Wi-LAN120-C02
Wi-LAN
Dr. Hatim Zaghloul, CEO of Wi-LAN Inc., had reasons to be pleased as he sat in the lobby of the Boston Plaza Hotel between meetings at the Wireless Communication Association trade show in July 2001. Wi-LAN was readying for the launch of its innovative proprietary 3.5 Ghz W-OFDM wireless broadband system in the fall of 2001 that promised speeds of up to 192 Mb/s across distances of up to 20 km. This solution was over ten times as fast as existing broadband wireless systems on the market and could easily compete with other non-wireless broadband solutions such as DSL, satellite and cable. Furthermore, Wi-LAN had an impressive track record with standards bodies crucial in the communications industries. Zaghloul and his team had successfully incorporated Wi-LAN’s patented OFDM technology into an important IEEE published standard for wireless local area networks – 802.11a. As a result, any manufacturer wishing to implement 802.11a would be required to use patented Wi-LAN technology. Furthermore, the FCC had been successfully lobbied to allow OFDM to be certified for use in the unlicensed 2.4Ghz band after two previous unsuccessful attempts. For a relatively small new player like Wi-LAN to have achieved such significant accomplishments was remarkable, particularly against strong incumbent telecom and data communication competitors such as Cisco, Lucent, and Motorola.
Yet, Dr. Zaghloul and his company faced significant challenges. How could it succeed as a wireless technology and research company? How could it shape future IEEE standards to use its patents? Given its size, how should it collect royalties from incumbents? What rates should it charge? How could it succeed as a product company given the downturn in the telecom sector? What should be their focus: on marketing their wireless broadband products or pursuing technology agreements with players in these various segments? Were they correct in focusing on the wireless broadband market given the opportunities that lay in wireless local area networks, home networking, telematics and wireless road access. Refer to Exhibit 1 for its financial statements.
John Cunningham, MBA 2001 prepared this case under the supervision of Professor James Henderson, Babson College, as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
Copyright © 2002 by James Henderson and BabsonCollege and licensed for publication at BabsonCollege to the BabsonCollegeCaseDevelopmentCenter. To order copies or request permission to reproduce materials, call (781) 239-6181 or write CaseDevelopmentCenter, Olin Hall, BabsonCollege, Wellesley, MA02457. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means – electronic, mechanical, photocopying, recording, or otherwise – without the permission of copyright holders.
Broadband Wireless
Industry Background
Broadband wireless technology consisted of radio transmitters and receivers capable of communicating high data rates over some distance without wires enabling bandwidth intensive services such as video distribution, video on demand, video conferencing, high speed internet access, music downloads, and internet radio. The market for broadband wireless technologies had grown rapidly over the course of the late 1990’s. Several broad social and business trends such as the dramatic growth in the Internet and mobility resulted in a number of potential applications in which broadband wireless could offer tremendous value. The benefits of a broadband wireless solution included most importantly, high location flexibility (mobility), low fixed installation cost, and ease of expansion. Yet, challenges also remained in a number of areas, including security of broadcast signals and interference issues.
Fixed Wireless Applications
Broadband wireless technologies could serve a number of markets. On a broad scale, wireless was categorized into the approximate $1 billion ‘fixed’ market in 1999 wherein transmitters and receivers were in fixed enclosed locations versus the approximate $90 billion ‘mobile’ market such as cellular and personal communication services. Within the fixed category, there were further distinctions resulting in dramatic differences in business models.
Wireless Local Area Networks (W-LANs): Within a short range, wireless LAN[1] technology could offer the ability to interconnect networked computing devices without the expense and inflexibility of a wired infrastructure. This market had been forecast to exceed $1.6 billion in North America by 2005, representing a compounded annual growth rate of 27.1%[2]. They typically consisted of single central transceivers that communicated with multiple end devices in a point to multi-point fashion. W-LANs were expected to operate mostly in the unlicensed bands (2.4GHz and 5.XGhz), and to be free-standing at least as far as specialized wireless services – any internet or wider network connections would be done through the corporate network. As a result end-users purchased equipment through computer networking distribution channels such as systems integrators, VARS, etc.
Wireless Home Networking: Most industry observers believed that another opportunity for wireless LAN technology existed within the home as well. Over the last 10 years, capability and variety of in-home electronic devices had increased dramatically. More consumers, particularly in the U.S., were using increasingly sophisticated computing devices in their homes including in-home broadband Internet data connections and multiple computers. Furthermore, the boundary between home computing devices and appliances was blurring. For example, digital content from the Internet could be shared via a wireless home network across various digital platforms including televisions, stereos, gaming consoles and DVD players. Standard home appliances also had increasing intelligence built into embedded processors and operating systems. Proponents of home wireless systems were predicting that even home lighting, kitchen and laundry appliances, heating and air conditioning were other possible devices that could be controlled by wireless home networking systems in the near future.
