Cometa Done Right?

Cometa was a failed venture backed startup that aimed to build a nationwide network of WiFi hotspots and wholesale the network capacity to ISPs.  They were a WiFi carriers carrier.  It was a noble attempt to make broadband available to the nation, but eventually failed.  Main reason of their failure was coverage issues that resulted in low end-user uptake.  This was at a time before 802.11g, 802.11n, and most importantly before Wimax. 

Today on VentureWire, there was news of a Venture backed startup (Redpoint, CRV, Kleiner) named M2Z which applied to license spectrum from the FCC to provide nationwide broadband, answering the call of President Bush to make it happen.  The company is founded by 1st class technologist Milo Medin (@home) and John Muleta (FCC).  Their proposal is to get the nationwide spectrum free, with the condition of making service availbe to 95% of the US, free to consumers for under 500Kbps (ad supported), and offering the government 5% of revenues for anything they sell better than 500Kbps.  My hats off for this bold vision. 

They have a better shot at succeeding because, the cost of building a nationwide network isn't as expensive as it was long ago.  I've written about this many months ago here.  Wimax cost per home passed numbers are under $10.  No doubt, M2Z says they've secured $400M of debt to fund the buildout.  So there is a wireless backhaul option that wasn't cost effectively available to Cometa.  On top of that, coverage with 802.11g, or n is a lot better as well.  So this is the right time to build this kind of network.  Since it is wimax, it does require a CPE, the report says will be reasonably priced.  Milo Medin started @Home, and at the time a reasonable priced cable modem was $250-300 (we built it at 3Com).  The pricepoint is understandable, because it will have to have wimax chips, antennas, and most likely wifi on the other end, after all you need to be able to use your laptop with it.

Does M2Z want to sell the service themselves, or wholesale it to others who want a two-way pipe into the home?  If it is the former, you need to add a subscriber acquisition cost on top of the CPE price to see what a hole M2Z has to crawl out of, if it is the latter, their monthly price to the carrier will be a more modest number say $5-10/mo.  My bet is the latter, the Cometa model.

It could work.  The key thing will be the price that they will be able to charge the end user.  Will a local MUNI wifi provider, or Google in SF, make the service free so that nobody would ever use M2Z?  Unknown.  If it is a billion dollars or two, can MSFT or Google build this themselves, and make it free and totally ad supported even at the higher bandwidths?  Also unknown.

Let's do a back of the envelope calculation on the business model.  If M2Z gets $5/mo revenue per paying sub selling wholesale, and operates at 50% EBITDA, that's $2.5/mo to cover the $300/sub investment (assume $275 CPE + $25/home passed+other).  The buildout cost is paid by debt, at 8% interest, the $250 per sub investment costs them $24/year, barely covered by the $30/year contribution margin. 

If they get $10/mo then they can pay off the debt service on that sub and generate about $35 or margin per user per year plus advertising.  This looks a lot better.  If they can get 10M users, this is pretty interesting.  Of course, that's the big if.  What will the alternatives be at the time?  My guess is that there will be a lot of nearly free options already, but who really knows?  It will be close, that's for sure. Since I am not an investor, it's not much of a worry for me on the business side.  On the other hand, it's a bold effort to change the world (as was @home) and I commend the courage and vision of the investors to do it.