Straight Path Communications Is (Significantly) Undervalued At Current Levels - After Recent Spike, Will Continue To Appreciate

By Hampshire Capital :

Company Introduction/Overview:

Straight Path Communications Inc. ( STRP ) is structured as a holding company with two subsidiaries; (1) a majority owned Intellectual Property holding company and (2) a wholly owned spectrum license holding company.

The spectrum holding company, Straight Path Spectrum Inc., is the principal source of value for Straight Path's shareholders.

With over 800MHz of bandwidth across the United States, Straight Path controls more spectrum than any other private entity in the country. STRP alone controls more bandwidth than is currently available for mobile broadband service in the United States today.

Source: Straight Path

Straight Path became a publicly traded company on August 1, 2013 when it was spunoff from IDT ( IDT ). In 2001, IDT bought what became STRP's spectrum licenses from the Winstar bankruptcy estate for $60 million. Those licenses provide for 39GHz bandwidth in every location across the entire country and 28GHz Local Multipoint Distribution Service (LMDS) bandwidth in many of the most densely populated areas, as shown by following license coverage maps:

LMDS License Coverage Map 39GHz License Coverage Map

Source: Straight Path

STRP has met the FCC's substantial service requirements for all of its licenses. The next license renewal date is not until 2016. The remainder of the LMDS licenses renew in 2018 and all of the 39GHz licenses renew in 2020. Straight Path will be easily able to meet the FCC's requirements for license renewal.

(click to enlarge)

Source: FCC

Regardless, Straight Path has more than enough time for recent developments in millimeter wave wireless technology to mature and deliver enormous value to Straight Path's shareholders.

Millimeter Wave Spectrum

The term millimeter wave is technically defined as referring to frequencies between 30GHz and 300GHz, but is generally used to refer to frequencies above 3GHz. It is a term that is rarely, if ever, heard in the discussion of the pending "spectrum crunch" caused by surging use of mobile data.

By comparison to millimeter wave, the FCC has auctioned an extensive amount of sub-3GHz frequencies as exclusive, wide-area licenses. While the upcoming AWS-3 license auction is the 97th such auction the FCC has held, only two auctions of millimeter wave frequencies have ever been held, both during the telecom boom/bubble around the turn of the millennium. In fact, wide area, exclusive licenses have only been made available in three millimeter wave bands:

  1. 24GHz/DEMS band licenses are almost entirely owned by FiberTower, a private millimeter wave spectrum holding company. The 24GHz licenses were originally granted directly to Teligent, a predecessor to FiberTower, and were not purchased at auction.
  2. 28GHz/LMDS is held by a number of different companies, each with a small number of licenses - but STRP is the largest holder, followed by a subsidiary of XO Communications. The LMDS licenses were originally auctioned in 1999 with total auction proceeds of $45M.
  3. 39GHz is almost entirely owned by Straight Path. Winstar Communications was the largest bidder for 39GHz when the band was auctioned in 2000 for total proceeds of $410M. IDT subsequently purchased Winstar and its licenses out of bankruptcy, and ultimately spun them out through Straight Path.

Historically, millimeter wave frequencies have received little attention because the propagation characteristics of millimeter waves are very poor compared to those of sub-3GHz frequencies. The laws of physics dictate that as frequency increases, wavelength decreases. In fact, millimeter wave frequencies are so named because they correspond to wavelengths of less than 1 millimeter, 1/1000 of the wavelength of 300MHz. This means that, given power restrictions, millimeter wave frequency signals tend to have a much shorter range than those transmitted in sub-3GHz frequencies.

On a more technical level, to overcome propagation challenges, millimeter waves must be focused into very narrow and highly directional signals. Consequently, in sharp contrast with sub-3GHz frequencies' broadcast utility, millimeter waves exhibit quasi-optical characteristics (think of a laser) and the transceiver must be 'pointed' at a receiver that it can 'see' to establish an effective communication link. The radios must be aligned manually and fixed in place. For longer distance transmissions, movement as slight as the sway of tower can disrupt a connection. Furthermore, these fixed radios must have a clear, direct line of sight (LOS) path between them for operation. Historically, the LOS restriction has been seen as a critical, gating limitation on the utility of millimeter wave frequencies for anything other than fixed, short range applications.

The laser analogy carries through to millimeter waves' qualities with respect to interference and obstructions as well. Whereas signals in sub-3GHz frequencies can penetrate all but the densest and thickest obstructions (such as highway tunnels and home basements), millimeter waves - like laser beams - can generally penetrate glass, but can be disrupted by relatively light obstructions such as foliage and reflect off of and refract around most walls.

Trading propagation characteristics away for frequency, however, does provide a unique characteristic to millimeter wave bands: they can support a very "fat pipe" for data transmission relative to sub-3GHz frequencies. Conceptually, frequency and data capacity are directly related. So having moved from frequencies as low as 700MHz to frequencies as high as 39GHz, the data throughput in millimeter wave frequencies is an enormous increase from what is possible in sub-3GHz. Millimeter waves can provide data rates far greater than even the fastest commercial fiber networks deployed today, easily supporting 1Gbps and more.

Wireless Fiber

In fact, the comparison to fiber data rates and throughput is so compelling that millimeter wave frequencies' sole historical utility was as a fiber alternative. During the telecom boom of the mid-90s and early 2000s, there was enormous interest in millimeter wave as potentially providing a cheap alternative to laying fiber over the 'last mile' of fiber networks, and an enormous amount of money was invested in such business plans. Specifically, millimeter waves were used by wireless competitive local exchange carriers to provide high quality, low cost voice, data and video telecommunications services primarily to small and medium-sized businesses through the combination of their own fixed local wireless point-to-multipoint broadband networks with leased long distance facilities.

