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Leap Into The Unknown

By Tammy Parker

A company spun off from Qualcomm is seeking to build its business in countries with low teledensity and a perceived economic riskiness. However, the rewards could be substantial. Tammy Parker

Leap Wireless International is hoping to get the jump on rivals by exploiting its cdmaOne expertise in developing countries that have low teledensity. The start-up operation is taking on some of the riskiest wireless markets with the long-term view of competing not just with wireless competitors but with entrenched wireline operators that have often provided dismal service to their customers.

One year ago, San Diego-based Leap didn't even exist. The company was created when it was spun off from Qualcomm in September 1998. Qualcomm shareholders received a dividend of one common share of Leap for every four shares of common stock they held in Qualcomm. The new company's shares now trade independently on the NASDAQ market.
Leap's beginnings lay in investments Qualcomm made in a number of consortia worldwide that bid on new wireless licenses. Leap possesses Qualcomm's former joint venture and equity interests in six entities in five countries. Companies in which Leap holds interests include Pegaso Telecomunicaciones (Mexico), Metrosvyaz (Russia), Orrengrove Investments (Russia), ChileSat Telefonia Personal (Chile), Chase Telecommunications (United States) and OzPhone (Australia). Total potential customers, or POPS, for the networks are 147.1 million.

Further, Leap is eyeing a stake in Telesystems of Ukraine (TOU) that is still held by Qualcomm. The company also filed an application with the U.S. Federal Communications Commission in October 1998 seeking approval to buy a 10 MHz F-Block PCS license from AirGate Wireless. Leap proposes to pay $19.45 million for the license, which covers 3.27 million potential customers in several cities across North and South Carolina.
Leap's spin-off from Qualcomm was seen as a way to enhance shareholder value both in itself and in the parent company. From the Qualcomm investors' perspective, the carrier interests "were seen as a distraction from core competencies," notes Harvey White, Leap's chairman and chief executive.

White, a Qualcomm co-founder who most recently served as that company's president, adds that the operator investments also put Qualcomm in conflict with its own customers. Not only that but Qualcomm's financial position was being affected by recognition of its share in the wireless operating companies' start-up operating losses.

Combination

With its Qualcomm beginnings, Leap is naturally 100 per cent focused on building and operating cdmaOne networks. As developing countries move to increase their teledensity, capacity-friendly cdmaOne technology is a natural fit, White says. The company is looking at providing a combination of fixed and mobile wireless solutions in its markets.
Leap is specifically seeking opportunities in developing countries that lack significant wireless penetration, markets where wireless licenses have been unavailable or limited in size and scope, or areas like the United States were it can "facilitate a continuing transition from wireline to wireless networks."

Leap has notable holdings in countries with relatively low teledensity and what many consider risky economies. Nonetheless, those markets hold the promise of stupendous growth. For instance, the Strategis Group says that while Eastern Europe accounted for only 3.9 million cellular and PCS subscribers in 1997, seven-fold growth in that region will increase subscriber numbers to 28.6 million in 2003.

Similarly, Strategis says that Latin America, which had 12.5 million wireless phone users in 1997, is expected to see 64 million wireless subscribers in 2003. And research firm Frost & Sullivan reports that Latin American markets for cellular and PCS will grow from their current value of $7.1 billion to three times that amount by 2004. "The arrival of PCS will impact not only the wireless sector but the whole telecommunications industry throughout Latin America," the firm adds.

Leap is the majority owner in all consortia in which it participates except one-U.S. C-Block PCS operator Chase Telecom. Leap holds a 5.8 per cent interest in Chase, an investment that was made mainly because it allowed Leap to break into the U.S. market with a modest investment.

In developing markets, White feels that Leap's power position is essential to its operating companies' success because Leap is ready to take them aggressively to market. In a telecoms market now rife with broadly based consortia, he says, "somebody needs to take the leadership to pull it all together". White adds that Leap is relying on the varied talents of its indigenous partners as carrier operations rev up, but it is in charge of subcontracting and management itself.

Leap, White says, will provide its partners with technical expertise in cdmaOne network deployment. "We're experts in CDMA," boasts White. Leap's partners will also benefit from its access to solid vendor financing, he says. Qualcomm is an equipment supplier for Leap's operating companies and is providing a $265 million credit facility to Leap, including $35 million for working capital and $230 million for investment opportunities.

