BW Online | May 22, 2001 | Light Fantastic, or Optical Illusion?

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MAY 22, 2001

COMPANY CLOSEUP

Light Fantastic, or Optical Illusion?
Broadband provider Terabeam's laser technology is earning raves. Can it win customers, too?

STORY TOOLS

The Nasdaq wants to delist broadband provider Rhythms NetConnections (RTHM ). High-speed Internet-access company Teligent (TGNT ) is on the verge of running out of cash. And WinStar Communications (WCII ), another provider of quick connections, declared bankruptcy on Apr. 18. So what makes Terabeam, a provider of high-speed Net access via wireless optical technology, think it can thrive where others have been struggling to survive?

In a nutshell, Terabeam is betting that its cutting-edge technology, a big bank account, and an experienced management team will get it through the tough times. Terabeam wants to create a nationwide wireless network that beams optical communications signals through the air instead of through glass fiber buried in the ground. Compared to other broadband providers, Terabeam claims its service, which is designed for small to midsize companies in major cities, is better, faster, and easier to hook up than services from competitors.

HIGH-RISE HUBS. That may be true. But so far, Terabeam has only a few customers in one city, Seattle. The company has scaled back expansion plans and it's unclear if the Kirkland, Wash., company will be able to roll out its wireless network on a national scale. "The technology holds a lot of promise," says Nick Maynard, an analyst who covers wireless technology for Yankee Group. "But it still comes down to execution, and making sure you can become a financially sustainable enterprise."

Terabeam's technology has been touted as an innovative way to beat the broadband bottleneck. Instead of waiting up to nine months for a hookup, a not-uncommon annoyance in the broadband world, Terabeam claims its customers can get hooked up to its network within four weeks. How? Terabeam houses its network hubs on top of high-rise buildings, which connect customers to the Internet via lasers instead of through buried fiber-optic cables. Customers communicate with Terabeam's hubs through a transmitter/receiver housed in their offices.

The transmitter, which looks something like a 1950s-style hair dryer, connects via cables to the customer's internal computer network. Terabeam's network eventually connects to other telecommunications providers in the city, usually at one location generally referred to as a "telecommunications hotel." With speeds equal to roughly 647 T-1 lines, which transmit data at about 1.5 megabytes per second per line, Terabeam can simultaneously beam four DVD movies, a videoconference, and another movie on high-definition television.

Until recently, Terabeam's work was the stuff of science fiction. The company had no paying customers. That changed in February, when Terabeam signed on the Four Seasons Olympic Hotel, Internet advertising firm Avenue A, Simpson Investment Co., the investment arm of a timber and paper company, and the Preston, Gates & Ellis law firm (as in Bill Gates Sr.). All are located in Seattle, where Avenue A, to cite one example, uses Terabeam to communicate between different office buildings. The Four Seasons is using Terabeam to provide Net access for itself and its guests.

DENVER NUGGETS. For now, Terabeam's service is only available in downtown Seattle. The company plans to launch its second network in Denver's downtown business area in June. On May 15, Terabeam announced that Barrett Resources, a natural gas and oil exploration company, would be its first customer there. By the end of 2001, Terabeam CEO Dan Hesse says Terabeam plans to expand to four more cities which he declined to name.

"If you'd asked me six months ago, everything was on growth," says Hesse, a former telecom executive from Lucent and AT&T Wireless. "Now there's a lot more focus on profitability, which means we'll probably end up growing more slowly, building out more slowly than we planned to do six or nine months ago, and focusing on how do we get profitable more quickly."

The good news for Terabeam is that it's well funded, with $537 million, including an eye-popping $450 million investment from Lucent Technologies. One year ago, Hesse showed his former Lucent colleagues what Terabeam was doing. Lucent was so impressed by the upstart's technology that it agreed to take a 30% stake, provide some of its optics patents, and the expertise of about a dozen Bell Labs scientists.

PROFIT DEADLINE. Lucent may have been impressed with its technology, but Terabeam still hasn't proven it can make money from its know-how. The biggest hurdle: Signing up enough customers before Terabeam runs out of money. Hesse says the company, which boasts 540 employees, has enough money to last about two years. But he won't say when the company will reach profitability or how many customers it needs to do so.

To bring in more money, Hesse says he is trying to license Terabeam's technology to communications carriers outside the U.S. Asia is a likely market. Last May, at the Asia-Pacific Summit in Seattle, Terabeam gave a demonstration of its technology to representatives from China, Taiwan, Japan and other Asian nations.

Still, with today's slumping economy, Hesse says he has pared Terabeam's expansion plans. Last year, Hesse was reported as saying he planned to have 100 cities by 2005. But the company now says that was wrong and won't give details beyond 2001. Even if Terabeam were to catch fire, some analysts wonder if its technology can scale. Jim Friedland, senior telecom services analyst with Robertson Stephens, says it's easy to manage a handful of customers, but "as you start rolling out large numbers of stations and sites, all of a sudden that changes."

CLOSING THE GAP. So far, Terabeam says it has had few problems with current customers. "We've had exceptionally positive feedback about the complimentary high-speed access [for guests]," says Brian Flaherty, Four Seasons general manager.

That's a good start. But the key, say analysts, is beating the land-based broadband companies to the punch. "Right now, 5% of buildings are hooked up to fiber -- but that will change," says telecom-industry analyst Jeffrey Kagan of Kagan World Media. "With every month and year that goes by, that increases." If Terabeam doesn't take off soon, its wireless network could become another casualty of the telecom meltdown.