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Craig McCaw's Secret Plan


Ever since he was a boy growing up near Seattle, Craig O. McCaw saw the moneymaking potential of the public airwaves. His father, J. Elroy McCaw, built one of the first rock 'n' roll radio stations in the country, New York's WINS-AM, and netted about $20 million when he sold it in 1962. An inveterate practical joker, Elroy sent his then-12-year-old son into a New York bank to deposit the multimillion-dollar check from the deal. Years later, Craig scooped up licenses for radio spectrum and cobbled together the first nationwide cellular empire, which he sold to AT&T (T) for a neat $11.5 billion in 1994.

Now, McCaw is trying to get back on the air. After losing billions on several ventures in recent years, the reclusive entrepreneur is quietly making wireless investments that could be the start of a new empire that once again upsets the balance of power in the telecom industry. In March he acquired Clearwire Holdings Inc., a Texas company that provides wireless broadband service in Jacksonville, Fla., and holds the exclusive rights to radio spectrum in about 100 other U.S. cities. In April he snapped up NextNet Wireless Inc., a Minneapolis startup that makes gear for delivering high-speed Internet access through the air. And on May 3, he invested $36 million in Microcell Telecommunications Inc., a Montreal-based cellular provider that plans to introduce wireless broadband throughout Canada.

DISRUPTIVE FORCE

Although McCaw won't say what he's up to, the deals have again made him the talk of telecom. The wireless broadband technology he's investing in has the potential to be one of the most disruptive forces in the communications industry in years. Cable and phone companies have dominated the broadband business so far because offering speedy Net access has required multibillion-dollar investments in a sophisticated communications network. Now, however, the economics of wireless broadband could shatter that duopoly. For less than $10,000, an entrepreneur can start offering broadband within a limited area, typically an eight- to 10-mile radius. Already, that has made the technology attractive in lightly populated regions, where it can cost phone and cable rivals four times as much to offer service. Over the next two years, the costs of wireless broadband are expected to drop to the point where it can be competitive with traditional wired service anyplace in the country. "We think this is a tremendous opportunity for the telecom industry to change the paradigm," says John Marinho, a vice-president at equipment maker Lucent Technologies Inc. (LU).

McCaw may be just the right person to grasp that opportunity. While small companies have been using the wireless technology in isolated markets, McCaw is the first person who has the money, reputation, and skill to take on the current broadband players across the country on a large scale. With the Clearwire radio licenses, he could offer coast-to-coast Net service at speeds roughly the same as today's broadband. Although he may try to build his own national brand, he could just as easily offer wholesale service to existing players. One person involved in McCaw's new venture says the entrepreneur is trying to persuade Microsoft Corp. (MSFT) and Time Warner Inc. (TWX) to offer their MSN and AOL Net services over his network. Two insiders say he is trying to raise about $400 million, preferably in debt, to seed the venture. "He has a fairly grand strategy," says Dixon Doll, an early investor in NextNet who now has a stake in McCaw's venture.

What kind of price will the service carry? Although McCaw isn't saying, industry insiders think consumers will end up paying $40 to $50 a month. And that'll likely include free local and long-distance service, the insiders say, since adding voice service based on Net technology doesn't cost anything extra. The price tag for the same bundle from the phone company runs about $100. "He's going to get a lot of takers," says Steve Stroh, editor of Focus, an industry newsletter.

TROUBLING COMPETITION

The big telecom companies downplay the threat. They point out that wireless broadband has flopped in the past, despite massive investments from MCI Communications and upstarts such as Winstar Communications, because of high costs and technological problems. Wireless broadband "may turn out to be an effective technology in some rural areas, but we're not focused on it as a big threat," says Eric Rabe, spokesman for Verizon Communications Inc. (VZ) Instead, Verizon is dishing up cable-television service to compete with its cable rivals and is boosting the speed of its Net services. It's rolling out fiber-optic lines capable of hitting 30 megabits per second, well above the 1.5 megs expected from wireless broadband.

Still, wireless broadband may prove to be troubling competition for Verizon and its ilk. Already, thousands of small wireless Internet service providers are delivering different flavors of the technology to pockets of homes and businesses. "We're kicking sand in their face, but on the edge of the beach," says Carlton O'Neal, vice-president of marketing for Alvarion Ltd. (ALVR), which makes wireless broadband gear. The threat will grow more serious as chip maker Intel Corp. (INTC) and other industry heavies get behind a wireless broadband standard known as WiMax, which is expected to lower costs, drive demand, and extend the technology's reach. The first WiMax equipment hits the market next year, and by 2007 industry revenues could exceed $5 billion, according to researcher Visant Strategies Inc.

McCaw isn't waiting on WiMax, although he's likely to adopt the equipment when it becomes available. He's snapping up as much spectrum now as he can, just as he did when he started McCaw Cellular Communications in the 1980s. He's staying true to his roots, too. While most small wireless broadband providers in the U.S. are using unregulated airwaves for free, McCaw is investing in licensed spectrum that's less vulnerable to interference from other radio signals. Clearwire, for example, holds exclusive rights to airwaves that had been set aside for universities and schools' educational programs, and McCaw is buying up additional rights elsewhere, says Stroh.

McCaw will have easy access to equipment since he's getting into the hardware business, too. It's an unusual move, likely made to ensure he can hit the market quickly. Last summer, his aides traipsed to Mexico City to examine a service built with NextNet equipment. The gear beams broadband from base stations mounted on cell-phone towers to small modems that sit on users' desks as far away as three miles.

McCaw's venture-capital arm was impressed and took a stake in NextNet. That opened the door to McCaw's buying NextNet outright last month for an undisclosed sum. On May 5, McCaw joined in on Microcell's quarterly earnings call with investors and said he was particularly interested in how Microcell could offer a combination of wireless broadband and wireless voice service that bypasses phone companies completely. That is "probably a global phenomenon we're going to see a lot more of," he said.

McCaw needs a hit after two disappointing ventures. In the late 1990s he helped finance upstart XO Communications Inc. (XOCM) to take on the Bells in the local-phone business, and the value of his stake peaked at $5 billion. XO ended up in bankruptcy in 2002 after the telecom meltdown, leaving McCaw's holdings worthless. Another McCaw venture, Teledesic LLC, promised to put hundreds of satellites into orbit that would drape the globe with fast Internet access, but technological and financing problems have delayed those plans for years.

With McCaw's latest venture now coming into public view, he could attract more competition from companies using the same wireless technology. Sprint Corp. (FON) owns swaths of spectrum suitable for wireless broadband and could use it to roll out service. Nextel Communications Inc. (NXTL) recently bought MCI's spectrum and is testing its own service. Still, no other company is making the kind of financial commitment to the cutting-edge technology that McCaw is. Says one close associate: "It's typical of Craig to go fishing in unfished waters." If his instincts are right, he may finally come up with another big catch. By Andrew Park, with Steve Rosenbush, in New York


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