Energy Industry Boom Fuels Growth at ERF Wireless

Wireless Provider Taps Vertical Markets

As a wireless communications company boasting a 212% YoY growth in revenue, ERF Wireless stands out as a success story in today's difficult and competitive market. The key to the company's business plan lies in something we've been highlighting for a while: the power of vertical markets. According to ERF founder and ceo Dr. Dean Cubley, the company's strength is its diversified business, which supplies high-capacity wireless services to three main sectors—WISP services for rural business and residential customers, secure wireless communications services for the banking industry, and “nomadic communications solutions” for the energy industry. With this model, Cubley says growth in one sector can counter stagnation in another sector. Right now, ERF's sustained commitment to providing wireless communications services for the energy industry has allowed ERF to be profitable over the last two to three years. When so many other companies are reporting losses and laying off employees, Cubley says ERF is “just having a hard time keeping up with all of the business.”

Cubley founded ERF back in 2004, after decades in the wireless industry. Since then ERF has acquired 16 companies—mostly wireless companies in rural areas and, most recently, in oil and gas producing regions. Now, Cubley says, “anywhere there's oil and gas, we're interested in networks there.” Not only can ERF supply wireless to the energy companies, but as people come into the regions, rural banks and rural customers also look for services, which ERF can supply off of the same networks. “We use a little bit of everything: licensed spectrum, unlicensed spectrum, and what we use depends where we are,” Cubley said. The company uses 6 GHz licensed spectrum on the backbone, typically, but also uses 3.65 GHz in rural areas if there is interference on unlicensed spectrum.

Based in League City, Texas, ERF is well-positioned, geographically, to grow alongside the booming oil and natural gas industry. The nearby Permian Basin spans from west Texas into New Mexico and represents one of the largest oil and natural gas fields in the country. It's a 55-county area where the number of oil rigs has tripled in the last two years, where oil companies have rented hotel rooms a year in advance for their employees, and where the need for manpower seems insatiable. This surge in production and influx of people brings with it the need for wireless connectivity, both for day-to-day business operations and for personal communications. “Our customers operate in very remote areas,” Cubley says, “where it can be a hundred miles or more to the nearest landline, with no towers for wireless connections.” This is where ERF comes in, as a close partner supplying communications services to the oil and gas companies.

ERF operates about 150-200 mobile broadband trailers, each equipped with a 50-foot tower that can be erected by a technician. The trailers can be driven to any remote drilling site and, by connecting back to the company's network, enable powerful high-bandwidth, low-latency wireless broadband in any location. In the past, Cubley says that communications “had been provided by VSATs (satellite), but software designers have developed programs that will not run over VSAT. They [the programs used by oil and gas companies] need high capacity and low latency, and we can provide that kind of system at the same cost as a VSAT.”

Right now, ERF provides this “nomadic solution” in the Southwest and southern Midwest, but Cubley says ERF is opening an office in North Dakota next month. The Williston Basin region of the Dakotas is enjoying a similar (but more recent) energy industry boom, and Cubley said ERF's plan there is to build their own network. “We will be one of the first WISP networks in the area,” Cubley said, “and we chose to build our own network since there are none in the area to buy.”

Cubley said that ERF's business strategy has been to buy and then improve small wireless networks in rural areas—tapping into new sectors of business that can make the networks profitable again. “We can buy a company that is unprofitable and make it profitable almost overnight,” Cubley said. “One of our company's original goals was to set out to acquire wireless in rural areas and use it in ways it hasn't been used before,” with a prime example being wireless networks in oil and gas producing areas.

“We operate as a WISP and have thousands of residential customers scattered throughout the U.S., but that is only 50% of our revenue. For a lot of companies, that is the only thing they're doing. If that is your only service, you have to have extremely large networks, because the margins are so thin. If a company can improve its economies of scale, those margins are much better,” Cubley said. “We're not trying to be the largest network, but use the networks for different purposes to generate more revenue.” According to Cubley, “the margins are 80-90% for the energy industry” and a bit less for the supplying communications services to the banking industry, which ERF also does through its wireless CryptoVue network security system.

Although ERF is sometimes in direct competition with local ILECs and RLECs, Cubley said they do often partner with traditional telcos and small wireless companies. “If we can't buy it or build it, we'll contract for it,” he said. In most cases, ERF will buy wholesale broadband bandwidth and re-sell it to the energy industry. “The problem is,” Cubley said, “sometimes the energy industry has higher standards for capacity and latency, so in some cases we have to pay to upgrade existing carriers' networks.” Right now, ERF has 14 such contracts in the U.S. and Canada, with more likely in the future.

Notes from the 2011 Wireless Symposium in Savannah, Georgia

Rural Wireless Industry Participants Discuss Challenges

Forty-one exhibitors and hundreds of attendees came together in Savannah, Georgia last week to attend the Wireless Symposium, sponsored by the National Telecommunications Cooperative Association (NTCA) and the Rural Telecommunications Group (RTG).  Panel discussions centered on the challenges facing rural wireless operators—but unfortunately, from where we sat, the conference raised more questions than it provided answers.  From spectrum limitations to regulatory needs to competitive hurdles, rural wireless operators are being assaulted from all sides.

