Heat, Water…and Wi-Fi

Ryan Easley, founder and president of Irvine, California-based EdgeFocus, claims his small company is the largest provider of Wi-Fi-based high-speed Internet access systems to apartment buildings in North America.

In fact, Easley says nobody else is attacking this market niche seriously. If true, this is surprising given that the notion of using Wi-Fi to light up entire MDUs (multi-dwelling units, AKA apartment buildings) has been around for at least a couple of years — and that EdgeFocus seems to be doing fairly well at it.

The company has partnership agreements with major real estate investment trusts (REITs) that manage large, mostly upscale apartment buildings. They include Aimco with over 1,740 properties, which Easley says is the biggest, and Archstone-Smith , the number four or five player.

EdgeFocus bears the capital costs of building the Wi-Fi networks, which typically cover entire complexes, inside and out, and shares revenues with the building owners — usually a 10- to 15-percent cut.

EdgeFocus Wi-Fi service is currently available to slightly fewer than 10,000 units, all in buildings in California. The company expects to be able to offer service to 40,000 units by the end of the year, contingent on finding additional funding.

EdgeFocus has just under 1,500 residential subscribers so far. They pay between $26 and $34 per month for up-to-1-Mbps service. The service typically delivers 500 to 700 Kbps, Easley says. The beauty is they can get it anywhere in the complex, even by the pool.

It takes about 12 to 14 months for a building to “mature,” he explains. Most sales of the service are made to new tenants as they move in, so it takes that long to start getting a significant amount of turnover of tenants.

“We have some properties now with 62-percent [penetration],” he says. “And we have some properties with 8 percent. Our business model says we get 12 to 15 percent after one year, 25 to 30 percent after two years — but we believe the numbers will go up as Internet adoption rates increase.”

The company is not breaking even yet, but it’s not losing a lot either. Easley says it has enough money in the bank to support the current rate of expansion, adding coverage of about 1,500 to 2,000 units each month. It will earn revenues this year “in the ballpark of a couple of million.”

The company got this far on a little under $2 million in angel financing from family and friends. Easley is planning to go after another $5 to $10 million in venture capital in the second quarter of this year so he can crank up the pace of expansion. His REIT partners are ready now, he says.

“We had to go in and do a property or two or three with the big players so they could get comfortable with us,” Easley explains. “A lot of [relationships with REITs] are maturing at this point, though, and they are passing over a large number of buildings to us [to be installed with EdgeFocus networks].”

The additional funding will be needed to meet the end-of-year target of 40,000 units covered, but the company could continue without the funding, he adds.

“We could continue to build out at a rate of 1,500 to 2,000 units a month and grow our subscription base, and it would be a very good small business,” Easley says. “But that’s not the direction we’re looking at right now.”

The aggressive expansion this year will mostly involve lighting up buildings “in the pipeline,” buildings owned by existing owner-partners. It will take EdgeFocus out of California for the first time, to Seattle — but not much further.

Wi-Fi in apartment buildings is the kind of business that requires a local presence to manage effectively, Easley says. Unless the company can find regional operating partners or work out some kind of franchise scheme, it will likely remain a west coast company.

MDUs are not the only opportunity EdgeFocus is working on, however.

It now has a deal on the table that would see it put wireless networks into 360 shopping malls across the country, to provide both hotspot services to shoppers and business services to tenants.

Easley is also enthused about the related notion of “hot lots,” the idea of deploying Wi-Fi networks to cover parking lots at shopping malls — or at other venues — where business people on the road could pull in briefly to get broadband access to the Net for e-mail or tap into the corporate intranet.

Apartment buildings will remain the core of the business, though, he says. EdgeFocus has gotten the technology side down to a fine art. When it first started, the capital cost for each building was over $80 “per door” — for each rental unit covered. Today it costs EdgeFocus only about $40 per door.

It takes about one access point for every 20 units and sometimes repeaters and 5.8-GHz point-to-point links to connect subnets.

The buildings EdgeFocus is in range in size from about 150 to over 1,200 units. There are over 90 APs in its largest installation, which Easley believes is the single largest non-campus Wi-Fi deployment. The company installs mainly equipment from Wi-Fi infrastructure vendor smartBridges.

The strategy initially was to go into an MDU and install a network that covered the whole building — or at least 90 percent of it. Now EdgeFocus is starting by lighting up 30 to 40 percent of a complex, and adding infrastructure only as it sells service in other parts of the building.

It can go this less capital-intensive route now in part because of the easy plug-and-play scalability of smartBridges-based networks, Easley says.

The company also began experimenting recently with a different business model. In some cases, it’s signing deals in which the building owner pays EdgeFocus a management fee — typically less than $10 per unit — for every unit in the complex. EdgeFocus builds the network and provides the high-speed Internet service free to tenants.

“It actually gives us better margins,” Easley says. “And you don’t have that ramp-up period [waiting for the revenue stream to start flowing as subscribers buy the service].”

EdgeFocus believes it now has a workable model for the apartment building business. It took some experimentation with technology and contract terms. More important, it took a lot of “business development.”

“There’s no secret sauce to a lot of this,” Easley says.

The company worked diligently at building business relationships with the REITs, and that effort is now paying off, he says.

It wasn’t always easy. Many REITs are gun shy after having hooked up with DSL providers who offered similar services. Many of the DSL companies “promised the earth,” Easley says, but based their promises on unworkable business plans that too often didn’t work out.

“A lot of the time the REITs got the bad end of the deal, so they really aren’t jumping at this right now. Still, we’ve been able to create some good relationships.”

Now, he believes, if the company can just land some additional financing, it can move to the next level. Easley brought Jeffery R. Hultman on as chairman and CEO. Hultman, an experienced big league telecom entrepreneur who founded companies he later sold for billions, brings added credibility. It will come in handy as EdgeFocus enters a tough and very competitive capital market.

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