Rivada Networks

Last chance saloon

October 20, 2016

Company Description

Founded: 2004

Founder: Declan Ganley

Subsidiaries and consortia:

Rivada Mercury: JV between Rivada, Harris, Ericsson, Nokia, Intel, Fujitsu, Black& Veatch, Hughes formed to bid for the FirstNet RFP

Rivada Port Graham: JV between Rivada and Port Graham Development Corporation formed to provide engineering, design, and implementation of communication systems of Homeland Security and first responders.

Rivada Research LLC: Research subsidiary that filed extended location based service patents

Red Compartida Consortium: composed of Rivada Networks and Spectrum Frontier, formed to bid on Red Compartida RFP.

Estimated Total Funding: ~$7MM startup funding from Founder, $80MM (Angel round)

Valuations:

2012–2013 Round: $330MM

2014 : $500MM (for possible IPO, Ganley ruled out IPO at that time)

Cap Table:

Founder: 50%

US and EU Institutional Investors: 50%

Employees: Linked In , 44, estimate 50–200

Patents: 70 world-wide, 195 applications filed

Growth History:

2010: Revenue: $21MM, 50 employees

2014: Revenue: Rivada $3MM, 15 employees (DOA contract data, subsidiary?), RPGS Revenue 4.4MM, 7 employees

2016: Revenue: $230 MM (Owler estimate, seems high compared to previous years)

History

Rivada was founded in 2004, in order to address the 9/11 commission’s recommendation on interoperability between agencies and first responders. Prior to this, many agencies used different networks and technology that were incompatible. For example, when a bridge collapsed in Minnesota in 2007, first responders on different sides of the river could not communicate with each other using radio or cell phones and had to revert to using megaphones.

In response, Rivada built a portable, stand-alone command center based on off-the-shelf technology that does not rely on commercial communication. These compact systems, with the largest being about five-feet high, allow responders to arrive at an emergency set-up an antenna and flip a switch. In addition, special devices designed by Raytheon were employed. These devices allow cell phones to talk to radio or radio to any other device. From the beginning, Rivada recognized the limited budgets of public safety budgets and designed the systems to range in price from $100,000 to $300,000 depending on the reach of the system.

The systems gained a lot of praise when Hurricane Katrina hit New Orleans helping Rivada to secure more contracts. Rivada’s customers include a diverse range of federal, state, and local agencies in the United States, including U.S. Northern Command, the Department of Homeland Security, the Federal Emergency Management Agency, and the National Guard Bureau.

Table 1: Rivada’s public Track Record

Rivada is currently bidding for two major contracts: FirstNet RFP and Red Compartida.

FirstNet

In 2012 Congress created and ordered FirstNet to build the first nationwide high-speed mobile network dedicated to emergency communications with substantial rural coverage requirement. The goal of the proposed platform is to ensure that firefighters and other first responders can always talk to each other. Be it across state lines, or even in the event of a major blow to urban infrastructure, the network will aim to keep communication lines open. The network will potentially serve 4million public safety users, providing service to 60,000 public safety agencies, 3,144 counties, and 566 federally recognized tribes.

The project has been tangled in bureaucracy and technical disputes till 2015.This year, FirstNet issued an RFP for organizations to deliver the network.

The winner of the RFP will receive the use of to 10MHz bands in the 700MHz band for 25 years. This band is highly suitable for transmitting the sort of wireless data consumers gobble on their cell phones and is next to bands of current cell phone operators.

Figure 1: FirstNet proposed spectrum

As a further incentive, FirstNet will provide $6.5billion to build out the system. In addition, the operator will be able to charge each agency user charges, obtain operating and maintenance fees from FirstNet and sell excess capacity. The anticipated contract resulting from this RFP will be a single award Indefinite-Delivery-Indefinite-Quantity with fixed price payments to FirstNet by the Contractor for each of the 56 states and territories resulting from this solicitation. Minimum contract size is $150MM, maximum 100 Billion. The winning contractor will need to provide nationwide coverage on a different spectrum within 6 months of being awarded the contract. With such a short timeline, this means that the capacity will need to come from a traditional carrier.