Interest in wireless fiber alternatives drove the FCC to auction the 28 GHz band for Local Multipoint Distribution Services ("LMDS") in 1998 (Auction 17). The auction saw 864 licenses sell for gross proceeds of $834.2 million. In early 2000, the FCC held a 39 GHz auction (Auction 30) for 2,173 licenses that garnered $467.2 million in gross proceeds. Winstar, Straight Path's predecessor in interest, was the largest bidder in both auctions.

However, the LOS restriction and increasing fiber penetration, among other factors, ultimately proved to make the wireless fiber business model uneconomic. Although millimeter wave spectrum was capable of outperforming fiber, the then-available radios were not. The multi-gigabit per second promise of millimeter wave spectrum simply could not be realized by the millimeter wave radios available at the time. Compounding the problem, radios were expensive and installations were complex. Without exception the companies building out last mile services over millimeter waves, including Winstar, wound up in bankruptcy court.

Millimeter Wave after the Boom

After the late-90s telecom boom, with the rise of wireless communications, millimeter wave bands became widely used for wireless cell site backhaul.

Cell site backhaul connects the cellular base station with the backbone of the fiber network. Millimeter wave backhaul quickly became a go-to solution for carriers needing to backhaul from cell sites that could not be serviced by fiber in a cost-effective way. Carriers found that the LOS restriction was not a problem in the relatively undeveloped landscapes around most cell sites. Millimeter wave backhaul radios were initially deployed in point-to-point links that dedicate a backhaul radio to each individual cell site, and, later, with subsequent improvements in millimeter wave backhaul radios, in point-to-multipoint links that allow one backhaul radio to support a number of cell sites.

The old fiber alternative business model eventually resurrected itself as well. In the last decade, Wireless Internet Service Providers ("WISPs") have emerged, largely in rural areas or remote markets where fiber is not available.

Interestingly, one of the more recent applications of millimeter wave spectrum has been in the capital markets, where millimeter wave's performance is valued for high-frequency trading ("HFT"). HFT funds rely on high-capacity millimeter wave radios installed at financial exchanges to provide an incremental edge over market participants entering orders over fiber networks.

Today's Straight Path Spectrum, Inc.

Straight Path's spectrum business today produces de minimis stream of revenues - just over $1 million per year. These revenues are derived from spectrum leases to WISPs and wireless telcos for use in cell site backhaul applications. The backhaul business also has proven to be challenging for millimeter wave spectrum holders.

Demand for wireless cell site backhaul continues to be undercut by the availability of single link, common carrier licenses in the 18 and 23 GHz bands. The common carrier licenses are granted by the FCC for a single point-to-point link at no cost, making them an obvious choice for most cell sites given the alternative of an exclusive, wide-area lease from Straight Path (granting exclusive access to Straight Path's spectrum in a large geographic area). Although common carrier licensees are required to coordinate with respect to interference, interference is rarely a challenge at relatively remote cell tower sites. The exclusivity and wide-area coverage that Straight Path's licenses offer simply are not necessary for a single, isolated point-to-point link.

Straight Path's spectrum business is also still suffering from all of the historical problems its boom-era predecessors faced. Despite some significant enhancements, millimeter wave radios are still too expensive and lack the capacity to effectively compete directly with fiber to the premises in fixed broadband services. All require LOS and generally must be manually aligned, making installation expensive. The multi-gigabit per second data throughput necessary to compete with fiber are not possible with current radios.

Moreover, fiber penetration has increased significantly since the early 2000s, leaving very few areas of the country not reached by fiber or high-performance cable broadband. Legacy millimeter wave services have been pushed to the (relatively unprofitable) corners of the U.S. broadband market.

The crux of the problem, though, is not that millimeter wave spectrum is physically incapable of competing with fiber. Theoretically, millimeter wave wireless services can outperform even the fastest fiber connection. Straight Path's problem is that its millimeter wave spectrum is massively underutilized by currently available technology. Its lack of current revenue is a direct reflection of that fact.

Moore's Law (of Spectrum):

- NYU-Wireless (January 15, 2015)

- Qualcomm (January 15, 2015)

In 1965, Gordon Moore predicted that the number of transistors per square inch on integrated circuits would double every year for the foreseeable future. Moore's law does not immediately apply to wireless technology. That said, mobile communications have evolved in a similarly predictable manner. Wireless technology is constantly evolving to provide faster, more reliable services to an ever-growing number of users. This technology, however, is bound by the physics of its medium - the frequency utilized. The wireless evolution, then, has been a constant push towards higher frequencies that has periodically redefined what constitutes spectrum usable for mobile communications.

Straight Path has enormous potential today because Moore's law, for lack of a better term, has finally caught up with millimeter wave spectrum.

Cellular Service over Millimeter Wave by 2020 - "Millimeter Wave Mobile Communications for 5G Cellular: It Will Work!"

As the FCC has recognized, the rise of mobile data use over the last eight years has created an increasing shortage of spectrum below 3 GHz in the United States. The record prices of spectrum in the (1.7/2.1 GHz) AWS-3 band at the FCC's recent auction are clear testament to that fact. The AWS-3 auction was itself an FCC response to the spectrum shortage. At the direction of President Obama, the FCC's 2010 National Broadband Plan sought to make 500 MHz of additional spectrum available for mobile broadband by 2020. Lower band spectrum is in such short supply that the FCC is struggling to meet even a fraction of that goal.