While this market was in its infancy, expectations were for it to grow to $2 billion by 2005[3]. Compared to wireless LANs, the channels for this market would be much more complex. Wireless cards needed to be built into consumer goods or sold separately through electronics and appliance retail channels. What was unclear was how specialized services would be sold –connections back to the Internet or other networks. There was a possibility that a service provider layer could develop that collected regular fees from consumers in return for offering connection and higher level services to their home wireless devices.
Wireless Metropolitan and Wide Area Networks: Expanding beyond a single location, corporate and academic campuses could also connect multiple sites using a wireless WAN[4]. Traditional narrow-band microwave systems fell into this category, and functioned as relatively simple point-to-point system. With the emergence of new robust broadband wireless technologies, the possibility was emerging to span longer distances with higher bandwidth. Indeed, the real wireless blockbuster application was for ‘last mile’ or ‘local-loop’ WAN services competing against cable, DSL and satellite technologies. Estimates were that this market could grow to $15 billion by 2005[5]. ‘Local-loop’ was the term traditionally used by telephone carriers to indicate the final pair of wires running from the local telephone central office to the home or business. Conventionally this had been copper wire which was expensive to install and maintain[6], and still might not deliver the kind of bandwidth needed for data applications. By the 2000, large businesses were rapidly converting to fiber-optic cables in order to deliver the adequate bandwidth and future capacity. However, there still existed a large opportunity for providing internet and telephony services to residential homes and small-businesses. Fixed wireless carriers for the most part within a licensed spectrum could now bring subscribers on-line faster with much lower up-front investments and long-term maintenance costs than cable or DSL. Fixed costs in wireless broadband represented 30% of total costs compared to 80-90% for cable and DSL. Long distance telephone carriers such as Sprint and Worldcom hoped to use wireless WANs as a way to enter the local telephony market. Wireless ISP’s such as Teligent, Winstar, and Metricom had also entered the market to sell wireless internet services.
Telematics and Wireless Road Access: Another developing wireless sector involved accessing mobile wireless data from within cars. Auto manufacturers were moving towards embracing ‘telematics’, a wireless service offering fully integrated into the automobile. A telematics equipped car could offer location based services[7] as well as connect automotive systems back to dealer maintenance systems to report errors or scheduled maintenance needs. ‘Road access’ systems on the other hand, extended Internet access to computing systems within the car, allowing mobile workers to connect back to enterprise systems and other internet based resources. Both varieties of mobile access would require extensive national - perhaps international - networks. What was highly uncertain was how equipment and services would be sold. Auto manufacturers were aggressively pursuing telematics, attempting to ensure that systems would be sold with new cars and that services would be licensed through the dealer/manufacturer network. Who would control Road Access was even less clear, but there would similarly be the need for consumers to obtain both hardware and ongoing data services.
Wireless Technologies: Spectrum and Transmission Methods
While wireless applications were simple to understand in concept, the underlying technology was much more complex. To create a wireless system, one first needed an allotted frequency or area of the radio spectrum in which to operate. Secondly, companies needed to agree on standards for transmission within the spectrum. Refer to Exhibit 2 for a summary of the markets, standards, transmission method and allocation of frequencies.
Spectrum: The radio spectrum was a scarce natural resource used by the military, aviation, broadcasting, cellular networks and public authorities. Different frequencies were used for different applications determined by national regulations. The width of frequency used also needed to be dictated, as signals could extend over either a broad or narrow range. National regulatory agencies would typically dictate frequency allocations, and would assign band names for each allocation. In the U.S. bands that were being targeted for broadband wireless use included LMDS, MMDS, ISM, and U-NII. Frequencies generally fell into two categories: licensed and unlicensed. A licensed frequency was typically divided into a number of sub-bands, which were then auctioned off by regulatory authorities on a regional basis to a fixed number of competitors[8]. An unlicensed band such as ISM (2.4 Ghz) and U-NII (5.X Ghz) on the other hand, allowed fairly unrestricted[9] sale and use of transmitting equipment. The limitation of unlicensed bands was that users could be subjected to interference from other wireless products. This problem was especially apparent in the ISM band where security cameras, microwave ovens, baby phones, wireless local and personal area networking gear all operated. A corporate network might have its performance degraded by conflicting signals from another network in the building across the street for instance. A home network may have conflicting signals from different appliances (e.g. microwaves and wireless home networking gear) leading to potential network crashes. As some industry observers had stated, “2.4 Ghz has turned into a junk band.”
