Building a New Mobile VoIP Empire

xG Technology LLC, a network equipment developer based in Sarasota, Fla., first introduced its breakthrough xMax technology—the brainchild of company founder and inventor Joseph Bobier—about a year ago. Now xG has unveiled its grand plan for commercializing Bobier’s invention.

The company is focusing on mobile voice as its first application. xG has developed a turnkey mobile VoIP system based on xMax, using the license-exempt 900 MHz ISM band. xG will bring the technology to market through small and medium-size local and regional dealers. The cost of entry for dealers, who will be awarded exclusive territories, is under $100,000. xG is counting on viral, grassroots growth to build a ubiquitous network.

xMax, a patented physical-layer technology, uses a single-cycle modulation technique—it takes just one RF cycle instead of tens of thousands to carry a single bit of data. As a result it can deliver much longer range and lower power RF communications than conventional technologies. This promises to significantly reduce wired and wireless broadband network costs, the company says, and among other things, allow service providers to deliver 4G mobile broadband networks years ahead of schedule.

First steps
“When we looked at this, we said, ‘We have to pick one [application],’ ” says Rick Mooers, the company’s chairman and CEO. “We’re not Intel, we’re not a major company, we’re an early-stage company—so we have to pick one thing and do it well. The industry will extrapolate [from that success] what this technology means to other areas. That’s why we picked mobile voice.”

In other words, if xMax can work for mobile VoIP, it should have no problem working in other applications, and that will be very obvious to the network engineering community. Mooers stresses that the initial xMax-based offering—which he describes as a “stripped down” voice-only system with no provision for data or Internet connectivity—is just the first salvo.

Because the xG mobile VoIP system is built from the ground up as an IP network, adding data, Internet access, video, seamless handoff between different types of networks, and other extensions will be a simple matter of upgrading network software.

The core technology can also be built into all kinds of other kinds of network equipment. In a vision statement at the company’s Web site, Bobier claims that xMax can extend the range of DSL from the current 18,000 feet to about 72,000 feet, allowing phone companies to add millions of new broadband subscribers. In the cable industry, which is currently limited to about 50 Mbps total network data capacity and perhaps as many as 158 distinct content channels, xMax will increase total data capacity to about 1 Gbps and channel capacity to more than 1,000.

xG realizes that given the startling claims for xMax, the onus is on it to prove the technology. “A lot of people have been looking at this for awhile,” Mooers says. “We understand there’s skepticism, as there is with all new technologies, especially if they’re disruptive.” xG has publicly demonstrated the core technology for simple wireless data transmissions, but has yet to demonstrate the mobile VoIP system. Base stations and handsets won’t be available until later this year.

Turning technology into business
However, the company is already talking to prospective mobile VoIP dealers, including local and regional Internet service providers (ISPs) and competitive local exchange carriers (CLECs), which are the primary target market. Because the cost of entry is so low, Mooers believes xG will also attract aspiring entrepreneurs. He envisions the market growing much the way the dial-up Internet market grew 10 or 15 years ago.

xG hopes to have two beta dealers up and running in the first quarter of 2007—probably in the central Florida area near the company’s research and development center—and begin commercial roll-out in the second quarter.

The company chose the 900 MHz ISM band because it offers excellent non-line-of-sight characteristics and long range, especially when xMax is used. A dealer could establish a first point of presence with a single $50,000 base station that would cover about 1,000 square miles and support up to 30,000 subscribers and 500 or more simultaneous users.

By the time the commercial roll-out begins, the technology will offer voice and connection quality similar to conventional cellular systems, Mooers says. The handsets, which will be the size and form factor of “candy bar” cellular handsets, work on xMax networks but will also include Wi-Fi radios, so they can work outside xMax coverage areas, and an Ethernet port so they’ll also work on wired LANs and wired hotel Internet services.

Dealers will be able to generate gross profits of $1 million or more with a subscriber base of just 10,000, the company predicts. “The idea is that we’ll let the profits of dealers drive growth,” Mooers says. As their subscriber population grows they can add more base stations with overlapping cell coverage.

How the numbers work
To get a territory, dealers will have to put up $1 for each head of population in their area, which could be as small as a single town. That upfront commitment is applied against the price of the first base station. Dealers also pay xG a royalty fee of $2.50 a month per subscriber and a “software fee” of $12.50 a month per subscriber.

Although an xG dealership is not strictly speaking a franchise, the company has established a basic business approach. Dealers will sell two flat-rate packages. For $49.99 a month, subscribers get unlimited calling. Or they can take a $39.99 package that gives them 1,500 free anywhere minutes—which is what the average residential phone customer uses, Mooers says. Those subscribers will pay a penalty of $15 if they go over, which amounts to a $5 penalty for not taking the all-you-can-eat plan in the first place.

Besides the $15 a month in fees to xG, the dealer’s other main top-line operational cost will be fees paid to wholesale VoIP providers, which currently run at about 0.7 to 0.8 cents per minute, Mooers says. So even if subscribers use the entire 1,500 minutes, the cost to the dealer will be about $10.50 a month. That leaves a top-line margin of about $15 a month per subscriber, which works out to $1.8 million a year with a subscriber base of 10,000.

“They have to ask themselves, ‘Do I think I’ll spend $800,000 on rent for a modest facility, employees, advertising?’ The answer for most will be, ‘No way,'” Mooers says. “So you’re looking at a potential seven-figure profit.”

If we build it, will they come?
It all sounds so simple: Sign up dealers, sell them a “business in a box,” and let them spread like wildfire across the country. xG believes this plan is its best chance for success on its own terms. It could sell the technology to much larger players—they’ve already been sniffing around, Mooers says—but then they, and not xG, would reap the lion’s share of the rewards.

But the xG strategy appears to leave a number of key questions unanswered. For one thing, does the market really want or need another mobile phone service? The flat fee strategy is probably a good one, but conventional cellular prices are already pretty low and getting lower, and flat fees are not unheard of in that industry. Mooers insists his company is not going head-to-head with the cellular carriers or trying to take customers away from them. There are still plenty of prospective customers that haven’t signed up for any cellular plan and will be attracted to a relatively low-cost local service. But then, the cellular companies are also targeting those customers.

The xMax technology will eventually provide true broadband data and Internet connectivity as well, so it should have appeal in areas poorly served by broadband providers, Mooers says. But in the early going, xG and its dealers will only be able to offer a me-too voice service. That could be a tough sell.

Then there are other questions. Can xG ramp up its business to support potentially hundreds of small dealers? How will it bring scores or hundreds of small networks together to allow the kind of roaming that cellular customers take for granted? And how much will it cost and how long will it take dealers to bring on enough subscribers to be profitable? Cellular industry estimates of the cost to acquire a customer range up to $400. That works out to $4 million for 10,000 subscribers, which is not covered in xG’s dealer business plan.

There is no denying the xG technology has exciting potential. If it works as the company claims, it will be a disruptive force. But is this the best way to bring it to market?

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