Difference

White is anxious for all Leap-affiliated networks to begin operating, predicting success against incumbent wireline and wireless operators through high-caliber network planning and exceptional customer service. "People have been convinced to pay extra money for inferior service," White says, adding that the existing telecom monopolies "don't necessarily provide the best service". He predicts customers will readily see the difference when Leap's cdmaOne networks come online.

As of late 1998, the only Leap-affiliated carriers in full operation are Chase and Chilesat-the former operating a PCS network in Chattanooga, Tenn., and the latter providing Latin America's first nationwide cdmaOne PCS network. In Russia, some regions are also reported as operational. Leap's Pegaso operation is slated for launch in Mexico during the first quarter of 1999. Alcatel and Qualcomm are infrastructure suppliers for that network, which will initially serve Mexico City, Monterrey, Guadalajara and Tijuana.

In Mexico and Chile, Leap's operating companies are taking on strong national cellular competitors-Mexico's Telcel and Chile's CTC-that were created when the PTTs in both countries leveraged their strong landline presence to become dominant wireless players. In addition to CTC, Chilesat's competitors include cellular operators BellSouth and Entel Cellular, as well as GSM-based PCS licensees Entel and Entel Movil.

Chilesat launched its 1900 MHz service on October 26, 1998, in a national market of 14.9 million potential customers. Steven Caliguri, Leap's senior director of strategic marketing, proudly points to the fact that Chilesat deployed the necessary equipment for nationwide coverage in about six months, convincingly beating the industry benchmark of 16 months. That, he says, shows how Leap's experience and assertiveness can pay off.

Chile's 15.6 per cent teledensity is higher than its Latin American neighbors, Caliguri says. Wireless penetration in Chile is at 5.5 per cent, he adds, and the country is forecast to experience annual wireless growth rates of about 30 per cent through 2003.
Chilesat is targeting what Caliguri calls mid-tier users and is touting call clarity and low-cost services as the network's main selling points. The operator also is beginning to create wireless local loop plans for Chile since there are no service restrictions on the PCS license.

Lessons learned in Chile could help Leap to succeed in Mexico. Mark Kelley, Leap vice president and chief technical officer, notes that Mexico's low teledensity makes it a perfect locale for cdmaOne-based wireless local loop applications. "We want them to have the same types of service that they have through Telemex [the national telephone company]," he says. Data applications could be especially important in such a market because wireless might provide the only telecom connection, he adds. Lacking a wired connection for data, Kelley explains, developing markets will see data as less of an adjunct service and more of a critical and expected capability of the wireless network. Specific data capabilities will be based in large part on what Leap's vendors decide to support, he adds.

According to Caliguri, Chilesat is already starting to see data emerge as a revenue generator. That experience gels with Frost & Sullivan's research, which indicates that the Latin American business sector "will drive up revenues by demanding value-added services such as e-mail, fax, data and paging."

Leap's keen interest in data has also led it to pledge support for San Diego-based WirelessKnowledge, which wants to provide data capabilities to wireless carriers on an OEM basis. Leap has not committed to any specific plans, however, saying only that it is "currently evaluating when and where it will offer these new services."

Meanwhile, Leap is busy getting its other markets online. For instance, OzPhone is slated to begin cdmaOne services in the second half of 1999. The company acquired two Australian cellular licenses in October 1998, adding to eight other licenses that it bought in May 1998.

Leap is also exploring other markets where it can exploit its cdmaOne knowledge. Leap's mission is to identify and invest "in growth markets with strong local partners who Leap Wireless believes will provide familiarity with the market and an ability to facilitate deployment". White adds that he sees "plenty" of opportunities for cdmaOne investments worldwide.

More specifically, a company information statement notes that Leap's Russian wireless operating company is seeking joint ventures with holders of licenses throughout that country to provide wireless service to up to 128 million more potential subscribers. Further, Leap is looking at possible participation in the planned March reauction of C-Block PCS licenses in the United States, White says.

And Leap wants to be ready to make its mark in Asia when those economies turn around. By having new debt and other financing prepared beforehand, the company hopes it will be positioned to serve pent-up Asian demand when the time is right. White feels that once the Asian markets regain strength, customers will be clamoring for wireless service. "We want to be the first people to come in," he says. And that could give Leap just the springboard it needs to launch itself on a new continent.