Keynote speaker Sten Anderson, CTO at Ericsson, focused (not surprisingly) on network quality.  “Your success as a wireless operator will be closely tied to the quality of your network,” he said, adding, “Of the 50 billion connected devices in 2020, how many of these will be connected to your network?”

On a panel entitled 4G Evolution Strategies, Alcatel-Lucent’s David Fritz pointed out that “the folks that are sitting in this room don’t drive the ecosystem.”  He noted that Verizon has LTE up in 38 cities and expects to offer 4G wireless services nationwide by 2013 using its upper 700 MHz spectrum and employing a rural partnership program to fill in the ‘white space.’ 

Fritz attempted to answer the question “Can a rural CMRS carrier skip from 2G to 4G?”  The keys, he opined, will be 1) Device and ecosystem availability, 2) Access, and 3) Price.  Fritz believes that for CDMA carriers, the answer is Yes, over time, but for GSM-based carriers, the answer would be No, based on the current market.  He also pointed out that 100 Mbps (true 4G speeds) will not be possible for rural carriers with only 5 MHz of spectrum up and down.

Nokia Siemens’ Robert Balconi said that the 4G “revolution has just begun.”  He noted that in every single second in 2010 there were: 1) Five subscriptions to a mobile broadband network, 2) 290 apps downloaded to a smartphone or device, and 3) eight smartphones connected for the first time to the Internet.  He said bluntly, “Whatever you’re doing today to adapt, truthfully, may not be enough,” adding, “The future of mobile communications is all about applications and experience.”  Balconi said that it’s about “My tech, not high tech” and noted that “every day, half of Facebook’s 500m users log on.”  He then asked, “What happens when we go beyond our traditional POPs that biz models were built on?” and pointed out that one video download is equivalent to 500k text messages. “That’s what the network has to deal with….There will be a multitude of smart devices, connected anywhere, anytime, including body sensors, machines, smart glasses, tablets, cars, 3D HDTVs, and eMeters.”

Balconi noted that the motivation for carriers to deploy LTE is that it reduces the cost per Megabit and improves the user experience.  “70% of consumers are not loyal and it’s not always about price, it’s about experience,” he said, adding, “The last 10 years were about building bigger, faster networks; the next 10 should be about building better relationships with our customers.”

Richard Ruhl, general manager of Pioneer Telephone Cooperative, described the agreement Pioneer struck in December to be a Verizon rural LTE affiliate.  He said the master agreement allows Pioneer to build out the white space in its Oklahoma territory, and will cover 250k of Pioneer’s total 345k POPs, where Pioneer has leased 22 MHz of spectrum from Verizon.  He noted that Pioneer doesn’t have the southern portion of its service territory under the agreement, due to Verizon’s restrictions in former Alltel territories.  “Anywhere they have existing Alltel service, the LRA (LTE Rural Agreement) is off limits…We can market and sell to those POPs, but they will be using Verizon service.”  Ruhl said that the initial build will cover northwest and southwest Oklahoma, with about 60 cell sites by year-end, and that the ecosystem will be established by mid-2011 with more devices in 2012.  Ruhl noted that Verizon was not open to negotiating price for its rural LTE program, but added, “They’re the tsunami and we’re going to ride their wave.”

Regulatory Morass

Numerous speakers over the two-day meeting pointed to policy and regulatory issues rural carriers are facing as significant.  Larry Movshin, Partner at Wilkinson, Barker and Knauer, said that “These are contradictory times for rural carriers.  The Obama administration is pushing hard for rural broadband, but the economy doesn’t make it easy.”  He noted that the FCC is becoming concerned about the concentration of spectrum held by Verizon and AT&T, and that’s why it has asked for comments on the Windstream/AT&T spectrum deal.  Panelists also noted that the FCC has a new rulemaking forthcoming on stricter build responsibilities.

Jill Canfield of the NTCA said that the RTG will oppose the recently announced Qualcomm/AT&T spectrum deal, and suggest an incentive auction instead, although she acknowledged that that is unlikely to happen.  She added that the Commission “Needs to mandate data roaming if the deal goes through.”  Concerns about USF reform were also raised.  Carrie Bennet, Managing Principal of Bennet and Bennet, asked, “How are you going to support broadband and rural carriers without having the USF grow?”  And regarding the recent “Bill Shock” proceedings, Canfield said “It’s like killing a fly with a sledgehammer, it’s way overkill.”  Speakers agreed that the FCC isn’t likely to go forward with Bill Shock rulings, as it will be too expensive for small carriers to implement.  They also noted that the Net Neutrality transparency and disclosure requirements could be onerous and expensive for small rural carriers to implement.  Bennet said, “The transparency requirements are effectively just a new cost without any tangible benefit to carriers.”

JSI Capital Advisors’ Dave Selzer summarized the major issues that had been raised throughout the conference as being related to 1) the need for access to spectrum that is appropriate for providing service in the rural space (lower band spectrum), 2) access to roaming and 3) a well developed ecosystem of equipment, particularly for bands 12 and 17.  He added that “Build deadlines are looming and it’s difficult to tell what direction the FCC’s going to go with regard to enforcement.”  Selzer concluded, “There is no panacea that’s going to present itself and open up the rural wireless space and allow you guys to compete. This is a marathon, not a sprint.  It’s going to require a tremendous amount of work to force that space open.”  He advised attendees to make incremental steps with regard to entering the wireless space.