Further compounding the problem, wireless subscribers are demanding more in terms of performance. Residential and commercial broadband connectivity is setting an increasingly high bar for wireless services. In certain cities, AT&T, Comcast, and Google are now offering residential fiber connections with gigabit per second data speeds. Data speeds in excess of 100 megabits per second are already available to most wireless subscribers at home. In contrast, LTE mobile data speeds rarely exceed 20 megabits per second.

Lower frequencies are simply not capable of delivering the fiber-like performance that wireless subscribers are demanding. Combined with the network capacity problems carriers are already facing, it has become clear that wireless networks need a new medium. FCC Commissioner Jessica Rosenworcel describes the situation today as follows:

- FCC Commissioner Jessica Rosenworcel (October 10, 2014)

This type commentary from an FCC Commissioner is completely unprecedented in the recent history of millimeter wave spectrum. To fully describe the revolution going on in millimeter wave, it is necessary to take a brief step back and understand why millimeter wave has never received this kind of attention before now, and what has happened to change things.

The long-held assumption in the mobile telecom industry with respect to millimeter wave spectrum is that a millimeter wave signal will lose strength through air ("free space", in industry parlance) much more quickly than a signal at frequencies below 3 GHz. The magnitude of this difference is such that millimeter wave spectrum has long been assumed to be unusable for mobile services.

While it is true that millimeter wave free space loss is nominally unusably high, there are two critical assumptions underpinning the applicability of that calculation to actual deployment scenarios: (1) that the same number of antennas is used for testing both frequencies and (2) that the antenna(s) used is or are omnidirectional. As it turns out, both of these assumptions treat millimeter wave spectrum unfairly.

As a rule of thumb, antennas must be one-half the wavelength of the signal frequency. Millimeter wave frequencies correspond to extremely short wavelengths - approximately one millimeter in length. Accordingly, millimeter wave antennas can be much smaller than the antennas used by traditional cellular frequencies: by comparison, wavelengths in the 1.9 GHz frequencies are approximately 15 cm and wavelengths in the prized 700 MHz bands are more than 40 cm. In fact, many millimeter wave antennas can fit in the same space as a single lower frequency antenna. This is important because the effect of adding antennas is that free space loss is greatly mitigated. In the free space loss model described above, simply accounting for the fact that real-world millimeter wave signals can benefit from the use of multiple antennas where only one can be used in lower frequencies nearly eliminates the much lauded difference in propagation.

Moreover, using multiple tiny millimeter wave antennas allows for the possibility of directional transmission and reception. Arranging multiple, tiny millimeter wave antennas into a grid pattern or array creates constructive interference that results in a very narrow, powerful signal. This process is known as beamforming. Assuming the use of beamforming antenna arrays even further mitigates historically prohibitive millimeter wave free space loss.

Beamforming is not new to the fixed wireless world, where highly directional radios have been used for years. However, current radio technology in millimeter wave requires manual alignment of the transceiver and receiver. The breakthrough technology is the use of so-called "adaptive antenna arrays" which make the historically manual alignment process automatic and allow for near-instantaneous adjustments to the focus of the antennas. Ted Rappaport of NYU-Wireless and his colleagues succinctly describe adaptive antenna arrays as follows:

- Ted Rappaport / Wonil Roh / Kyungwhoon Cheun (August 27, 2014)

As Rappaport and Co. also point out, these adaptive array antennas have been used for years in satellite operations. Bringing them to terrestrial applications, to mobile terrestrial applications, is groundbreaking. Adaptive arrays of lower frequency antennas would not fit in a mobile handset. The unique combination of the tiny size of millimeter wave antennas and "spectrum crunch" that has developed over the last five to seven years is driving new applications of existing, tried and true technology.

Crucially, the cost of millimeter wave radios has also recently become more commercially viable. It is now possible to package an entire millimeter wave radio on a single CMOS or silicon-germanium chip.

These technologies have already been commercialized for unlicensed wireless. Wireless Gigabit ("WiGig") is an unlicensed wireless service utilizing the 60 GHz band, a huge block of spectrum in the 57-64 GHz range that the FCC has designated for unlicensed use. The massive amount of bandwidth available in 60 GHz (by comparison, traditional 2.4 GHz WiFi operates using just 60 MHz) allows for data speeds up to 7 gigabits per second. IEEE's 802.11ad standard is WiFi for 60 GHz, and WiGig/802.11ad devices and routers will begin shipping next year.

- Intel Corporation (January 15, 2015)

While this is an important confirmation of the effect of advanced antennas and the commercial demand for millimeter wave wireless service, unlicensed products are relatively unsophisticated and do not have the full range of capability necessary for an outdoor, wide-area telecommunications network. With millimeter wave frequencies in particular, obstructions are much more likely to occur using a mobile device in an outdoor setting. Furthermore, the LOS restrictions long associated with millimeter wave frequencies are not particularly bothersome indoors, but are completely unacceptable for a commercial cellular network.

The final key to making millimeter wave cellular services possible is non-line of sight (NLOS) capability. Thanks to the work of some of the country's leading wireless engineers in academia and private industry, that problem also now has a solution.

In 2011 and 2012, consistent with work on millimeter wave antenna technology, studies (conducted first by researchers from the University of Texas at Austin and NYU-Wireless) began to look closely at millimeter wave propagation in urban environments. Employing mechanically directional antennas, researchers gathered extensive data on millimeter wave reflection, refraction, and penetration off of, around, and through buildings and other obstructions. The results of this testing were so compelling that Ericsson, among those conducting tests, declared the "NLOS myth [about millimeter wave] is crushed."