The bids will be mainly evaluated on the net payments (i.e. operating and maintenance fees less lease payments from the contractor) by FirstNet to the contractor. These net payments will be mainly driven by the assumption made on the value of the revenue obtained by selling the excess spectrum capacity and the cost of capital.

Overall the RFP allows the winner to secure lucrative spectrum on more favorable terms than a standard auction and build approach. A less superior piece of spectrum went for $40 billion in the last auction process. Industry experts have projected that it will cost the winner at least $40 Billion to build out the system.

The winner is expected to be announced in early November 2016.

By Q2 2017, each state would have their individual plans available for evaluation. Each state has 90 days to decide whether it wants to build out its own network or accept the FirstNet plan. If a state opts out for the FirstNet plan, this would mean that the winner would not be able to use the spectrum in that state.

Following this construction would begin in 2017 with a full roll out finished by 2022.

Rivada has formed a consortium named Rivada Mercury incorporating the following partners: Harris, Ericsson, Nokia, Intel, Fujitsu, Black& Veatch, and Hughes. The consortium has selected InfoVista’s Planet software to design a large-scale public safety LTE network

Four bidding teams have announced their intentions: led by AT&T and Motorola, led by Verizon, led by pdvWireless and the Rivada Mercury bid.

Bids by AT&T will receive strong consideration, given its size, low cost of capital, deep customer base for reusing excess capacity, the current operating capacity to provide national coverage within 6 months and its deep influence in Washington lobbying circles.

A Verizon bid will also be aggressive due to its current spectrum allocation being the closest to the RFP spectrum, providing them with an advantage on equipment and devices.

Rivada has assembled a strong technical team for the proposal, based on the capabilities of the contractors and the secured patents. However, it will be fighting an uphill battle on the cost of capital and the sale of excess capacity. Although Rivada has been signaling that it had discussions with utilities, automakers, and MVNOs about selling the excess capacity. It’s track record, and current website/marketing materials do not show a lot of focus on sales and business development. Based on the team, most of the previous deal look to have been sourced through government relationships. Customer acquisition cost for Rivada will be higher than existing operators like AT&T and Verizon with their deep networks and years of business development experience. Rivada lacks the balance sheet strength of AT&T and Verizon, thus will be challenged by raising debt. Financiers will want a big portion of revenue to be contracted, meaning that long-term offtakes for the excess spectrum capacity will need to be sourced. These contracts would be at a discount to prevalent rates thus further squeezing the economics of the project.

Update 1 ( November 4, 2016): FirstNet has delayed the award or the RFP, and PdvWireless has confirmed that it has been taken out of consideration for the RFP. (http://www.rcrwireless.com/20161028/network-infrastructure/firstnet-delays-rfp-award-national-public-safety-network-tag6)

Red Compartida RFP

The Ministry of Communications and Transportation is currently evaluation the Red Compartida RFP. This PPP contract will allocate the winner 90MHz of the 700MHz band for a 20-year term. The winner is obligated to design, finance, build and maintain a shared public network using 4G technology that covers 85% of the population. In addition, the winner will be required to sell its services and capacity at the wholesale level.

Wholesale prices can be set by the winner as long as they are non-discriminatory (i.e. offering the same price to everyone for the same services), and there is no regulation concerning profit margin. For this privilege, the winner will have to pay a preset lease payment for the spectrum to the government.

AT&T has recently entered Mexico, and is focusing its lobbying power on calling off this tender, and promoting a market-based approach.

The key evaluation criteria for the RFP is based on the population coverage target offered by the bidder.

The results of the RFP are expected to be announced on November 17, 2016, with a full operating network being ready by Q1 2018.

