NEW YORK-Crest Communications Holdings L.L.C., a venture capital and private equity firm focused on telecommunications, has yet to make a pure play wireless investment because of the risks inherent in carrier consolidation.
“We have looked at almost every single version of wireless plays. The reason we have yet to make a pure play wireless investment has to do with the fact that the end customer is controlled by a very small handful of companies,” said William W. Sprague, founder and managing partner of Crest.
Companies competing to serve that large but centrally controlled marketplace are taking a high stakes gamble unless they are niche players in the content applications area. That software segment “is a betting game,” one that Crest does not involve itself in, he said.
The dominance of six, well-established, nationwide mobile operators is a far different scenario than investors anticipated.
“A year ago in the emerging communications industry, everyone saw unlimited potential. The bet was that new companies would be the winners,” Sprague said.
“Today, everyone is making the assumption that only incumbents will be winners. That’s probably not true either, but they will be dominant.”
By contrast, there are about 7,000 Internet service providers, approximately 2,000 local telephone companies and “lots of emerging service providers,” he said. To hedge its bets, Crest looks for companies with technology that can improve the performance of both wireless and wireline networks by addressing four kinds of bottlenecks in the systems.
“The first is the Victoria’s Secret problem. How do you scale your data server to support peaks in demand, like when the new catalog comes out?” Sprague said.
Difficulties and delays also arise at the points where wireless and wireline networks interface.
“At some point in time, wireless and wireline networks need to come together, or peer. Peering creates a lot of very difficult provisioning problems among carriers,” he said.
The last mile between the street and the building is another hot spot for communications delivery and access problems. “If we had broadband wireless that actually worked on a large scale, that would solve the last mile problem,” Sprague said.
Bottlenecks also are commonplace in network backbones where long-distance transport and backhaul take place.
“The type of wireless play we’d make would involve design and support of networks, improving their efficiency and service provisioning, the integration of wireless into the wired backbone and the tools and applications to support this. More and more of a network is software driven,” he said.
“It is astonishing to me that we have an alternative voice system (wireless) that works efficiently only about 80 percent of the time.”
Crest, established in 1998, so far has closed two venture capital/private equity funds totaling $150 million, and it has invested about $90 million of this. Last year, two of the companies in which Crest invested went public: Viasource Communications, a nationwide provider of outsourced field services to cable TV and satellite operators; and Interland, a Web hosting provider for small and medium-sized businesses.
Sprague said Crest has started assembling commitments of investor money for another, larger fund. The first closing round of this fund is expected in March, with final closing expected by year-end.
“My guess is we have received 250-plus business plans during the first two months of this year. There are more deals and less filtering. Companies are just throwing out their business plans to see if anyone will talk to them,” Sprague said.
“We have done follow-up on less than 10 percent of those and made more than one phone call on about 1 percent.”
