IoT Monthly: The Path To 5G
Straight Path acquired: carriers are making progress towards 5G.
The most important deal ABB has ever done.
Comcast joins the LoRa alliance. Should you care?
Every new generation of wireless networks delivers faster speeds and more functionality for devices. 1G brought us the very first cell phones, 2G let us text for the first time, 3G brought us online, and 4G brought us the speeds we enjoy today. But as more devices come online, 4G networks have just about reached their limit of what they’re capable of, at a time when connected devices are growing at an exponential rate. Now, we’re headed towards 5G, the next generation of wireless. It will be able to handle 1000x the traffic of today’s networks and up to 10x faster than 4G LTE. An HD movie will download in under a second… 5G will be the foundation for smart grids, virtual reality, autonomous driving, and every other category of the IoT. So what is 5G? Essentially, 5G will be a combination of technologies that improve the efficiency and security of networks. We believe this is still a long way from becoming a reality, but the foundation of this technology is already seeing plenty of action. The foundation includes:
- Millimeter wave spectrum: This section of spectrum has never been used before for mobile devices, and opening it up means more bandwidth for everyone.
- Small cell networks: Millimeter waves have a tougher time traveling through obstacles, and small cell networks solve this problem through a relay of base stations.
- Fiber: Small cells need signals, signals come from macro cells (base stations) and these signals will need to be connected (backhaul) by fiber networks.
The month of April saw $2.5B in investment, primarily saturated in network infrastructure and cloud monitoring technology. There was an aggressive bidding war for Straight Path Communication’s (NYSEMKT: STRP) spectrum, continued consolidation in fiber and SD-WAN services, and the most important deal ABB has (NYSE: ABB) ever done.
Companies You Should Be Watching: Straight Path Communications
M&A and Investments:
- Fiber: Crown Castle International (NYSE: CCI) acquires Wilcon, Wave Broadband acquires Cascade
- Network Hardware/Services: Airgain (NASDAQ: AIRG) buys Antenna Plus, Riverbed acquires Xirrus, Sierra Wireless (NASDAQ: SWIR) buys GlobalTop Technology’s module business
- Industrial: Cognex (NASDAQ: CGNX) buys ViDi Systems, Thales buys Guavus, ABB acquires Bernecker + Rainer
- Connected Car: Sirius XM (NASDAQ: SIRI) acquires Automatic
- AR/VR: AMD (NASDAQ: AMD) acquires VC-backed Nitero
- Energy: Qundis buys Kalorimeta
- Blockchain: Spotify (Private:MUSIC) acquires Mediachain
- Network Services: Comcast (NASDAQ: CMCSA) joins LoRa Alliance
- Industrial: ABB and IBM (NYSE: IBM) partner for industrial AI
- Insurance: Liverpool Victoria partners with TH_NK for IoT
- Enablement: Nvidia (NASDAQ: NVDA) releases edge analytics capabilities
- Networking Technology: Apple (NASDAQ: AAPL) files for wireless charging patent
Companies You Should Be Watching:
Straight Path Communications grew their market cap by 6x this month as a bidding war emerged for the company’s spectrum assets.
Why is there a bidding war? This has been covered in nearly every tech outlet, so here is the quick and dirty from Straight Path’s eventful 2017:
- Jan. 12th: STRP settles with the FCC for $100mm, surrenders their 5G licenses, but they’re told they can keep $85mm in cash if they sell before 2018
- Mar. 10th: Reports earnings with no revenues and a $25mm loss for the quarter
- Apr. 10th: AT&T (NYSE:T) offers to purchase the company for $1.6B or a 162% premium
- Apr. 13th: Rumors of a Verizon (NYSE:VZ) bid begin circulating
- Apr. 25th: New mystery bidder tops AT&T’s offer. AT&T has 5 days to match
- May 10th: The 12 p.m. ET deadline passes and Verizon secures their bid and pays $184 per share, versus the $35 stock value at the start of the month, as well as a $35mm termination fee to AT&T, on behalf of Straight Path.
Why is this spectrum so valuable? These licenses are an essential component for building a 5G network capable of handling increased download speeds. They’re designed for use by IoT products like self-driving cars that require a consistent signal but commonly operate out of the reach of Wi-Fi. Additionally, the mmWave spectrum is not interchangeable and the supply is limited. What kind of spectrum do they own? The licenses Straight Path owns cover the 39 GHz and the 28 GHz band. Both will enable higher capacity and faster data transmission, but the 39 GHz (roughly 86% of their licenses) has proven to be more difficult to use because it’s a space-to-earth directional frequency versus the earth-to-space direction of 28 GHz. Interference from signals originating in space is still a hurdle for telcos.
