Entrepreneurial Dominion

       Dean Johnson

Making a Fetish

of Flexibility

Dean Johnson has a new telecom business model: Leasing spectrum to other companies with new business models. He’s positioned First Avenue Networks as a winner however the wireless industry shakes out.

To the casual observer, the world would seem to be awash in wireless radio spectrum. When a tiny firm like Charlottesville-based First Avenue Networks can snap up, for a mere $105 million, the spectrum assets of a company like Teligent, Inc., which had been valued at $4 billion at the height of the dot.com frenzy, surely there must be an imbalance of supply and demand.

But Dean Johnson, CEO of First Avenue, insists that there is no glut of spectrum – only a shortage of profitable business models for exploiting it. “Spectrum is going to be in demand more than ever,” he asserts. Just look at the phenomenal spread of wireless text messaging, of Wi-Fi connections for laptops, and of digital photos transmitted over cell phones. “There are more bits than ever flying through the air – and people love it!”

First Avenue’s fortunes aren’t tied to the success of any one wireless application. Having assembled a nationwide footprint in the 39 Ghz frequency from Advanced Radio Telecom and a gaggle of 24 Ghz licenses from Teligent, Johnson is well positioned no matter which products and services take off. His strategy: Lease the spectrum to whomever has the best ideas for deploying it.

Says Johnson: “People call us and say they want spectrum in this area, and here’s our business model. We say, ‘OK, here’s a slice.’ We’ll lease [the spectrum] to them for money. We’ll take equity in their company. We’ll do whatever it takes to get that spectrum out there and used.”

Bankruptcy has purged dozens of telecom companies of their dot.com excesses, stripping away debt, reducing employee count and tightening their market focus. But their business models have not changed radically. Most telecoms use the same infrastructure, provide the same services and cater to many of the same customers they always did. First Avenue, by contrast, got out of the retail end of the business that had bankrupted its predecessor, Advanced Radio Telecom. Now it just leases spectrum to other telecom companies.

Perhaps the most remarkable aspect of First Avenue is its incredibly low overhead. Although the company owns rights to spectrum valued far in excess of a hundred million dollars, the company employs only three employees – including Johnson. The burn rate is extraordinarily low. “If it doesn’t work this year, no problem,” says Johnson. “We have five years to make it work. That’s an eternity in this industry.”

The First Avenue story began when Ted Weschler, founder of Charlottesville-based Peninsula Capital Advisors, LLC, and other investors purchased bonds in a struggling Advanced Radio Telecom, a few years ago. The Bellevue, Wash., wireless company filed for bankruptcy, but the bond-holders managed to come out controlling it when it emerged from bankruptcy. The new owners installed Johnson, whom Weschler had backed in a local wireless broadband venture in Charlottesville, as CEO.

Johnson moved quickly. He relocated the headquarters to Charlottesville, extracted the company from its retail entanglements and wound down the Bellevue operation. He reduced head count to three -- down from 200 at the pre-bankruptcy Advanced Radio Telecom -- preferring to engage outside consultants and services when he needed them rather than bringing on board a lot of managerial talent and puffing up fixed overhead. Finally, under the new name of First Avenue Networks, he repositioned the company as an owner and lessor of millimeterwave spectrum.

When the Federal Communications Commission auctioned off the radio spectrum in the 1990s, it envisioned that most companies would own their piece outright. Initially, there were no provisions for leasing it to someone else. However, a regulatory precedent known as “InterMountain Microwave” opened up the possibility of leasing spectrum under certain, limited conditions. Then in October 2003, the FCC kicked the leasing door wide open.

The 2003 decision was crucial to the revitalization of the wireless telecom industry, Johnson says. After the dot.com crash, huge swathes of spectrum were tied up by companies with failed business models – many of them in complex bankruptcy proceedings. Short of buying out entire companies, there was no easy way to put spectrum in the hands of start-up companies with novel applications. The FCC ruling, Johnson explains, “de-linked the spectrum from the failed business models. It freed up spectrum to be reallocated to up-and-coming business models.”

Now, First Avenue can parcel out spectrum to small, innovative companies in smaller, less expensive batches. That way, Johnson hopes to foster experimentation. If an application proves economically viable, he’ll do everything he can to help it spread.