The design of the RFP leads to challenging economics and is borne out by a very poor showing of bidders. The population target bid criteria gives preference to the biggest and most expensive networks, rather than most cost-effective and efficient systems. On the other hand, the wholesale requirement leads to the commodification of the spectrum, removing most of the pricing power. The lack of negotiating power and unhappy incumbent competitors will push the winner into negotiating significantly reduced prices. The low wholesale pricing will be further distorted but lender’s requirement for a certain % of contracted cash flows over the life. Sourcing the long-term off-take contracts would be made at a significant discount to current market price. Both the high costs and the low revenue will squeeze the margins of the winner, driving the poor economics.

This poor design and structure of the RFP are reflected in the fact that only two companies bid for the RFP and both of these companies are small and inexperienced.

Only two consortia presented bids for the RFP. The Altan consortium includes two Mexican companies Megacable and Axtel.

Megacable is a Mexican public cable operator and provider of internet and phone services to 250 cities in 25 states. It currently serves 5 million customers and had a 2015 EBITDA of $320 million.

Axtel is a Mexican public fiber optic cable operator and provider of telephone, internet and television services in 45 major cities. It is the second largest land-line operator in Mexico, with revenues of $800 million.

The Rivada consortium is composed of Rivada Networks and Spectrum Frontier.

Update 2( November 4, 2016): Rivada Networks was disqualified from the RFP for failing to provide required financial guarantees. (http://www.wsj.com/articles/mexican-government-disqualifies-one-of-two-bidders-for-ambitious-mobile-network-1478297341)

Patents

Rivada currently own 70 worldwide patents grouped into two categories, E-LBS (Enhanced Location Based Service) and DSA (Dynamic Spectrum Arbitrage). A full list of patents is shown in Table 3.

Enhanced Location-Based Services, use a mesh network, self-triangulation and Kalman filters to determine its location against other devices. Through this novel approach, the software is able to lower the devices power consumption and provide accurate 3d positioning. A further benefit is that the mesh and devices could be used to provide exact locations of wireless infrastructure. Rivada owns 11 E-LBS patents and has developed a full working library function for the Android operating system. In recent field tests the software achieved a position-location accuracy of 1 meter.

Dynamic Spectrum Arbitrage (DSA) encompasses the majority of the patents. DSA enables instant prioritization of users on a mobile network. This ensures that during a crisis or high congestion a group of users (i.e. first responders) receives priority over all other users. The other users would then be switched over to alternate networks within the vicinity.

Another aspect of the DSA patents is the open access market structure. This is a dynamic real-time marketplace where users can bid on 4G bandwidth.

Table 1: Rivada Patents

Team

Rivada’s Board of Directors is mainly composed of ex-government officials, mainly coming from the defense and public safety sectors. This might have provided valuable guidance to Rivada when its main focus was public safety contracts but would struggle to guide a telecommunication focused company. This drawback has been partially addressed through the composition of the management team. Most of the current management team has previous telecommunication experience a majority coming from Sprint.

Market Opportunity

Rivada is aiming to address three aspects of the market: demand for mobile bandwidth, the cost of mobile bandwidth and increased demand of accurate location-based services.

Demand for mobile bandwidth

The demand for mobile bandwidth has been increasing exponentially over the last number of years and is forecast to explode in the future. It is driven by retail consumer’s desire for data and video services as well as the emergence of data-heavy businesses such as Internet of Things (IoT).

Internet of Things encompasses a wide variety of devices, such as Smart Home internet-connected thermostats and appliances to industrial machinery that send diagnostic data to the manufacturers.

Figure 2: Market Opportunity: IoT

Source: https://www.ncta.com/positions/internet-of-things
Source: http://www.forbes.com/sites/louiscolumbus/2015/12/27/roundup-of-internet-of-things-forecasts-and-market-estimates-2015/#5af8b64d48a0

IoT devices are forecast to show explosive growth in the next few years reaching 50billion devices by 2020. This translates to an estimated $14.4 trillion market by 2022.

