The Obama administration, as part of its recovery plan for the US economy, announced an infrastructure investment program a few months ago. The goal is to create 400,000 new jobs. Out of a total investment of $150 billion, more than $7 billion is earmarked for investment in broadband. The aim is to give tens of millions of Americans who live in remote areas access to broadband communications. The means are grants and loans from two government agencies. One is the National Telecommunications and Information Administration (NTIA), an agency in the US Department of Commerce. The other is the Rural Utilities Service (RUS), part of the US Department of Agriculture. Among other potential beneficiaries of the program are Israeli public companies that produce telecommunications equipment: Alvarion (Nasdaq: ALVR; TASE: ALVR), Ceragon Networks Ltd. (Nasdaq: CRNT; TASE:CRNT), and Gilat Satellite Networks (Nasdaq: GILTF; TASE: GILTF), for example.
"The aim of the US program is to promote communications infrastructure in rural and remote areas," Oscar Gruss analyst Jonathan Kreizman explains. The agencies responsible have not defined the technology by means of which such areas will be linked to broadband. It could be wireless, fiber optics, satellite, or ADSL, but Kreizman estimates that WiMAX is emerging as the winner. WiMAX is a wireless telecommunications technology, and Alvarion is one of the companies identified with it.
"WiMAX satisfies many of the requirements in a short time, and offers an ideal solution for remote areas. What's more, it's an existing technology," Kreizman says. He believes that Alvarion could benefit from the program, and says that "the assumption is that it's a matter of several tens of millions of dollars that Alvarion's customers will receive, and Alvarion will be part of this."
The first stage of applications for loans and grants will end on August 14.
Alvarion is due to start work on the projects connected with the program towards the end of the year, but it is already benefitting from another project connected to RUS. Alvarion's largest ever contract, worth over $100 million, was recently signed with Open Range, which obtained a loan from RUS to promote communications in remote and rural areas.
What about the profitability of these projects? Kreizman estimates that in the very large projects, such as Open Range, profitability is probably lower than usual, but that in other projects, profitability will be of the same order as Alvarion normally achieves.
"The potential for Alvarion is very big," outgoing Alvarion CEO Tzvika Friedman agrees. "Much of the project is focused on areas known as 'unserved' or 'underserved', where most households do not have access to broadband. These are the places where WiMAX is successful, because it is more economic than other technologies, and can be installed quickly."
Friedman is adamant that the obvious solution is wireless. "Rapid installation means wireless, otherwise it’s a solution for the next crisis," he says.
Friedman points out that one of the requirement for obtaining grants or loans is to demonstrate existing activity, so that Alvarion's current customers are at an advantage. Some of the projects will be carried out via municipal and government agencies, as opposed to commercial companies, and there too, Alvarion has experience and is well positioned. "It's not that we'll win everything, but we can benefit," Friedman believes.
Another Israeli company likely to benefit from Obama's investment is Ceragon, of the RAD group. Ceragon provides high capacity wireless communications solutions. While Alvarion provides the last-mile technology, that is, to the customer's home, Ceragon provides another link in the chain: backhaul, the wireless connection between base stations and the main switch. This is why Kreizman thinks that the opportunity for Ceragon is less substantial than for Alvarion.
Ceragon president and CEO Ira Palti believes that in most areas the technology that will be chosen for the last mile will be wireless. "In any wireless network, you have to reach the "tower" by broadband, and that is our classic territory," he says. In any project, 15-20% of the costs are for backhaul equipment. Palti estimates that several Ceragon customers are "taking part in the game", and trying to obtain loans and grants.
"We are very well positioned as providers of high speeds in IP technology, which is precisely the need," Palti says. How will Ceragon's financial performance be affected? Here, Palti is less excited. "I'm not placing high hopes on this. It will expand the volume of our activity in the US, and that's an upside of the order of $10-15 million in 2010 for us." Profit margins are higher in the US than in the rest of the world, according to Palti.
Another technology that could be suitable for connecting remote areas is satellite technology, which is where Gilat Satellite Networks comes into the picture. It too is likely to benefit from the program's money. Gilat has considerable experience in connecting remote areas to the communications infrastructure with its very small aperture terminals (VSATs).
For now, it seems that Gilat does not attribute dramatic importance to the program's potential. In its conference call after the release of its second quarter financials, the company's chairman and CEO Amiram Levinberg commented that, "the rules of the game are still not clear at the moment; we are cooperating with other companies in our industry, and with companies that have other applications."
The first kind of cooperation generally links up competing companies that join together to promote their technology in competition with another technology. Both the satellite companies and the WiMAX Forum try to promote their technologies and lobby for them.
What about a second kind of cooperation? Is there a chance that two Israeli companies might out themselves forward for the project together? Alvarion and Ceragon do not rule out the possibility. "There are projects in which we work together with partners, and in some of them we will work with Ceragon," Friedman says. "There is room for cooperation with many players," Palti agrees, "including Alvarion." In any case he says, "In the field, the teams work together."
Incidentally, Israeli companies have a certain advantage over others. Some of the government projects have a "Buy American" clause, which awards preference to US products. Canada, Mexico, and Israel also qualify for this coveted status.
Published by Globes [online], Israel business news - www.globes.co.il - on August 12, 2009
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