So 28 GHz is the golden goose. Who else owns it? Verizon. Sort of. When they bought XO Communication’s fiber network assets earlier this year, they also purchased a lease of the spectrum, with an option to buy at the end of 2018.
How much of this value is hype? There’s some logical comp-math you can find here suggesting it’s only worth $289mm, but this analyst has no telecommunications background. However, it points out the valuation nightmare and the potential hype that’s getting priced in to these assets. The corporate strategy teams at AT&T and VZ may have more information and insight to the future of networks, but it looks quite frothy from the sidelines.
What have we learned? As far away as 5G might be, the infrastructure assembly is in process, and with limited spectrum licenses and high valuations, carriers clearly believe these assets have the ability to decide between success and failure.
M&A and Investments
Fiber: Crown Castle International, the wireless infrastructure real estate investment trust (REIT) acquired Wilcon to increase their fiber assets and enhance small cell capabilities.
- What do they do? Wilcon has built 1,900 route miles of fiber, mostly in Los Angeles and San Diego. Why did Crown Castle acquire them? Upon closing the acquisition, Crown will own or have rights to over 28,000 route miles of fiber. This will complement their tower-heavy holdings in the near term, and longer term, it will provide them with the opportunity to capture more incremental capex from carriers as fiber is the largest cost and underlying asset to small cell deployments.
- Strategy? CCI has traditionally been a tower company, but they’re moving to a fiber provider focused on small cell opportunities. In the past two years, they’ve purchase three fiber operators: FiberNet (17,500 route miles), Senesys (10,000 route miles), and 24/7 Mid-Atlantic (800 route miles).
- Competitors? There’s heavy small cell competition from the likes of Zayo, Lightower, and more recently, Verizon and T-Mobile (NASDAQ:TMUS). It’s widely rumored that Zayo (NYSE:ZAYO) is the next target of these larger players, especially Crown Castle, given their more focused position in the value chain of network infrastructure and services when compared to the larger carriers like Verizon and T-Mobile.
- Valuation? CCI has $320mm in cash and $13.5B in debt and holds a valuation of 57x trailing twelve-month EV to EBITDA. ZAYO has a slightly higher leverage ratio, and they’re valued at 13x EV to EBITDA.
Fiber: Oak Hill makes another fiber asset acquisition through Wave Broadband’s acquisition of Cascade Networks.
- Why? Oak Hill is a private equity shop that’s been executing on an aggressive fiber acquisition strategy through their holding companies Wave Broadband, Metronet, Wave, Atlantic Broadband, and Wide Open West.
- Where does Wave Broadband fit? The companies vary by geographic focus, and Wave covers the pacific northwest. Their acquisition of Cascade adds 350 route miles of fiber across Washington and will supplement their existing infrastructure across Washington, California, and Oregon. It’s the company’s 22nd acquisitions since launching in 2002, and this past September, they raised $125mm to expand their asset holdings.
- Last month, we covered their fiber route miles in New England.
Network Hardware: Airgain buys Antenna Plus for $6.4mm.
- What do they do? Antenna Plus has a range of mobile, in-building and outdoor antenna solutions for private network government, public safety, and automatic vehicle locator markets. They also make antennas for connected kiosks/vending machines.
- Why did Airgain buy them? Airgain makes antennas for a number of devices, including set-top boxes, Wi-Fi routers, and digital TVs. The acquisition adds to its product line-up with GPS, cellular, Wi-Fi, and private radio frequency antennas.
- Valuation? Disclosed financials reflect that Antenna Plus generated 2016 revenues of $7.5mm, so it looks like the deal was less than 1x TTM sales. Management also stated that they expect the transaction to be accretive within 2017. Airgain has $45mm in cash, $2.7mm in debt and trades at 20x trailing twelve-month EV to EBITDA.
- We profiled AIRG and their tailwinds of DOCSIS 3.1 and IoT earlier this year.
- What do they do? Xirrus essentially builds enterprise-grade Wi-Fi kits that deliver multiple access points in a single framework.
- Why is Riverbed buying them? Riverbed is one of the leading WAN (wide area network) optimization vendors, which are private networks that connect branch offices of large corporations, enabling them to control and secure their long distance network connectivity without having to rely on the public internet. Xirrus will be used to expand the capabilities of software-defined WAN offering, SteelConnect by adding enterprise grade Wi-Fi functionality with high density access points and cloud services.
