the coming 3 - 4 months will bring some key announcements, which should move Flarion's Flash-OFDM technology from its current position as an "in-trial" dark horse to a recognized commercial reality. Specifically, we think the near future holds key developments in the following areas:

Enhancements and new applications

Based on our discussion, we believe the company is close to unveiling enhancements to the technology which should treble throughput (currently 1.0 - 1.5Mbps downstream, burstable to 3.2Mbps, and 300 - 500kbps upstream, burstable to 900kbps). Such performance enhancements, in the European broadband context, would put Flarion on a level pegging with the best of the consumer DSL/cable modem products currently available. We think that with such plentiful bandwidth and latency of below 50 milliseconds (in practice it is actually around 20ms.), Flarion users should be able to run a number of bandwidth-intensive applications (IM, VoIP, conferencing, streaming media, etc.) simultaneously in a mobile environment with no appreciable difference in experience to that of a high-bandwidth fixed broadband connection.

To date, much of the coverage of the company has been from the carrier perspective, particularly the Nextel trial in North Carolina. However, the company is also seeing increased interest from municipal public safety authorities (some of which are also examining/deploying Wi-Fi based solutions) on the heels of its trial with Motorola in Washington D.C. We think this experience may well be repeated in Europe in future. Additionally, reference was made to the potential for Telstra's test deployment in rural Australia to explore the possibilities for broadband backhaul in the airborne environment, which opens up some interesting scenarios for in-flight communications and entertainment alternatives.

Contracts and handsets

Flarion seems to be pursuing a strategy of getting the technology embedded in networks first, then using the carriers' leverage with handset suppliers to produce units in volume. The company remarked that it believes all it needs is one commercial order for handset production to kick off, and that such an order may not be far off. The chipset, developed in cooperation with Texas Instruments and Philips, is ready for production, and there is a prototype handset, which can be viewed in the factsheet (http://www.flarion.com/products/overviews/Handset_Product_Overview.pdf) and also in high resolution here (http://www.flarion.com/news/library.asp). It is interesting to note that Motorola is the networking partner for Flarion's public safety trial in Washington D.C., particularly in light of Motorola's apparent leadership position in integration of other technologies into GSM handsets (BT's Bluephone, expected Wi-Fi integration), and also its long-standing relationship with Nextel.

Europe

We noted that of all the announced trials and partnerships running around the world (Nextel in the US, Vodafone in Japan, Telstra in Australia, and SK Telecom/KT Corp/Hanaro in Korea), Europe is notable in its absence from the list. This, too, should change by year end, we were told, though there was absolutely no indication of who or where. Obviously, Vodafone is the first European operator to publicly announce a trial of Flarion (albeit in the Japanese market), and as such it would be tempting to pick it as the most likely candidate. However, with its own 3G launch just going live, we are not convinced. T-Mobile's position in markets like the Netherlands and the UK is more marginal than Vodafone's in any European market, probably making Flarion a larger differentiation opportunity than a cannibalization risk in these markets. Additionally, we think that given Deutsche Telekom's views on seamlessness of services articulated at CeBIT in March, Flarion is probably a more reasonable strategic match than in the case of Vodafone (for example, would Vodafone see the same strategic imperative to adopt a technology in Europe which would allow it a position in the residential broadband market?). T-Mobile's Venture unit is also a Flarion shareholder, and it is pure speculation on our part, but we think it may be possible that the company has pre-emption rights on trials in the European markets, or at least in markets where T-Mobile operates.

It is difficult at this point to envisage what approach T-Mobile might take in a trial deployment. However, with an estimated cost of deployment of around EUR5 per PoP in an existing W-CDMA network, and somewhere around EUR7 per PoP in a greenfield environment, we think that coverage of a market like the UK could be delivered for something under EUR400m (Germany would probably come in under EUR600m). With the performance enhancements expected, T-Mobile could deliver a mobile product superior to anything in the UK market currently, as well as (if it so desired) an attractive alternative to existing residential broadband technologies, which would represent an incremental revenue opportunity, either through bundling with T-Mobile subscription, or via a separate marketing/branding scheme.

No comments: