All big-brother, overbearing-parent arguments aside, precisely locating a cell phone has its advantages. Not only are there a bunch of neat applications, the government has passed the "911 laws", which require wireless carriers to be able to locate every subscriber phone in their networks to within 50 meters. Nothing says loving like legislated demand.
Most assume the Global Positioning System (GPS) is the solution for mobile positioning services. But the fact is, there's a technology that'll do the job just as well as GPS for a fraction of the cost.
CellPoint (CLPT:OTC-BB), a Swedish company, can locate any phone in a GSM (Global System for Mobile Communications) network down to 50 meters, depending on network density. This should satisfy the 911 law requirements. The CellPoint System uses the GSM network to locate users, so there are no expensive network modifications, cell phones don't need any extra gadgets taxing the battery, and best of all, there's no expensive satellites to maintain.
Making fun of satellites
It's easy to make fun of satellites. All you have to say is "Iridium". Dead as a company, Iridium will probably gasp its last breath sometime later this decade when its worthless satellites begin bombarding innocent fishing boats in the Indian Ocean.
It's not really fair to use Iridium as the standard for satellite-based cellular services. But a cruddier business plan is hard to imagine. (How Motorola could've put up several hundred million after they heard the words "US$9 a minute" is beyond me...)
But satellite-based carrier Globalstar is clearly on a better track. It's slashed the per-minute rate to as low as US$1.39 a minute. And its relationship with AirTouch/ Vodafone puts success in the realm of the possible.
But Globalstar is a carrier. GPS is just one of the value-added services Globalstar can offer. GPS may be the best solution for mapping, global fleet tracking, or just about anytime mobile positioning outside of traditional cellular networks is required.
But where applications and services are concerned, a re-write of Ockham's razor is appropriate—all things being equal, the simplest and cheapest solution is usually the best. For most cellular applications and services, satellite solutions are overkill. For location-based services, a network solution like the CellPoint System offers the best cost-to-performance ratio.
And the CellPoint System performs better than GPS in urban environments. GPS must have a direct line-of-sight to work. If you're in a tunnel or parking garage, forget it. The CellPoint System can locate your phone even if it's in a briefcase and you're deep in the bowels of an office building.
The "apps" market
Wireless has a lot of room to grow, especially in the U.S., and value-added services like mobile positioning will help drive the market. Europe is an example of what lies ahead. The penetration rate of cell phones there is astounding. Scandinavian countries boast a 70% and higher penetration rate. In England and Italy, one out of every two people uses a cell phone. Even Germany has a penetration rate around 30%.
The U.S. penetration rate is on par with Germany's, around 30%. It's easy to imagine cellular phone use doubling in the U.S. over the next few years. One reason for the popularity of cell phones in Europe is multiplying usefulness—the more phones sold, the more useful each existing one becomes. And the more ways they can be used, the more are sold, and so on.
In Finland, you can buy a soft drink from an enabled Coke machine right from your cell phone. Strolling around London, CellPoint's Finder! might alert you that a certain friend is right around the corner, close enough to invite her for a cup of coffee. And Starbucks may even send you a coupon for an espresso. (Of course, this also will allow you to dodge ex-girlfriends, people you owe money to, or that wizened philosophy professor who still haunts your Freudian nightmares...)
A fundamental element in maximizing the value of the cell phone in Europe has been the unified GSM standard. A single standard allows for seamless roaming, wider coverage and more value-added services.
Now, I'm not here to argue whether CDMA or GSM is the superior system. There's plenty of evidence that CDMA (Code Division Multiple Access) is better for wireless data. My point is only that GSM enjoys much broader deployment. As you read this, GSM subscribers worldwide are surpassing the 300 million mark, a 70% increase over 1999. Compare that with the 50 million worldwide users of CDMA, and you can see where the business opportunity is right now. In the U.S., GSM subscribers are being added at a rate of five a minute. GSM is the de facto world standard, and will have an estimated 1 billion users, fully two-thirds of the market, by 2005.
These numbers may change. But it'll take a while. Building brand new networks is expensive and costs precious time. What we'll see is a slow migration to third generation (3G) cellular networks that are robust enough to handle data.
Best solution: the CellPoint System
The CellPoint System, based on a proprietary algorithm, is deceptively simple. It uses the Short-Message System (SMS), a standard in GSM networks. SMS is a real time text chat feature, sort of like ICQ, Instant Messenger or AOL Messenger for cell phones.
For nearly 2 years, cell phones have come with an "SIM (Subscriber Identity Module) toolbox" embedded in them. The SIM toolbox "knows" which transmitter in the wireless network it's using, allowing short messages to be exchanged back and forth. So in a sense, phones already know roughly where they are. CellPoint makes that information useful.
The great thing about using SMS is that there's no loss of bandwidth for the carrier. SMS runs on a separate, underutilized channel so it won't interfere with voice transmission. And because the messages are so short there's minimal battery use.
Where's the money gonna come from?
Neat technology and cool applications are one thing. Making money is another. CellPoint is actively marketing business and consumer applications for its services. The company is on record saying that it expects to sign 12 carrier contracts in 2000. Two distribution partnerships, with Yahoo (YHOO:NASDAQ) and Ericsson (ERICY:NASDAQ), are done deals. Now, here's some more of what CellPoint has to offer. Business apps are the most boring, so I'll start there.
CellPoint has a vehicle tracking application (Automatic Vehicle Location or AVL) for companies that need to monitor fleets of vehicles. A small GSM transmitter
module, the GT-1 Terminal, is attached to each vehicle, allowing very precise locating. Delivery drivers will no longer be able to say they were stuck in traffic when they were actually taking the scenic route. And if a driver gets lost, the dispatcher can easily locate his position on a map through the CellPoint Internet interface and give specific directions. There are currently 15,000 GT-1 terminals in operation.
Of course, tracking is impossible if delivery routes stray too far from a GSM network. But in Europe or on the East Coast of the U.S., where GSM coverage is nearly universal, the CellPoint System is a low-cost alternative to GPS. And the CellPoint System is actually compatible with GPS, if need be. The GT-1 terminal can also be used to locate stolen or distressed vehicles. And businesses can use the system to locate members of its mobile work force.
The Strategis Group estimates that by 2003, 3.4 million vehicles will have AVL technology on board. If CellPoint can take even 10% of that market, hardware sales could reach US$60,000,000 over the next few years.
Consolidating a unique position
In February, CellPoint acquired Unwire, the only other company in the world with GSM positioning technology. With its strong patent portfolio, Unwire is creating and marketing telematics applications for GSM positioning
Telematics refers to remote systems management. Unwire's deal with PM-LUFT AB of Europe will help explain how telematics works. PM-LUFT AB manufactures, installs and maintains industrial ventilation systems for shopping malls, office complexes, etc. Using the CellPoint System, PM-LUFT AB can be alerted to ventilation system failures as soon as they happen. Repair teams can be on site fixing the system before there's a noticeable change in temperature.
Also, temperature can be monitored and adjusted from a remote location. As you can imagine, there are hundreds if not thousands of uses for this technology. PM-LUFT AB has already ordered 500 units, with several thousand more expected to be installed.
In May, Unwire and Ericsson announced a joint venture to market telematics solutions to Southeast Asia. Ericsson will work with Unwire to develop applications based on the CellPoint System. As a worldwide GSM network provider with a foot in the door in Asia, this deal is nothing less than gigantic for CellPoint. Ericsson has already committed to buying several hundred programmable GSM terminals from Unwire. One of Ericsson's solutions has already been demonstrated in Malaysia in April of this year.
Value-added services
For PM-LUFT AB, telematics is a value-added service that makes the company stand out from the crowd. It's easy to see that the extra attention it can pay to installed systems could make the difference in winning lucrative contracts. The same can be said for consumer services.
These days, price competition is so fierce, service companies have to provide a little extra to keep customers coming back. Companies like Sprint and MCI used to try to buy customers. (I myself must have pocketed US$500 in carrier bribes.) In the telecommunications industry, switching repeatedly from carrier to carrier is known as "churning."
Value-added services can reduce churn by as much as 50%. CellPoint has a range of value-added services available or in development that carriers can implement cheaply, easily and rapidly. My favorite is CellPoint Finder! CellPoint has teamed up with Yahoo! Europe to co-market Finder! under the name Yahoo! Find-a-Friend. (You can tell this will be a synergistic alliance from the liberal use of the exclamation point.)
What's coming down the pike
After the introduction of the Finder! Service, we can expect to see several other location-based services offered. Say you need directions to a restaurant or you need to find the nearest gas station or hotel. Maybe you just want to pull up a map of your surrounding area. Targeted advertising will also be available in the near future.
Also coming down the pike is revenues. CellPoint is just making the transition from life as a development-stage company, so revenues have just begun over the last two quarters. Some may view this as risky, I view it as an opportunity.
Since CellPoint is the only company in the world that has GSM mobile positioning, we may well be looking at the 800-pound gorilla as it learns to walk. Location-based services are expected to be a US$25 billion dollar market by 2005, with carriers shelling out US$9 billion on 911 services alone. That's a lot of cash to spread around.
As I said before, the company expects to sign 12 carrier contracts this year. It's in active negotiations with 10 right now. The company believes that after 18 months, carrier contracts should generate US$1 million a month. So, after a year and a half, each contract should be worth around US$4 million per quarter and total revenues may well top US$160 million annually.
One company already under contract is France Telecom (FTE:NYSE). Last year, France Telecom contracted with CellPoint to test the services, with a rollout scheduled for April/May 2000. The CellPoint System has been operational on Sweden's Tele2 network for over a year. The company has a few other irons in the fire, but none are generating significant revenues yet.
The earnings picture
The latest earnings are from the quarter ending December 31, 1999. Sales were US$272K, not much, granted, but substantially more than the US$81K from the previous quarter. And the company told me directly that they are comfortable with estimated sales of US$500K for the quarter ending June 30, 2000. Personally, I think this number is low and I'll tell you why.
For each contract, CellPoint gets paid a minimum every month, plus a fee per user per month. It generated US$272K without any significant commercial contracts. France Telecom has 5.4 million subscribers. If the rollout of CellPoint's services is on schedule and successful, significant revenues could start coming in by the end of the fiscal year in June.
Plus, revenues from the Ericsson deal will be booked over the next two quarters. I look for Q4 revenues to be in the US$750K range, with fiscal year sales around US$1.3 million. Not stellar, but not bad for the first year of commercial service. Starting in Q2 of the next fiscal year, revenue growth will accelerate quickly. Based on the company's estimates, I'm setting a two year price target of US$110.
What to do about all this
I've been watching this company since December. I watched the NASDAQ bubble bounce the price to over US$90 a share. As with everything else, it got whacked down to the low US$30s. With the amount of volatility in the market, and with the summer doldrums right around the corner, I don't think there's any need to rush out and buy a whole bunch. This is one to nibble on.
CellPoint is a thinly traded stock, averaging just 37,000 shares a day. I've watched 200 shares boost the price by a dollar. If all of you run out and buy your whole position at once, this stock is going to go through the roof. Use a stealth approach. I recommend picking up a hundred or two hundred shares any time it dips below US$30. We should get several opportunities to implement this strategy over the summer. And remember, use a limit order for all of your buys. If the price gets out of hand, just wait for it to come back.
Contact information: The Rowe Group handles North American investor relations. That number is 877-880-1195. Investor relations on the Web.