- Ericsson (February 2013)

Researchers found that in urban environments, millimeter wave signals tend to ricochet off of obstructions and consistently find a path into areas nominally out of sight of the transceiver. The best analogy is found in a quasi-optical characterization of millimeter wave propagation: unlike sub-3 GHz frequencies, millimeter waves consistently reflect off of buildings and other obstructions in the same way light reflects off of a mirror, establishing connections far around corners and over rooftops. Put simply; using millimeter wave spectrum, LOS can be achieved even in nominally NLOS situations.

Combining that characteristic with adaptive antenna arrays, the "sweeping" beams of a transceiver and receiver can identify not just a LOS link but also, should LOS not exist, the strongest available reflected or refracted signal.

With NLOS connectivity possible in millimeter wave, full deployment of a commercial-grade millimeter wave cellular system is now technically feasible. This fact was announced to the world by Ted Rapport's NYU-Wireless with a whitepaper titled "Millimeter Wave Mobile Communications for 5G Cellular: It Will Work!" (NYU-Wireless, Feb 2013) .

The global wireless telecom industry took notice. Perhaps due to its unique situation as a chipmaker, mobile handset manufacturer, and a network equipment manufacturer, Samsung ( SSNLF ) quickly emerged as a leader in millimeter wave mobile technology.

Samsung announced one of the first tests of millimeter wave mobile technology in early 2013. Using 800 MHz (bandwidth) of 28 GHz (carrier frequency) spectrum, the rudimentary proof of concept system provided data rates of over 1 gigabit per second to a mobile radio in LOS and NLOS situations up to 2 km away from the base station / cell site. That system has since been refined. The most recent tests Samsung has disclosed , again using 28 GHz, provided up to 7.5 gigabits per second to a mobile terminal (handset proxy) installed on a van. The millimeter wave cellular prototype maintained connectivity even with van traveling at more than 100 km per hour. Not bad for fixed, LOS-only spectrum.

Providing that connectivity to existing mobile devices is also very feasible. Samsung has already investigated installing (28 GHz) millimeter wave radios in its Galaxy Note II phone. Two millimeter wave adaptive antenna arrays, each consisting of 32 individual 28 GHz antennas, can coexist with existing cellular chipsets in the Galaxy Note II. Samsung installed the arrays at the top and bottom of the phone to minimize user interference.

4G/LTE Small Cell Deployments

Although millimeter wave is easily compatible with existing mobile devices, it does not fit so well in existing cellular networks. Even though antenna array-enhanced millimeter wave free space propagation is comparable to spectrum currently used for cellular and consistent NLOS service can be consistently established, over long distances the likelihood of blockage ("shadowing") is much greater using millimeter wave spectrum. Today's "macrocells" provide service for users who are up to 5-10 km away from the cell tower. Even with high-gain adaptive antenna arrays, the early indications are that a mobile user will have to be within 1-2 km of a millimeter wave base station to receive service. Cell sites need to be smaller to accommodate millimeter wave spectrum.

As it happens, existing wireless networks are also evolving as a result of the "spectrum crunch." Due to the high cost of spectrum, carriers are increasingly adding additional cell towers or sites covering smaller areas for the purpose of adding network capacity. Incidentally, this process of "densification" through the deployment of "small cells" will also be transformative for Straight Path's legacy wireless backhaul business.

Spectrum has become a scarce resource, and small cells allow carriers to multiply the capacity of their existing spectrum licenses. Small cells take the idea of the macrocells that are widely deployed today and shrink it from a 5-10 km in radius to something much smaller, generally about 1-2 km. This allows the same bandwidth to be deployed over fewer users, and so increases the network capacity available per user in any given area. By dividing the cell size, carriers can multiply network capacity. Verizon describes the small cell as follows:

- Verizon (May 21, 2013)

Late in 2014, FCC's AWS-3 auction saw competition between major wireless market participants drive the price of spectrum to record highs. Following the auction, Verizon announced that auction prices for spectrum were unattractive compared to the cost of adding similar capacity through network densification. Verizon accordingly bid for less spectrum than it would have otherwise acquired, and will be deploying small cells for supplemental capacity in key markets.

Sprint is similarly deploying small cells, although less for capacity and more to accommodate the poor propagation of its 2.5 GHz spectrum (Clearwire's spectrum). Sprint CEO Marcelo Claure recently spoke of a "massive densification" of Sprint's network through the deployment of small cells.

For supplemental network capacity, T-Mobile is also densifying its network. Deployment of small cells will allow it to roll out commercial-grade LTE services in the unlicensed 5 GHz band. Interestingly, 5 GHz has many of the same propagation challenges found in millimeter wave, and T-Mobile is looking to small cells for that very reason.

The small cells that carriers are rolling out today are ideal for an eventual millimeter wave cellular deployment. Once access rights to the building rooftop or lamppost ("real estate") has been secured and basic infrastructure installed, the LTE radios in place today can be easily replaced with millimeter wave antennas. Over the next several years, small cell deployments will set the stage for commercialization of millimeter wave mobile services.

Millimeter Wave Backhaul for Small Cells

The same low-cost, high performance millimeter wave radios developed for mobile services will also catalyze the legacy fiber-alternative business case.

Straight Path's millimeter wave spectrum today is greatly hampered by the lack of high-performance, low cost radios providing for NLOS capability. Billions of dollars in R&D around the world is now focused on resolving that issue. NLOS backhaul is now regarded as highly reliable. Though the funding is driven by mobile ambition, the new technologies will also allow millimeter wave to compete directly with fiber.

Prior to the recent developments that have alleviated the legacy LOS restriction on millimeter wave, wireless backhaul compared poorly to fiber. Ericsson describes the problems with using the old LOS-only, Point to Point wireless backhaul solutions for small cells as follows:

- Ericsson (February 2013)

Millimeter wave backhaul is an obvious solution for small cell sites. It removes the right of way and construction problems with running fiber to every lamppost and building hosting a small cell base station, and provides better than fiber data rates and throughput. The potential implications of NLOS backhaul in millimeter wave are enormous. Millimeter wave could become the silver bullet for small cell backhaul, providing the data rates of fiber combined with the NLOS capability of lower frequency bands.