The Teligent acquisition expanded First Avenue’s offerings. He now sees three broad markets for his spectrum:

Mobile backhaul. When you make a call on your cell phone, the signal goes to a cell tower, where the cell phone operator aggregates it with other calls and sends it to a land-based facility where the calls are routed to their proper destinations. Many cell phone companies rely upon a local land-based carrier, typically the incumbent phone company, to make that connection. For example, Sprint has to rent capacity from Verizon, for its “back haul” capacity.

Mobile phone companies don’t like leasing from competitors, Johnson says. First of all, it’s costly. Second of all, they telegraph their intentions to the competition when they ask for a change in capacity. First Avenue’s spectrum is well suited to help wireless carriers by-pass the incumbent carrier through a point-to-point connection. Because it’s not a cellular business itself, a wireless operator can be assured that it’s not revealing any competitive intelligence to a competitor.

Fiber extension. A company like MCI owns a robust fiber network running through the United States but it doesn’t hook up to every office building. The telecom giant must rent copper line from incumbent carriers to make the so-called “last mile” connection. The local phone companies charge dearly for the privilege. First Avenue’s wireless spectrum can bridge the gap for a fraction of the cost.

For a company like MCI, leasing spectrum from First Avenue is a no-risk proposition. It can readily identify the costs, calculate the savings and determine a return on investment. “It’s not like they’re trying to increase market share,” where they have to make a lot of assumptions about how much new revenue they’ll generate, Johnson says. “There’s nothing speculative about cutting costs. It’s a known benefit to the bottom line.”

Wireless ISPs. Mom-and-pop wireless internet service providers (WISPs) are doing a lot of innovative things. Johnson cites, for instance, a wi-fi operator in the San Francisco Bay area that’s lined up roof-top rights to link a hospital to the offices of its anesthesiologists and radiologists with high bandwidth service. Leasing First Avenue’s bandwidth, the WISP can provide inexpensive T-1 and T-3 connections.

“We haven’t cornered the market on good business ideas or technology ideas,” Johnson says. “We’re relying on the vitality of the marketplace” to come up with new applications.

Of course, other companies own bandwidth that can serve the same markets as First Avenue. There’s nothing to stop them from duplicating Johnson’s business model and going into competition with them. But there may be big advantages to be the first company into the market. Johnson will enjoy a significant strategic advantage if he can persuade telecom equipment suppliers to adapt their technology to First Avenue’s 24- and 39 GHz bandwidth.

It’s a chicken and egg problem. Equipment suppliers don’t want to invest capital in adapting their technology for specific slices of the wireless spectrum unless there’s a viable market. “Some exciting technologies were withering on the vine," says Johnson, "because they didn’t have spectrum available to them.” Conversely, a particular segment of spectrum will be slower to develop its market if the suppliers aren’t delivering state-of-the-art equipment.

To Johnson’s way of thinking, a slice of spectrum is less attractive when it’s owned by a single company dependent upon a single business model. What if that company fails? The vendor has wasted money adapting its equipment for the specs of that bite of bandwidth. By contrast, developing a pluralistic market, populated by companies with diverse business models, will enable a vendor to invest secure in the knowledge that he’s not dependent upon the vicissitudes of a single company.

If Johnson can persuade equipment vendors to make those investments, he then has a broader range of technology to offer telecom companies. Eventually, he sees his two bands of spectrum stimulating a virtuous feedback loop in which wireless operators and equipment suppliers push the frontier of innovation. His challenge, he says, is to “catalyze” that process.

Johnson was reticent to describe just how he hopes to accomplish that goal in a market dominated by multi-billion giants and loads of alternative spectrum. His strategy is certainly not evident from First Avenue’s organizational structure. The company’s three employees include a president and CEO, a CFO and a vice president of business development – First Avenue has more directors (five) than employees! That seems like a small staff to initiate contacts, field queries and negotiate complex leasing deals – no matter how many outside consultants and attorneys the firm employs.

Johnson acknowledges the challenge: “People aren’t accustomed to having this many choices in telecommunications transmission media. [Until recently,] it’s just been been fiber or copper. Wireless has not been mainstream.” But the clear advantages of wireless, combined with the flexibility of his business model and the creativity of free and competitive markets, gives him confidence that First Avenue will help define the future of the wireless industry.

-- July 28, 2004

Find Out More...

First Avenue Networks Home Page

News...

July 8, 2004:

First Avenue Networks Signs Letter of Intent to Acquire Teligent Assets

June 16, 2004: Pass Word Inc. Advances Network with First Avenue Networks Licensed Spectrum

June 2, 2004: First Avenue Networks and Windchannel Communications Partner on Hybrid Network

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