- What is software defined networks (SDN)? Think of transportation in Manhattan. The roads are the network, and the cars, buses, bikes, and pedestrians are packets of data. Now, imagine there was some sort of master traffic planner whose role was to make sure everyone gets to their destination as quickly and safely (reliably) as possible. They can manipulate the rules such as moving a lane in an empty road to one with gridlock or giving bikes, trucks, and cars their own lanes so they don’t interfere with each other. This is what SDN does. Network administrators can manage data traffic responsively to ensure efficiency and reliability.
- Who do they compete with? Steel connect competes with Silver Peak’s Unity EdgeConnect, Versa Networks, Citrix’s (NASDAQ:CTXS) NetScaler, Cloudgenix, and Cisco’s (NASDAQ:CSCO) Meraki solution.
- Valuation? Financial details of the deal were not disclosed beyond Xirrus’s annual revenues being between $50mm to $100mm, and Riverbed was brought private by Thoma Bravo in 2015.
Industrial: ABB acquired Bernecker + Rainer Industri-Elektronik (B&R), an open source machinery and factory automation platform for an estimated $2B.
- What do they do? B&R was founded in 1979 and has historically made programmable controls for machines used in discrete manufacturing, specifically by automakers BMW, Daimler and Volkswagen. More recently, the company has put all their chips into machine and factory automation.
- Why did ABB acquire them? ABB is considered 2nd place in industrial automation, against lifetime rival Siemens (OTCPK:SIEGY) leading the charge, and ABB’s CEO confirmed this characterization, saying that Siemens is number one in factory automation and ABB is number one in process automation but now a key player in factory automation.
- Valuation? The best estimates we could find were $600mm in fiscal 2016 revenues, and this would equate to a 3.3x trailing twelve month sales multiple. Not bad for “the most important deal ABB has ever done.”
Industrial: Cognex acquired ViDi Systems, a maker of deep learning AI for industrial machine vision.
- What do they do? ViDi’s software uses artificial intelligence to improve image analysis where it’s difficult to predict the full range of image variations that could be encountered. Using feedback loops, the software then trains the system to distinguish between acceptable variations and defects.
- Why did Cognex acquire them? Cognex has pursued an active industrial vision-based M&A strategy recently, acquiring 3D vision companies such as Boulder-based Chiaro Technologies in November 2016, EnShape in October 2016, and Aqsense in August 2016, as well as barcode verification provider Webscan in December 2016. As most of these are sensor platform technologies, ViDi’s AI solutions will provide the engine to the industrial data collection.
Industrial: Thales (OTCPK:THLEF) acquires machine intelligence and big data analytics platform, Guavus for $215mm.
- What do they do? Guavus is an eleven-year-old machine analytics platform that has found a niche in supporting infrastructure for large communication service providers, including the five largest North American mobile operators, 4 of the top five internet backbone carriers in the world and seven of the top eight cable operators.
- Why did Thales acquire them? Thales’ push into IoT data management will be well-suited for Guavus, and their core markets in aviation, trains, energy, and city infrastructure will be logical adjacent markets for Guavus, after conquering the communications space.
Connected Car: Sirius XM acquired connected car company Automatic for over $115mm.
- What do they do? Automatic offers a device that users plug in under their dashboard and syncs data to their mobile app such as trip logging, engine light diagnostics, crash alter, parking tracking and more. More importantly, Automatic has been building partnerships with insurance providers who then provide subsidies to their policy holders to use the devices.
- Why did Siriux XM acquire them? The acquisition adds to the company’s connected car, data collection offerings, allowing them to stay relevant while users utilize mobile media for in-car entertainment. And even though this retrofitted monitoring is likely only a temporary success because OEMs will build this technology into vehicles on proprietary platforms, there’s still a market for tape adapters, so this device might have a fat tail.
- Valuation? There was no financial data released besides the acquisition size which would be frustrating as an shareholder, but SIRI is now holding a mere $230mm in cash on $6B in debt while garnering a 17x trailing twelve-month EV to EBITDA valuation.
AR/VR: Advanced Micro Devices acquires VC-backed Nitero, who builds wireless chips for streaming VR content from desktop computers to headsets.
- What do they do? Nitero is one of the few companies in the world building 60 GHz mmWave radio technologies, especially for wireless VR. More simply, they’re enabling wireless VR through a high rate data connectivity (the same frequency that Apple’s wireless charging patent claims; see “Product Announcements” section).
- Why did AMD buy them? AMD has been facing pressure against Intel (NASDAQ:INTC) and Qualcomm (NASDAQ:QCOM) who have already built wireless divisions and 60 GHz technologies for virtual reality, and this acquisition reflects AMD ensuring a seat at the table in the VR ecosystem.
