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For wireless ISPs, small is beautiful

The lesson to be learned from these providers is that staying small and setting realistic goals could mean the difference between a long life or a short one.

Marlon Schafer beat Paul Allen at selling wireless Internet access.

Schafer had a $10,000 bank loan, a grain silo for an antenna tower and 10 neighbors in Odessa, Wash., willing to give wireless access a try. Allen, the multibillionaire co-founder of Microsoft, plowed a fortune into Metricom, a company that offered its $1 billion Ricochet network in 14 major U.S. cities.

Schafer's business may have been far less ambitious than Allen's, but as it turned out, he got the edge over Allen in one category: profits.

Ricochet closed shop in August, one of nearly 10 high-profile wireless Internet providers to close or file for bankruptcy this year. But Schafer's oddly named Odessa Office Equipment is still running, with 70 customers paying him $50 a month for high-speed wireless services.

"The other guys look at my stuff and all they see is that one of my radios is covered in bird crap," Schafer said. "But I'm making money--they're not."

Schafer's company is just one example of the more than 1,100 small U.S. wireless Internet providers that have managed to eke out a business amid rather grim economic conditions.

While the large flameouts from companies such as Metricom leave the impression that wireless Net access is dead, scores of smaller operators are sitting on profitable businesses that could become small gold mines if a predicted consolidation takes place in a few years.

The lesson to be learned from these small wireless companies is that staying small pays. By comparison, the go-go days of the Internet were marked by companies seeking to get large at all costs--and in many cases the cost was bankruptcy.

Online grocer Webvan, for example, embarked on a nationwide expansion in 1999 and 2000 even though it had not figured out a way to make a profit in any single market. It shut down in July.

Metricom built wireless networks in several large cities, even though individual markets came with relatively modest numbers of customers and large infrastructure costs. Its network cost $1 billion to build, but it had just 51,000 customers. It was sold earlier this month for $8.25 million.

Boom before the bust?
While they have been operating profitably in the shadow of larger players, the next two years may even be better for smaller companies such as Odessa Office Equipment as competition withers. Many of the failed wireless providers do not have much hope of coming back, and the major U.S. wireless carriers have shown but mild interest in buying these flailing companies.

"Why would a carrier buy a (wireless) ISP? There are lots of interim technologies, but there's only (so much) free cash flow," said Bruce Friedman, senior enterprise application director at Sprint PCS.

One exception is VoiceStream Wireless, which offered financial assistance to struggling wireless provider MobileStar. The wireless ISP, which briefly shut down during the cash crunch, has coffee chain Starbucks as its biggest customer and plans to outfit all of its 3,200 cafes with wireless Net access.

Instead, U.S. carriers are looking inward, spending billions of dollars to make their existing networks faster. VoiceStream completed a nationwide high-speed wireless network this year; other carriers see better networks within the next two years.

Analysts say the investment community may also be pulling back from funding wireless ISPs. Sarah Kim, a wireless and mobile technologies analyst for The Yankee Group, said although wireless ISPs had great plans, they fell short when it came to subscribers.

"I suspect the investment community is getting smarter about these business plans with every fatality," Kim said.

Small and flexible
Wireless customers are now finding their way to smaller local providers in towns such as North Aurora, Ill. Mike Anderson, chief Internet officer of Prime Directive, says he maintains 400 customers with 12 employees.

"We don't do anything we can't afford," Anderson said. "If you have all the income Microsoft has, sure, you can blow all the capital you want and still be way ahead of the game."

Most wireless ISPs own their own equipment, with costs of up to $5,000 to build a single tower. Depending upon the area, a tower can serve dozens to hundreds of people, according to Robert Hoskins, managing director of the Broadband Wireless Marketing Alliance.

Most of the failed, larger wireless ISPs built their networks first, spending hundreds of thousands of dollars--and only afterward realized that customer demand could not offset the initial cost.

"These (small) guys can't afford to do that," said Hoskins, adding that realistic goals have kept smaller wireless carriers around. "It has helped them survive."

While AT&T, Cingular Wireless and Verizon Communications have spent billions on radio frequencies, these smaller wireless ISPs pay nothing for airtime, broadcasting over a portion of radio spectrum that is free to use, Hoskins said.

Gradually, Hoskins said, more than 1 million wireless customers will access the Net as a customer of one of these smaller carriers. When this happens, larger companies will get interested.

"These sleeping dinosaurs are going to wake up," he said. "They'll end up paying for it later rather than sooner."