The demand for mobile data is increasing exponentially and is expected to increase six-fold by 2021. Although the demand for the data is strong, the supply has not kept up as demonstrated by the cost of mobile data. North American monthly data costs are among the highest in the world.

Figure 3: Market Opportunity: Mobile Data traffic

Source: http://bgr.com/2016/06/02/smartphone-data-usage-2021-gigabytes-erricson/
Source: http://www.cisco.com/c/en/us/solutions/collateral/service-provider/visual-networking-index-vni/mobile-white-paper-c11-520862.html

Figure 4: Market Opportunity: Mobile Data cost

Source: http://www.crtc.gc.ca/eng/publications/reports/wall2015/rp150618.htm

For Rivada there exists a big opportunity through the two RFPs, to capture a market share in the mobile data market. Capturing the spectrum would give them the opportunity to test, develop and growth the application of their patent portfolio while focusing on reducing mobile data costs.

Demand for location based services

The demand for location-based services is growing exponentially, due to new technologies such as self-driving cars. GPS signals and current technology provides an accuracy of within few meters and requires significant battery drain. The market adaptation of these services has entered an aggressive growth stage, where it is being moved from niche products to deploy all over the industry. A specific growth field will be the deployment in healthcare, mining and transportation sectors. The market is projected to grow from a $12 billion to $55 billion by 2020.

Figure 5: Market opportunity: Location based services

Source: http://www.technavio.com/blog/top-33-indoor-location-based-services-lbs-companies-in-the-us,

Rivada has focused it research on addressing the issues of current location based services, by providing a more accurate approach that uses less power. Through this, they are aiming to capture market share in a growing market.

Competitors

Rivada’s products and competitors can be broken down into two areas: network providers and location-based services.

Network Providers

Aviat Networks

Aviat Networks provides microwave networking solutions to wide range of industries from public safety, utilities, the federal government, and enterprises, with a specific focus on helping existing operators reach rural and underserved areas. It is the primary equipment supplier to 7th largest telecommunications service provider (BSNL) and has a worldwide presence and track record. It’s a public company listed on Nasdaq, with 720 employees and $260 million of revenues.

Airspan provides solutions for public safety and private companies employing the WiMax technology. It has a presence in over 100 countries, with over 100 engineers developing mobile WiMax and LTE solutions. In the US it has an exclusive tight to market the 1.4GHz spectrum targeted for utility communications. It’s a private company owned by Oak Investment Partners, with 275 employees and revenue of $55 million.

Alvarion provides end-to-end wireless solutions for smart cities, stadium, and high-density events. It was one of the first manufacturers of mobile WiMax systems. Alvarion is a private company owned by SuperCom, with 365 employees and $50 million of revenue.

Redline Communications, provides mission-critical wireless networks for government, public safety, military and Oil&Gas applications. Some of its illustrative customers are US Army, US Marine Corps, Chiapas and Puebla States in Mexico. It’s a public company listed on the TSX, with 130 employees and $30 million of revenue.

Ceragon, provides high-capacity microwave backhaul solutions to public sector, public safety, defense, Oil&Gas, and utilities. It claims to be the number one worldwide backhaul specialist. Ceragon is a public company listed on Nasdaq, with 1,100 employees and $446 million of revenue.

Dragonwave provides packet microwave radio systems for public safety, state and local governments and has customers in over 150 countries. It’s a public company listed on Nasdaq and TSX, with 350 employees and $78 million of revenue.

CommScope provides wireless solutions for inside buildings, outdoor spaces, wireless cell sites, airports, and tunnels. It’s a public company listed on Nasdaq, with 25,000 employees and 3,8000 million of revenue.

Technology

The biggest competitor to Rivada’s opportunity in the mobile data space is technology. It is expected that 5G networks will start to be rolled out by 2020. 5G networks will result in at least a tenfold increase in the data bandwidth. This will result in pricing pressure on bandwidth and make 4G networks obsolete.