NLOS millimeter wave also has the potential to open an opportunity for wide-area, exclusive millimeter wave spectrum leasing. In urban environments, where the small cell and NLOS millimeter wave backhaul both find maximum utility, multiple carriers deploying a large number of base stations backhauled by reflection or refraction will be forced to acquire or lease wide-area, exclusive licenses.

U.S. network operators will have look to one of the three millimeter wave bands currently licensed on an exclusive basis. Straight Path will be one of only a few companies (the two others are privately held XO and FiberTower) that will be able to provide the nationally available exclusive area licenses necessary for millimeter wave small cell backhaul. Straight Path effectively holds the keys to high throughput wireless backhaul of a full scale small cell network such as that which Verizon, Sprint, and T-Mobile will be rolling out over the next several years.

Straight Path's de minimis stream of spectrum revenues today will grow appreciably as small cells create large-scale leasing opportunities in key markets.

5G - Next Generation Mobile Wireless

Although cellular networks are becoming compatible with millimeter wave cellular services, millimeter wave mobile broadband represents a categorically different service offering than LTE in terms of performance. While AT&T users in New York City today can expect to receive 10-20 megabit per second data speeds, Samsung's early 2013 tests demonstrated that multi-gigabit per second data speeds are achievable using millimeter wave spectrum for mobile broadband. Millimeter wave latency is also far lower than existing networks, likely less 10 microseconds compared to more than 50 microseconds for current LTE services . The improvement in performance is so dramatic on every metric that Samsung labeled its millimeter wave mobile broadband technology as "5G" cellular service.

Samsung's early tests of millimeter wave mobile technology has sparked an arms race of sorts, a global push by the telecom industry to develop a next-generation wireless service that offers performance and network capacity categorically better than existing LTE services.

Following Samsung's publicly announced millimeter wave test in early 2013, other carriers and chipset OEMs disclosed work in millimeter wave bands. The original papers published by Samsung researchers and NYU-Wireless had topped the most read charts of the IEEE (a benchmark for the telecom industry), and buzz began to catch on at industry events. Conversations among engineers focused on the potential throughput that millimeter wave bands could provide, and the details of the technology that could make mobile broadband possible in such frequencies.

In its press release announcing its successful millimeter wave tests, Samsung targeted 2020 for a commercial deployment of the technology, and the aggressive timeline drove other players to act quickly. Alcatel-Lucent's ( ALU ) Bell Labs dedicated 100 people to a 5G program. Huawei committed $600 million to 5G R&D over the next 5 years. Qualcomm ( QCOM ), Intel (INTC), Ericsson (ERIC), and Nokia (NOK) all took steps towards 5G. The world's most advanced carriers, SK Telekom (SKM) in South Korea and NTT DoCoMo (DCM) in Japan, also began investigating millimeter wave frequencies as a possible basis for their next generation networks.

5G gathered even more momentum into 2014, spreading well beyond IEEE and the engineers into corporate strategy and regulatory policy, as well as more mainstream press.

In January of 2014, the South Korean government pledged $1.5 billion to accelerate development of 5G, specifically millimeter wave, for commercialization by 2020. SK Telecom has since preempted that pledge with plans of its own to have a test network built for the 2018 Olympics and a full-scale roll-out of a commercial 5G network by 2020.

In February of 2014, Intel announced a millimeter wave antenna operable on STRP's 39GHz bands that is even more technologically advanced than Samsung's. Intel claimed that with its achievement and the R&D to date done by other OEMs and Telcos, the barriers to millimeter wave mobile broadband were "only regulatory issues, not technological ones" (MIT, Feb 2014) .

In June, NTT DoCoMo announced 5G test bed project with 6 mobile vendors - Alcatel-Lucent, Fujitsu, NEC, Ericsson, Samsung, and Nokia - with the support of the Japanese government. The test bed will focus on moving mobile broadband into higher frequencies, with a view that such an advancement will underpin any fifth generation cellular service. Samsung would continue to experiment with 28GHz, while the other vendors would be exploring lower millimeter wave bands. At this point Samsung, NTT DoCoMo, and Intel have all announced an early 2020s commercialization target for millimeter wave mobile broadband.

NTT's test bed bore fruit quickly, with Ericsson successfully testing a 5.8Gbps connection in July. The company showcased the test as demonstrative of its vision for the future of wireless. Shortly after that test was announced, SK Telecom and Ericsson signed an MOU focused on coordinating their respective 5G research programs.

In October 2014, Samsung's 5G team announced a continued advance towards commercialization with successful outcomes from their most advanced millimeter wave tests to date (utilizing 28 GHz spectrum):

- Samsung Electronics (October 15, 2014)

So far into 2015, the momentum behind 5G/millimeter wave has continued to build. 5G was a key topic at the Mobile World Congress in Barcelona, where SK Telecom , Samsung, Korea Telecom , NTT DoCoMo , Nokia, and others showcased 5G/millimeter wave systems.

Around MWC, Nokia and NTT DoCoMo announced a successful test of a 5G/Millimeter wave outdoor mobile service that provided data rates as high as 4.5 gigabits per second. NTT DoCoMo recommitted to deploying 5G services in time for the 2020 Tokyo Olympics.

Most recently, 5G/millimeter wave is part of the justification for the mega-billion dollar Alcatel-Lucent and Nokia merger.