Transmission Methods: A number of dramatically different techniques were used to broadcast the signal over the allocated spectrum. Traditional radio technologies had fairly simply broadcast signals over a fixed frequency. However, engineers constantly sought innovative methods to use the radio waves more effectively, achieving higher ‘spectral efficiency’, as well as to solve problems related to bouncing radio signals and interference. Newer products used a variety of ‘spread spectrum’ methods to spread signals across sub-channels. In Frequency Hopped Spread Spectrum (FHSS), a transmitter and receiver agreed upon a pattern for rapidly jumping around a series of channels, and achieved up to 2 Mb/s data transmission rates. Direct Sequence Spread Spectrum (DSSS) on the other hand, used a more complex encoding system to transmit redundant signals spread across a wider bandwidth. By reducing interference, DSSS resulted in an ability to achieve data transmissions of up to 11 Mb/s.
Another key technology in broadband wireless was Orthogonal Frequency Division Multiplexing, or OFDM. While OFDM spread signals across a wide spectrum, it used multiple channels with precise spacing[10]. OFDM offered a number of benefits over other transmitting methods. A high spectral efficiency meant that OFDM offered the promise of both higher capacities to the end-user, and the ability to use allocated frequencies more efficiently. This was very interesting to a range of players involved in the emerging wireless sector. Within licensed frequency bands, OFDM would offer the potential for either more carriers to be allocated, or for each carrier to achieve higher data transmission rates. Another key benefit of OFDM was ability to overcome a variety of interference issues. This made it highly attractive for applications operating in unlicensed bands as well.
Background on Regulations and Standards
In most countries, governmental agencies regulated broadcasting rights, such as the FCC in the U.S. These agencies would dictate what frequencies could be used, and often would license broadcasting rights to a limited number of carriers. However, they would not specify the standards for transmission within those allocated frequency bands. Companies with underlying transmission technologies had two choices. They could either attempt to make their proprietary technology the market or de-facto standard or they could influence the standards set by a recognized standards setting organization. The Institute of Electrical and Electronic Engineers (IEEE) was considered the official standard setting body for the communication and electronics fields in the US. The European Telecommunication Standards Institute (ETSI) was considered the official telecommunications standard setting body for Europe.
Membership in the IEEE was open to anyone with an interest in engineering or computer science. In return for membership fees, the IEEE provided a number of technical publications, access to conferences, and assistance in career development. Anyone could also participate in the standard setting process by joining the IEEE Standards Association. The standard setting process involved seven steps, which took in most cases up to 18 months to complete. Refer to Appendix A for a description of the processes. Standards were approved through a series of votes. The working group, made of interested individuals, had to approve the proposed standard before submitting it to the community. A 75% vote was required for approval of the standard.
In order to ensure proprietary technology (e.g. patents) entered into the proposed standards, companies either pushed for either leading the working groups or packing them with large numbers of employees or individuals that could be trusted to vote in the interests of the company. Furthermore, there was an incentive for companies to get approval for work that they had already completed since that would give them a leg up on competitors in the market. In such cases, many companies tried to recruit allies that would support the technology as well.
In the association, a careful categorization scheme was enacted. For example, the ‘802’ standard, governed networking, with 802.3 representing the well-known Ethernet standard, 802.11 involving wireless LAN networking (in the 2.4Ghz and 5.XGHz bands), 802.15 referring to personal area networking (in the 2.4GHz band), and 802.16 representing local-loop or broadband wireless access applications (in the 2.6-2.7/3.4-3.7 GHz bands (MMDS), 5.X GHz bands and 28 –31 GHz bands (LMDS)).
The first 802.11 wireless LAN standard was ratified for the 2.4 Ghz band in 1997, which allowed for a maximum of 2 Mb/s. However, this standard did not gain much attention from IT purchasers since it was not close to the 10 Mb/s speeds coming from wired Ethernet. In addition, the IEEE had no mechanism to enforce a single interpretation of the standard. As a result, several incompatible offerings were commercialized.
Realizing the weaknesses of the 802.11 standard, by September 1999, the IEEE published two supplements: 802.11a for the 5.X Ghz UNII band and the 802.11b for the 2.4 Ghz ISM band. The 802.11b WLAN standard used the DSSS transmission method reaching speeds of up to 11 Mb/s across short distances. Based on the lessons learnt from the original 802.11 standard, five industry participants headed by 3Com, created an ad-hoc consortium called the Wireless Ethernet Compatibility Alliance (WECA) to ensure a common interpretation of the 802.11b standard. In turn they tested and certified products from various players for interoperability with their own Wi-Fi logo.
The 802.11a WLAN standard was ratified in 1999 and used OFDM transmission method reaching speeds of up to 54 Mb/s on the 5.X Ghz bands, five times faster than 802.11b. The speed and bandwidth advantages were appealing to IT managers who were interested in reducing congestion on the wireless networks. It was with this standard that a small start-up based in Calgary, Alberta became known.