Figure 6: 5G mobile technology

Market Analysis ELB

Location based services depend on a combination of GPS data and terrestrial based locations. A GPS signal takes a few minutes to be procured (i.e. time to first fix), as the GPS device does not know which satellite is currently in its view. Assisted GPS is a hybrid method of using network level resources to provide satellite information, which in turn are used by the GPS receiver to select the correct satellite. This reduces the time to first fix. There are a variety of methods used to improve the accuracy or decrease the time.

The major patents on LBS are held by Motorola,Qwest, Google, and Intel.

A list of competitors in this space and their approaches is shown below:

  • Qualcomm uses the location of cell-phone towers and the signal strength to improve accuracy.
  • CISCO, Google, Navizon, Skyhook, Microsoft and Apple employ surrounding wifi signals to triangulate positions and improve accuracy.
  • TruePosition focuses on TV signal strength in order to determine the location.
  • Polaris Wireless has mapped its LBS to radio frequency patterns
  • Nokia uses Bluetooth signals to improve the accuracy indoors.
  • NextNav and Locata, aim to improve the accuracy by installing beacons and terrestrial GPS transmitters.
  • IndoorAtlas provides indoor LBS through the use of internal magnetic maps
  • ByteLight provides indoor LBS through mapping flickering patterns from LED lights
  • Polaris Wireless employs a radio-frequency matching technology to accurately determine location.

Other alternative methods are triangulations as done by Rivada, and proximity to reference places. RFID tags are also becoming popular, where a phone would pick up a fixed location from RFID tags spread over a region. Once such a location is known the phones inertial measurement equipment can be used to update the location in real time.

Market Analysis Spectrum Optimization

Currently, there is no direct market for mobile spectrum. However, there exists a number of platforms which could be extended to support such a market. Those platforms currently focus on internet and wifi bandwidth.

InvisibleHand’s Merkato open software platform although a little dated enables real-time, market-based pricing and allocation of IP bandwidth.

GlobalCapacity is a marketplace that benchmarks 50 million price points and allows for trading of internet bandwidth.

BandwitdhX brings together mobile data demand and WiFi capacity. Wifi providers can sell their capacity to mobile operators, through the BxMarket.

Conclusion

Rivada looks like it a classic strategy and execution case study. It was started with a novel idea to solve the problem of incompatible or unavailable communication channels during emergencies. It achieved this by creating a communication command center and focusing on the public safety and defense industries. For a few years this was a good business, but as other more diversified companies entered the market, Rivada’s competitive first mover advantage started to erode. These new competitors being both diversified in other industries and with better sales/BD/marketing experience were able to gain significant market share. This has put Rivada at an important juncture, where it needed to diversify into other products in order to survive and grow. With this in mind and having a unique view on the FirstNet RFP, Rivada decided to reinvent itself as a telecommunications provider. In order to achieve this, it ramped up its R&D, started to apply for patents and went on a hiring spree for telecommunications talent. In the quest for survival and re-branding, it became aggressive and bid on the Red Compartida RFP overlooking the poor economics.

Rivada’s survival at this point depends purely on winning the FirstNet bid. Winning the FirstNet bid would provide Rivada with some breathing room to monetize their IP and improve their track record and reputation. However, the FirstNet bid will not be a slam dunk, due to its limited economics and strong competitors. The timing of the system roll out would coincide with the roll out of 5G networks, making some of the technology obsolete and putting negative pressure on bandwidth prices.

If Rivada does not win the FirstNet RFP, most of the IP and patents do not provide lots of value. A lot of the patents depend on Rivada’s business plan for FirstNet. These patents could be circumvented by their competitors or different approaches developed in order to achieve similar solutions. A lot of Rivada competitors are better funded, so they can more easily promote their internal solutions industry and have the luxury of time to wait till Rivada’s patents become obsolete.

I would not recommend an investment at this point. One the dust settles after the two RFPs, and a clearer picture emerges on the direction and strategy of Rivada, the opportunity should be evaluated.