Regulation and Standardization

The enormous amount of industry focus on millimeter wave mobility has driven a regulatory response.

In September 2014, the FCC put consideration of a Notice of Inquiry into mobile broadband over frequencies 24 GHz and above at the top of its October 17th open meeting agenda, with the stated intent to fully support ongoing development in the bands. FCC Chairman Tom Wheeler blogged about the proposed NOI the same day, commenting:

- FCC Chairman Tom Wheeler (September 26, 2014)

On October 14th, FCC Commissioner Jessica Rosenworcel echoed Wheeler's support in a speech at a 4G Americas event in DC. Her comments show the 8th Floor at the Commission is very much paying attention to millimeter wave:

- FCC Commissioner Jessica Rosenworcel (October 14, 2014)

At the October 17th Open Meeting, the Commission unanimously approved the NOI with strong expressions of support for the item. The FCC's NOI on millimeter wave mobility is both a capstone for the progress that has been made in millimeter wave wireless since R&D seriously began just three years ago and a very important guidepost for future development.

Concurrently with the NOI, the FCC also passed important regulations that greatly eased the regulatory hurdles associated with small cell deployments. As well as helping carriers with their current plans for widespread small cell deployments, the small cell order was another step that helps set the stage for the FCC's vision of millimeter wave mobility.

- FCC Commissioner Jessica Rosenworcel (October 17, 2014)

In early 2015, comments poured in on the FCC's NOI proceeding. Almost every significant player in the U.S. wireless telecommunications industry participated. Comments highlighted the technical feasibility of mobile services in the millimeter wave bands. Even the carriers, ever conservative on new generations of wireless, were cautiously supportive.

  • Samsung:"Unlike existing commercial mobile services, 5G networks will rely on higher frequencies, wider bandwidths, and higher- density deployments. For this reason, and as detailed further below, Samsung strongly supports proposals by the Commission to make spectrum above 24 GHz available for 5G."

  • NYU-Wireless: " We conclude that, barring outage events and maintaining the same physical antenna size, mmWave propagation does not lead to significant reduction in path loss relative to current cellular frequencies… and, in fact, path loss may be improved over today's CMRS systems using directional steered antennas."

  • Ericsson:"The mmW bands above 30 GHz hold promise for providing very high peak data rates in specific areas where traffic demands are very high at relatively short range, such as high-definition video communications."

  • Intel:"We believe that innovation in millimeter wave (mmW) access and backhaul technologies over the past 20 years has reduced cost, volume and power consumption to the point where mmW mobile service in the bands above 24 GHz is now feasible."

  • Qualcomm:"Qualcomm's technical analyses of the spectrum bands above 24 GHz show that it is feasible to deploy mobile services in these bands."

  • Nokia:"The availability of huge bandwidth coupled with the use of large antenna arrays at both transmitter and receiver can make [spectrum above 24 GHz] attractive for deploying high capacity 5G networks."

  • Huawei: "Huawei believes that future mobile services can operate in bands above 24 GHz under several different scenarios. These include independent operations (i.e., exclusive use of mmW spectrum assignments) and/or in-concert ("complementary") with other wide-area mobile network frequency spectrum (e.g., as a "supplementary component carrier" in lower 6 GHz wide-area networks)."

  • T-Mobile USA: " Higher frequency spectrum such as the bands above 24 GHz could potentially be used for the provision of mobile services. The characteristics of this high frequency spectrum make it attractive for addressing network capacity issues in congested areas."

  • AT&T: " Evidence of the industry's concurrence in this action can be seen in its overwhelming support for the Commission's proposal to examine the possible uses of millimeter wave ("mmW") bands for mobile use."

Although many participants refrained from commenting on particular bands, those who did comment were strongly supportive of 5G mobile services operating on the 28 and 39 GHz bands:

  • Samsung:"Participants in this proceeding, including existing licensees in the bands under consideration, have echoed Samsung's support for a licensed 5G regime in the 28 and 39 GHz bands."

  • NYU-Wireless:"The LMDS and 39 GHz bands each have incumbent licensees and are common with Ofcom's current inquiry. Thus, we recommend these bands for near term rulemaking action."

  • Qualcomm:"Qualcomm encourages the FCC to promptly issue band-specific Notices of Proposed Rulemaking proposing to exclusively license for mobile broadband services large blocks of spectrum currently assigned to the LMDS, 39 GHz and 37/42 GHz services."

The FCC's proceeding prompted a reaction in Britain, where in January 2015 Ofcom (the British telecom regulator) initiated its own call for input on the use of spectrum above 6 GHz for future mobile communications. In April, Ofcom published a summary of findings from industry comments. The bands identified as suitable for mobile services included 28 GHz and 39 GHz, as well as immediately adjacent frequencies.

These first regulatory actions are reflective of the wireless industry's standardization process, where industry participants come together to decide on technical parameters for new wireless technologies. This process, although non-binding, is very structured and is organized into several forums, the most prominent of which is the 3rd Generation Partnership Project ("3GPP"). Bringing together industry participants (including Samsung, Ericsson, Nokia, Huawei, Intel, etc.), 3GPP has specified every recent wireless technology, including GSM, GPRS, EDGE, W-CDMA, HSPA, LTE, and LTE-A.

Over the next several years, in research and development centers around the world 5G/millimeter wave technology will continue to be refined. In 3GPP and other working groups, the telecommunications industry will coalesce around technical specifications for 5G / millimeter wave commercialization issues such as air interface and interference management. These technical specifications will ultimately be submitted by 3GPP to the International Telecommunication Union ("ITU") for incorporation into its International Mobile Telecommunication ("IMT") standards for 2020 (" IMT-2020 "). IMT standards have defined both 3G and 4G, and 5G is expected to be no different.

