Notes From The Frontline - TierOne Networks Bridges The ''Digital Divide''
by Kevin Weaver, Chief Executive Officer
Tier-One Converged Networks, Inc.
April 2008
According to a study by the Gartner Group, 100 million residential rural and suburban consumers are presently without broadband Internet access and would subscribe were it available. Based on fixed wireless network innovations, Gartner expects the market for rural broadband Internet access to grow from $1 Billion (USD) annually in 2006 to $12 Billion in 2010. Fixed wireless innovations reduced the per line network costs from up to $4,000 per line for DSL and Cable to $400 per line for fixed wireless, or a 90% cost reduction. The dramatic per line cost reduction is driving boom times in rural wireless network deployments.
My name is Kevin Weaver and TierOne Converged Networks, Inc. is a Dallas based Wireless Internet Service Provider (WISP) I formed to capitalize on this new $12 Billion rural internet access market. TierOne’s management and technical knowledge is positioned to dominate rural WISP markets in the southwestern U.S. with an initial focus on DFW and Texas markets.
Underserved Rural Market Opportunity
TierOne operates primarily in markets outside of the top 150 Metropolitan Service Areas (“MSAs”) with populations up to 250,000. There is limited competition from incumbent landline providers of broadband services in these markets, creating a significant market opportunity. In 2006, while broadband penetration in urban and suburban markets reached levels of 44% and 46%, respectively, rural market penetration fell far behind penetrating only 25% of rural households.
Competitive Advantages & Investment Considerations
The gap in penetration rates is driven by a lack of availability for rural customers resulting from the high network build-out costs for ILECs and cable MSOs. Network build-out cost per subscriber in rural markets for ILECs and cable MSOs is estimated at $1,000 to $4,000 depending on distance from the central office or head-end. The per-line cost does not meet the return on investment criteria to justify the network build. The result has been an absence of broadband network built to serve the needs of rural customers, until now.
TierOne’s network-wide cost per-line is $400, or 40% to 90% less than DSL and Cable competitors. This was accomplished by successfully deploying the SkyPilot Mesh network and utilizing a mix of FCC Licensed and unlicensed frequencies. TierOne’s strategy is to build and own networks in rural areas where ILECs cable MSOs cannot economically build networks and where average annual household income is relatively high. TierOne targets customers in close proximity to large metropolitan areas surrounded by wealthy bedroom communities and a large commuter population. As a result of these factors, TierOne operates in rural communities with substantial annual income and no Cable or DSL competition.
TierOne’s first network deployment will cover 4,000 square miles of suburban and rural communities surrounding Dallas/FortWorth (DFW). Rural and suburban DFW includes 500,000 households with Median Household Income 25% above the national average. In January 2008, TierOne completed the network build-out for Collin County, Texas, a suburb of Dallas, and initiated its marketing efforts. According the US Census Bureau, Collin County, Texas is one of the five fastest growing counties in the United States and has Median Household Income of $75,709 versus $41,645 for the entire US. Applying the urban broadband penetration rate of 52% to the 500,000 rural DFW households implies estimated annual revenue for broadband Internet access at $156,000,000. Based on publicly available competitor information and its own experience, TierOne believes it can capture 60% of the DFW market, or 156,000 customers and $93,000,000 of annual revenue.
Subscriber Growth through Acquisition
At TierOne, our strategy is to capture the 156,000 DFW subscribers through both organic growth and acquisition. The WISP industry is extremely fragmented, with many small WISPs serving several hundred to several thousand customers with limited resources, management and capital. There is significant opportunity for consolidation even in the DFW market. TierOne is in negotiations to acquire several small WISP operators and expects to acquire more as it reaches critical mass. The acquisition strategy is led by Ron Celmer, CFO whose experience includes 20 years on Wall Street and six years as a Managing Director with Bear Stearns. Mr. Celmer’s expertise includes identifying, negotiating, closing and integrating acquisitions having closed more than 50 in his career.
As with all industry consolidations, small competitors need to join larger organizations or risk becoming uncompetitive. The consolidation in the WISP space will be driven by economies of scale. TierOne’s WISP competition is highly fragmented, typically under 1,000 subscribers. They are usually undercapitalized and sole proprietors with no marketing budget or expertise. As a result their infrastructure is outdated, customer service is weak, technical support is spotty and their marketing budget is zero.
In summary, we’re very excited about the future of TierOne. We are meeting the demand of high speed internet to the 100 million customers in underserved rural markets. TierOne has all the elements necessary become the dominant player in the Dallas/Fort Worth, WISP market and beyond. TierOne has the following competitive advantage: 1) Bandwidth cost 75% below competitors as a result of its position in the Dallas NAP. 2) Access to equity & debt capital. 3) A “Carrier-Grade Network”. 4) An in-place, seasoned management team, technical team and an experienced acquisition team.
For more information please contact:
Ron Celmer
Chief Financial Officer
TierOne Converged Networks, Inc.
ron.celmer@tieronecn.com
www.tocn.com