- Who else is doing this? As noted, the big players like Intel and Qualcomm are exploring this technology, but we’d recommend keeping an eye on Peraso, who recently raised a Series C led by Integrated Device Technologies (NASDAQ: IDTI) and SiBEAM, a subsidiary of Lattice Semiconductor (NASDAQ:LSCC).
Energy: Qundis, a sub-metering business owned by HgCapital, was sold to German indoor climate control group Kalorimeta.
- What do they do? Qundis’s connected meter devices are used to monitor data about heat and water usage in households, and their acquirer Kalorimeta is a provider of climate-intelligence solutions for buildings.
- Who’s the winner here? HgCapital will mark a 3.5x investment multiple on a 30% IRR from the 2012 investment.
Blockchain: Spotify acquired blockchain startup Mediachain to connected artists with the tracks hosted on the company’s service.
- What do they do? Mediachain has developed a decentralized, peer-to-peer database to connect applications with media and the information about it, as well as an attribution engine for creators. They also developed a blockchain-enabled cryptocurrency that rewards creators for their work.
- Higher level? They were using blockchain to help solve problems with attribution.
- Why Spotify? Last year, Spotify settled a licensing dispute over unpaid royalties after failing to obtain licenses to reproduce musical work. The lawsuit claimed that as much as 25% of the activity on the platform is currently unlicensed, and Spotify was forced to pay $25mm to settle. Now, the IPO rumored company has the technology to locate and pay these royalties.
- For fans of Silicon Valley, Mediachain might sound like a very familiar business model.
Comcast joins LoRa alliance
- Why should you care? This move follows Comcast’s October announcement of testing low-power wide-area (LoRa) network with chip manufacturer Semtech Corp. (NASDAQ: SMTC), and it officially pits the cable provider against network providers and LTE/5G disciples AT&T and Verizon who have been targeting similar verticals such as smart metering and asset tracking.
- What is it? When compared with WiFi, LoRa is a wireless network that’s cheaper and optimizes the life of batteries. The technology is owned by Semtech, who acquired it from French startup Cycleo, and it’s a more distributed concept when compared with Sigfox or LTE-M because they allow each mobile operator partner to roll out the infrastructure on an independent basis, so anyone can succeed or fail. However, Semtech is the sole supplier of LoRa chips and make $0.50 on each one sold, so it’s not exactly open-source as it’s marketed.
- Who else is leveraging LoRaWAN? Cisco has piloted a LoRaWAN offerings with the Hamburg Port Authority in German, Softbank is using the network to supplement their NB-IoT applications.
- A great primer on these networks can be found here.
ABB, IBM partner for industrial artificial intelligence.
- Why? Whereas ABB’s rival, GE is acquiring companies like Bit Stew and Wise.io for artificial intelligence, ABB will be utilizing Watson. These technologies will be used in industrial for tasks such as identifying root causes, decreasing downtime with predictive maintenance, and optimizing energy use.
Liverpool Victoria (LV), the largest insurance provider in the UK, partners with TH_NK to develop strategies to insurance driverless cars and the internet of things.
- Why? LV has vowed to increase their digital spend to $110mm over the next three years in an effort to keep up with the innovative rental insurance and IoT-focused startups like Lemonade and Trov, who we highlighted last month.
Nvidia is developing edge camera analytics. Continuing on last month’s narrative on Mobileye’s (NYSE:MBLY) potential as a software company, Nvidia is following the same path of using their graphics processing units (GPUs) as deep learning data centers inside the devices.
- What are they doing? Check out last month’s introduction for more detail, but they’re basically moving the cloud back to the device. Back to the silicon, to be specific.
- Why is processing move to the edge? Bandwidth, latency, privacy, and availability. Bandwidth is becoming an issue with cloud processing, particularly for video with cameras moving to 4k, so this is the first of many data processes transitioning away from the cloud.
Apple has released a patent indicating their investigation of wireless charging over radio frequencies.
- How does this work? The patent is titled, “Wireless Charging and Communications Systems with Duel-Frequency Patch Antennas,” and it utilizes the beamforming antennas we highlight in this month’s 5G playbook to locate and focus a signal for improved range and charging speed. Further, the patent cites transmitting power through the 60 Ghz which utilizes high rate data connectivity (up to 7 Gbps) over small distances.
- Who else is doing this? Earlier this year, Disney Research debuted a room where multiple devices could be charged wirelessly. However, Integrated Device Technology has been leading innovation in this space since its emergence – we profiled them in the March article on Fiber consolidation.