Following the final release of IMT-2020 specifications, advanced operators such as NTT DoCoMo, Korea Telecom, and SK Telecom will be ready to deploy full-scale commercial millimeter wave services. The U.S. operators typically lag behind Japanese and Korean carriers by one to two years, putting U.S. millimeter wave cellular services in operation by the early 2020s.

Millimeter Wave Small Cells - the Millimeter Wave Access Network

- Samsung (January 15, 2015)

By the early 2020s, the network densification that U.S. mobile network operators are beginning now will be mature and the small cell infrastructure necessary for millimeter wave cellular services will have been deployed. Advanced millimeter wave wireless will already backhaul many of these small cell sites. Conceptually; for deployment of next-generation millimeter wave mobile services, network operators will just have to add millimeter wave access radios to existing cell sites. Base stations providing millimeter wave wireless access service backhauled by millimeter wave wireless will form a mesh network of small cells providing ultra-high speed, low latency wireless service.

Just like every previous generation of wireless technology, such 5G millimeter wave deployments will start in urban environments and develop along major thoroughfares including the interstate highways. Existing macrocell towers will remain in place, continuing to provide LTE services that provide overlay coverage to low-priority markets and rural areas. Eventually, the need for that macrocell overall will diminish, particularly in heavily populated areas.

Due to millimeter wave's poor propagation through substantial obstructions such as buildings, millimeter wave cellular service will not be directly available on a consistent basis indoors. For indoor service, WiFi will continue to be the primary service for wireless users. Today, 85% of mobile data traffic occurs over WiFi. With U.S. carriers now offering Voice over WiFi, the outdoor/indoor split of the wireless network is already nearing completion. Millimeter wave cellular services will track this trend.

Fixed - Mobile (Infrastructure) Convergence

Although millimeter wave wireless will not be directly available for most indoor users, it could well be the backhaul for indoor wireless / WiFi.

Millimeter wave access networks, once deployed, will provide wide-area, multi-gigabit per second wireless broadband. These networks will have the capacity to host fixed services as well as mobile.

Today, fixed (commercial and residential) broadband access is almost exclusively provided by wireline (fiber and cable) services. Deployment of an extensive millimeter wave access network would eliminate the need for separate wireline and wireless infrastructure, a very attractive proposition for either a new entrant into the fixed broadband business (e.g. Sprint (S), T-Mobile (TMUS)) or a new entrant into the telecom industry altogether (e.g. Google (GOOG) (GOOGL)). Revenues today associated with separate wireline and wireless divisions could be consolidated, enhanced by a higher performance broadband offering, and driven over a unified wireless cost structure.

There are several examples of early steps towards this structure in the telecom market today. Verizon (VZ), for instance, currently offers an "LTE Internet (Installed)" product in markets where it has excess network capacity. Subscribers receive a home antenna that can be installed on the outside of a house, not unlike satellite dishes for more widely-adopted Direct Broadcast Satellite services. This service is presently limited to the few markets where Verizon happens to have low utilization, and even there cannot compete directly with fiber. A millimeter wave access network will have virtually unlimited capacity and offer better performance than fiber to the premises at comparable or lower cost.

The vision for millimeter wave access network is not limited to mobile subscribers. 5G/millimeter wave may well be not just the next generation of wireless service, but the next generation of broadband service.

Straight Path's Activities with respect to 5G

Straight Path appears to be focused on positioning itself ahead of these developments.

With over $20 million of cash on the balance sheet and a structural cash burn of $2-3 million per year (ignoring any further IP settlements), Straight Path will not need to raise capital prior to the maturity of next-generation millimeter wave services. The company's focus can center on encouraging millimeter wave technology development and taking advantage of the burgeoning small cell backhaul and advanced fixed wireless opportunity.

Hiring Zhouyue "Jerry" Pi , one of Samsung's top millimeter wave researchers, as CTO was a brilliant strategic move that made Straight Path one of the most-technically informed parties in the FCC's NOI proceeding . Straight Path will almost certainly be working closely with the FCC on future regulations for millimeter wave spectrum, as well as participating the mobile standardization process.

Straight Path also recently announced that it was exploring partnerships to develop advanced fixed wireless radios. This may be an opportunity for the company to accelerate the monetization of new millimeter wave technology with a fiber alternative offering that provides near-term financial performance and, post-standardization, drives a better value proposition for an eventual strategic transaction with a mobile operator.

Going forward, Straight Path is in a great position to continue encouraging millimeter wave research and development, and may directly participate in the development in advanced fixed wireless equipment that will enhance current business opportunities. The company will also have an opportunity to benefit from the small cell backhaul boom that will emerge over the next several years as mobile network operators in the United States move to densify their networks.

Tomorrow's Straight Path Spectrum, Inc.

Beyond current business opportunities and small cell, Straight Path's 28 and 39 GHz spectrum is ideally suited for both next-generation fixed wireless and cellular services.

Frequencies above 3 GHz and below 24 GHz have most of the same material propagation challenges (for example, 5 GHz is challenged outdoor - indoor in the same way that millimeter wave bands are) and cannot accommodate the full adaptive array antennas necessary to mitigate propagation.

Frequencies above 24 GHz are necessary to deliver throughput and latency targets of 5G.

Higher than 39 GHz, power added efficiencies make it very difficult to achieve the range necessary for an outdoor cellular system. 60 GHz, for instance, is limited to coverage of a single room indoors.

The FCC took all of these factors into account when licensing millimeter wave in the first place. The FCC originally considered these bands to be suitable for mobile communications. The 24, 28, and 39 GHz bands were the best spectrum bands then, and remain the best today.

