It took just one year for the hype and optimism to come crashing down on Metricom Inc., which now finds itself choking on nearly $1 billion in debt and seeking protection under Chapter 11 bankruptcy code.
Last July, the high-speed wireless data provider launched its first market in San Diego with great fanfare, paying a professional diver to leap 128 feet out of a helicopter into the waters off Mission Beach. The 128 feet represented the 128 kilobits-per-second data speed its Ricochet service could achieve. Company executives eagerly announced plans to have 21 markets deployed throughout the country during the following months.
But today Metricom is looking at a complicated and costly mess, where millions must be paid back to various investors and bondholders under seemingly impossible circumstances. Metricom only has about 41,000 paying customers in 15 markets.
“As a result of the depressed state of the capital markets, we have been unable to raise necessary additional capital,” said Ralph Derrickson, interim chief executive officer of Metricom. “Consequently, management and the board of directors decided this action (Chapter 11) would be in the best interest of all of Metricom’s stakeholders.”
When Nasdaq halted trading of Metricom stock on July 2, shares were trading at $1.82, substantially down from its 52-week high of $49.50.
According to analysts at The Yankee Group, Ricochet’s greatest problem and the root of its demise most likely stemmed from an identity crisis. Metricom started out marketing Ricochet to the average business consumer, then switched its focus to enterprise users through a wholesale strategy using channel partners such as WorldCom Inc. and Aether Systems Inc.
The strategy itself was not flawed, said The Yankee Group, but Metricom then faced the “chicken and egg” dilemma.
“Metricom could not position itself as a viable mobile enterprise solution without a nationwide presence, but it could not complete service buildout without customer growth and financial resources,” said the analyst firm.
Metricom also faced competition from two sources. On the wireless side, personal digital assistants and two-way pagers increasingly have become the device of choice among mobile business users, and on the wireline side, digital subscriber line and cable modems have emerged as a reliable means to get high-speed data access to campuses and homes.
In hindsight, perhaps Metricom should have deployed slowly, to grow a stable customer base one market at a time, but the technology held so much promise, and the capital needed for expansion was plentiful and available a year ago. Numerous creditors, including WorldCom, Sierra Wireless and Novatel Wireless collectively poured more than $400 million into Metricom. Through his investment company, Vulcan Ventures, Microsoft Inc. Co-founder Paul Allen acquired a 43-percent stake in Metricom, but now all are seeking a little payback.
The bankruptcy filing itself was foreshadowed months ago. In the company’s 10-Q report filed with the Securities and Exchange Commission in May, Metricom revealed it had a $769.7 million deficit, and it “expected to continue to generate substantial net losses for the foreseeable future.”
As of April 30, Metricom said it had working capital of approximately $214 million and outstanding purchase commitments for capital equipment, network construction labor and modems of approximately $322 million.
“We believe that, in addition to the current funds on hand, to achieve positive cash flow from operations, we will require additional cash resources of approximately $500 million,” Metricom said.
At the end of June, the company also announced it was cutting about 23 percent of its staff, leaving 451 employees worldwide.
And a look at the subscriber numbers alone told a discouraging story. Metricom said it collected substantially all of its revenues from subscription fees paid by users of its original 28.8 kbps Ricochet service and from sales of its UtiliNet products. The modems cost around $300 and the monthly fee for service ranged between $50 and $80-a cost too pricey for most users.
Looking ahead, Metricom said it expects to collect the majority of its revenues from subscription fees paid by its channel partners, including WorldCom, Juno Online Services Inc., Wireless WebConnect Inc., GoAmerica Communications Corp., Aether and IP Communications Inc.
The Chapter 11 petition will allow Metricom to continue its operations while it explores financial alternatives. The company appointed Kevin Dowd, a principal at Nightingale & Associates L.L.C., chief restructuring officer. Dowd said the Ricochet service and Metricom’s wireless Internet network are viable products.
“The company believes that the filing is the best means to preserve these assets moving forward,” Dowd said.
