The Spectrum Bubble?

Craig McCaw, the wise sage of wireless apparently once said, there is no such thing as bad spectrum. He might have been speaking metaphorically but apparently, the Wall Street is taking him for his word, and is fueling a “spectrum bubble.” The efforts by IDT Telecom to take its fixed wireless assets public, the XO deal and the run-up in First Avenue Networks stock are proof enough, that investors are all hopped up on spectrum…

Here is people’s exhibit #1…Back during the last bubble, there was a company called Advanced Radio Telecom Group, a me-too fixed wireless technology company that raised bazillions from folks like Qwest before doing the belly flop. It owned a lot of spectrum in the 600 MHz of spectrum at 24 GHz and 39 GHz frequencies. And then it changed its name to First Avenue Networks in 2002. Then they bought more spectrum, this time from another fixed wireless disaster – Teligent for $105 million.

xo spectrum

If anyone who remembers those wild-and-wooly days of the telecom bubble, (and I do), one thing I distinctly remember is that none of these fixed wireless services worked well if at all. Rain, fog and well all those technical issues that came in the way of a hype-inflated stock haven’t changed all that much. Nevertheless, for some odd reason people believe that it has.

Take a look at First Avenue Networks’ stock. It is currently changing hands for about $6 a share, giving the company a valuation of $359 million. Here is the rub – the company had $104,000 in revenues for all of 2004. This year, the sales are better – a whopping million dollars during the first three quarters of the year.

People’s exhibit #2: The big makeover of XO Communications. Carl Icahn took the wireline business private and paid about $700 million for it. That’s about seven times 2005 EBIDTA and 5.2 times 2006 EBIDTA. Someone who knows the wireline business well told me that this thing is going to suck in about $50 million in cash every year, unless he finds a buyer quickly. What is left of XO is the wireless broadband business, debt free and $300 million in cash.

Following the sale, the Company will retain its fixed broadband wireless spectrum assets and be uniquely positioned to be a leading provider of fixed broadband wireless services nationally as one of the largest holders of fixed wireless licenses in the 28 GHz-31 GHz spectrum range covering more than 70 U.S. major metropolitan markets…. the Company plans to launch its services on a wider basis in the near future.

The so called fixed wireless broadband company is what used to be the Nextlink Communications. Like all its peers in the fixed wireless space it had troubles including the technology problems. Those problems have not gone away, and as many have explained time and again, never will. So what XO just did – well put a “broadband wireless” lipstick on a pig, and left it to its own devices. If First Avenue can be valued at $350 million on a million dollar in sales, why not the same for XO.

I was reading a research report by an analyst who used language eerily similar to the one used during the bubble. (Okay total recall is the only advantage of getting old.) He claimed that the fixed wireless technology in higher frequencies worked now but offered no proof. My sources tell me otherwise, and I trust them more than some one shilling the stock.

It might be a bit self-serving but do read Broadbandits: Inside the $750 Billion Telecom Heist and figure it out for yourself.