In getting $600 million from MCI Worldcom and Paul Allen's Vulcan Ventures, Metricom Inc. (Nasdaq: MCOM) got more than just money to build out its wireless structure. It got time.
The provider of corporate networks and wireless Internet access also got an injection of life into its stock today. Shares of Metricom were up almost 50 percent in mid-afternoon trading following the announcement of investments from Vulcan and MCI.
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Metricom's choice was easy. The company faced a cash crunch serious enough to force the company to note in that it faced a "net capital deficiency that raise(s) substantial doubt" about continuing beyond this month, according to SEC filings. Given that Vulcan -- whose supply of money will never dry up as long as Microsoft stays in business and engorges Allen's stock holdings -- already owned 49.5 percent of Metricom, survival was probably never in doubt, but it still has to be a relief to announce a big name partner like MCI Worldcom (Nasdaq: WCOM).
The price is steep. Bringing in MCI for a 38 percent stake effectively turns Metricom into a joint venture between Vulcan and MCI, although it technically is an independent company. But when just 13 percent of your shares are held by the rest of the world, your freedom is obviously limited.
It's probably stretching things just a little bit to say this was a marriage by default. MCI Worldcom couldn't buy a major wireless player, but it needs to offer something to the business customers that generate the majority of its revenue, especially as rivals like Sprint and AT&T aggressively sell more into the space. Metricom faced the same problem, but magnified, since its entire business goes head-to-head against services like PCS.
Even with MCI and renewed Vulcan backing, Metricom will likely never be a huge player. Metricom's original Ricochet service of 28.8 kbs wireless speeds has just 27,000 customers in the areas of San Francisco, Seattle and Washington, D.C. The deal announced today would give Metricom money to expand its 128 kbs Ricochet2 into 50 metro regions, but it doesn't change the fact that wireless Internet is a niche service that has yet to produce a profit maker. The company lost $15 million, or 80 cents a share, on revenue of $4.2 million. Much of the red ink came from continual infrastructure building, a trend that's only going to accelerate in the next year.
Today's news release touts an International Data Corp. projection that predicts the mobile data market will reach 13 million users by 2005. Sounds nice; on the other hand, America Online alone has more than 16 million customers right now.
And there's no guarantee that Metricom will get a majority of those 13 million either. Sprint has already unveiled plans for a high speed wireless access service of its own, especially with its recent purchase of People's Choice TV, whose technology supposedly offers wireless access in megabit speeds. You can bet that other wireless companies, most of them better capitalized than Metricom, will jump into the pool also.
That's why the most critical element of today's announcement is time. Getting MCI on board and a revived commitment from Vulcan gives Metricom some breathing room to erect its network in time for the planned commercial offering next year. And the deal includes $350 million over five years from a wholesale contract with MCI. Getting capital money and locking up a nice revenue stream helps a lot -- but it hasn't produced a winner yet.
Metricom isn't the only big broadband investment of the day. Other issues:
The technology sector continues to see overall gains today despite some blue chip weakness. With two hours left in regular trading, the Nasdaq Composite Index was up 38.08 to 2601.52, the S&P 500 was down 2.08 to 1340.76, and the Dow Jones Industrial Average had fallen 87.39 to 10768.17. 22GO>