Straight Path owns all of the outstanding 39 GHz licenses and huge swath of the outstanding 28 GHz licenses. There are only two other significant millimeter wave licensees: FiberTower and XO Communications, both privately held and both significantly smaller than Straight Path.

Beyond the finalization of IMT-2020 standards, Straight Path's spectrum will be in play for operators looking to deploy a wireless service offering better than fiber performance to mobile and fixed users. Using an early to mid-2020s timeframe for deployment and assuming a four year purchase to buildout time frame, carriers will be looking to acquire millimeter wave spectrum for 5G deployments by 2020 at the latest. As this becomes clear over the next several years, Straight Path's spectrum will appreciate in value accordingly.

- Ted Rappaport / Wonil Roh / Kyungwhoon Cheun (August 27, 2014)

Valuation

Judging what a mobile network operator or new wireless competitor might pay for Straight Path's spectrum three to five years from now, just before commercial deployments of millimeter wave mobile broadband services begin, is difficult. There are, however, some indications available today.

First, a quick primer on spectrum valuation.

The industry standard basis for spectrum value is a metric known as MHz-POPs. MHz-POP is calculated as the total bandwidth of the licensed spectrum times the population (a.k.a. Points of Presence, or "POPs") covered by the license (within the license area). The assumption underpinning this metric is that bandwidth has a high correlation with service revenue per subscriber (ARPU). More bandwidth translates into higher ARPU which translates into greater value per capita.

For example, in the New York City market area Straight Path holds licenses covering 800 MHz in the 39 GHz band. The population in the covered license area totals 26.7 million. Accordingly these licenses provide 800 MHz times 26.7 million POPs or 21.3 billion MHz-POPs.

In total, Straight Path holds 133 licenses in the 28 GHz band and 828 licenses in the 39 GHz band for 260 billion MHz-POPs across the country.

(click to enlarge)

Source: Public Company Filings, FCC

Looking first to precedent transactions, the FCC's most recent spectrum auction is a decent starting point for valuation Straight Path's spectrum in 2020. The FCC's AWS-3 auction, completed earlier this year, saw winning bids in excess of $45 billion for 50 MHz of nationwide "paired" (licenses have an uplink and downlink allocation) spectrum and 15 MHz of "unpaired" uplink-only spectrum in the 1.7/2.1 GHz bands. Not unlike Straight Path's spectrum, none of the AWS-3 spectrum sold at auction will be commercially deployable before 2020.

Straight Path's spectrum has an uplink and downlink channel (although FDD is unlikely to be used), making the comparable spectrum the paired licenses, which sold for an average of $2.71 per MHz-POP. Applying that metric to Straight Path's spectrum yields a valuation of $704 billion.

Perhaps mobile operators view Straight Path's spectrum as somehow inferior to that of traditional frequencies (although, by every measure, Straight Path's spectrum should prove to be more valuable). A comparable transaction for somewhat 'impaired' higher frequency spectrum would be Sprint's acquisition of Clearwire. Including the present value of the EBS leases, Sprint paid approximately $0.30 per MHz-POP. Applying that metric to Straight Path's spectrum yields a valuation of $78 billion, or $6,600 per share.

There are a number of other transactions that might be informative, the least favorable of which is DISH's (DISH) acquisition of DBSD's Mobile Satellite Service spectrum out of bankruptcy four years ago. DISH paid $0.18 per MHz-POP, implying $47 billion, or $3,973 per Straight Path share.

Even taking a conservative view; assuming that an acquirer of Straight Path's spectrum would value the spectrum on a market by market basis, Straight Path is still wildly undervalued. A nationwide portfolio of 50 MHz of spectrum just sold in the AWS-3 auction for $45 billion. A single license for 20 MHz of spectrum in the New York City market area sold in that auction for $2.76 billion. Straight Path holds a nationwide portfolio of over 800 MHz of spectrum and owns a like amount in New York City, all of which is valued by the market at a little over $200 million.

Clearly, precedent transactions would more than justify an enormous valuation for Straight Path once millimeter wave mobile services commercialize. Turning to public company comparison, there are two major spectrum holding companies in the market today - DISH and Globalstar (GSAT).

(click to enlarge)

Source: Proprietary

Both own operating businesses: DISH a direct broadcast satellite business, and Globalstar a mobile satellite services business. DISH's DBS business is likely worth around 6 times LTM EBITDA. Globalstar's MSS business is likely worth about 8 times LTM EBITDA. Backing the value of the operating businesses out of each, the implied market value for DISH's spectrum is approximately $24.3 billion or $1.19 per MHz-POP and the market value for Globalstar's spectrum is approximately $3.1 billion or $0.52 per MHz-POP. Taking the less favorable of the two comps implies spectrum value of $135 billion for Straight Path shareholders.

There are many other valuation comparisons, but they only further confirm one conclusion: Straight Path's market value today is, for all intents and purposes, zero. The $200 million market cap today is approximately nothing relative to the size of the asset it buys.

The implication is that, even as the entire global wireless telecommunications industry is in an arms race to deploy millimeter wave cellular services, the capital markets are assigning approximately zero probability of millimeter wave spectrum ever becoming useful to mobile network operators, not to mention zero value to a burgeoning opportunity in small cell backhaul. Zero chance of deploying what multiple tests have already proven to be a technically feasible and commercially viable service.

It's not clear what the actual probability is. But it is obvious what it is not.

Summary Financials

(click to enlarge)

*Note that IDT contributed $15 million with spinoff on August 01, 2013

Source: Public Company Filings

See also Unveiling A Pivotal Plan For This Predictable Outlier on seekingalpha.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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