It's all down to the wire for Woosh

Investors may soon need to decide if internet company Woosh Wireless is the next big thing in New Zealand telecommunications - or just a blow-torch applied to a very large pile of cash.

So far, investors have put $120 million into the business, which launched its high-speed wireless internet service 22 months ago.

The biggest stakes are held by a Californian private equity investor Clarity Partners (24 per cent), and an Islamic investment fund underwritten by Kuwait Finance House (21 per cent).

Next up are Todd Capital, the Todd family offshoot that is an experienced investor in telecommunications (17 per cent), Woosh founder and chairman Rod Inglis (15 per cent) and The Warehouse's Stephen Tindall (12 per cent).

Sky Television founder Craig Heatley is a smaller but substantial investor (7 per cent) - although the word on the street is that he will not be tipping in any more cash.

One institutional investor - with a stake bought for $1.59 million - is the Accident Compensation Corporation.

The Business Herald has learned investment bank ABN Amro has been sounding out investors, including local fund managers, about raising a further $80 million, with $60 million to come from new investors and $20 million from existing shareholders.

A sharemarket float is possible later this year.

One of the selling points in Woosh's pitch to potential investors is the possibility of sharing in a forecast internet "bonanza" as surfers jump en masse from dial-up connections to broadband over the next four to five years.

The special spice in the recipe is the company's work towards introducing an internet telephony service - the feature that could liberate customers from Telecom's fixed line into the home.

But there are red flags too. Woosh is still burning cash, reportedly tens of millions of dollars a year to install a network of cell sites and more than $1 million a month in routine operating costs.

To put that in context: this is a company with just 15,000 customers - even if it can boast of adding 5000 in the past five months. It needs perhaps 50,000 to 60,000 to break even.

It is also a company that faces three uncertainties:

* How rival and similar technologies and companies will develop in the intersecting worlds of wireless, internet and mobile phone communications. Some people like others' technology better.

* How Woosh's planned voice service will pan out in practice.

* How the 900-pound gorilla of the telecommunications business, Telecom, will respond if Woosh gets real legs.

One term to feature in Woosh's presentations to potential investors has been "healthy dwarf". It seems intended to capture the idea that Telecom would not slash prices to defeat a Woosh voice service because it would not want to eat into the large profits of its fixed-line business, and it would rather have competition than provoke regulation.

In other words, Telecom would tolerate a "healthy dwarf".

That could be an optimistic view.

Last week the Business Herald visited the modest Newmarket offices of Woosh to ask chief executive Bob Smith, 52, a telecommunications veteran in a slightly rumpled suit, when the company expected to break even.

"It's not something that I'm at liberty to discuss," said Smith, someone seriously well-qualified as a former head of Telecom's internet service, Xtra.

Cracking a smile, he added: "It's not in the never-never land."

Smith is a Tindall man. He has known the retailer for "a long time" and took over as chief executive of what was then called Walker Wireless in 2001, after serving on the Walker Wireless board and also helping with a series of Tindall start-up investments.

For him, the attraction of the company was the intersection of three key "future trends" - broadband internet, wireless communication, and internet protocol applications such as internet telephony.

He also sees big strategic value in a network bypassing Telecom's wires-in-the-ground local network.

Woosh is unlike Telecom competitors such as TelstraClear, ihug and CallPlus whose ambitions are centred on Telecom opening up its network.

It's in Woosh's interests for Telecom's network to stay closed - the reason that the company sided with Telecom in the "unbundling" debate.

For now, Woosh is targeting residential and small business customers, offering broadband internet packages that start at $29.95 a month - cheaper than Telecom's Jetstream, although price comparisons are complicated by set-up costs, data caps and 12-month terms.

So far, it has 106 cell sites, 65 in Auckland and the rest scattered through Wellington, Christchurch and Southland.

Many sites look like flagpoles but others are attached to buildings or power pylons and they use radio to broadcast data to be picked up by customers' portable modems.

Woosh said in June that its coverage of homes and small businesses was: Auckland, 35 per cent; Wellington, 25 per cent; Christchurch, 10 per cent; and Southland, 35 per cent.

It is planning a network of 500 sites to cover 65 per cent of the population, hence the tens of millions to be spent each year on equipment.

Smith's chief operating officer is Rich Cane, 40, a veteran of a string of relevant telecommunications ventures in the United States and elsewhere.

He joined the company last year at the request of California's Clarity Partners, the company with a Beverly Hills address that is one of Woosh's two biggest investors.

The big ask for Cane is: can the company make a real go of internet telephony - voice over internet protocol.

If Woosh could offer a package that was an alternative to both Telecom's Jetstream and a standard telephone account ... well, then the game would get interesting.

One long-term IT industry observer said of the voice plan this week: "If this is a success, it changes the game for them. If it's a failure, they will really struggle to be a credible player."

The company is in the final stages of testing a commercial service - but is not saying when it is likely to launch. Cane makes no apologies for that. "We want to make sure that, if we come out with a voice service, it's something that we can stand behind."

The tricky issues for wireless services include lag - the delay that conjures memories of international phone calls from decades ago. Lag also makes wireless impractical for some big broadband users such as computer gamers.

Woosh made the classic tech industry mistake of over-promising and under-delivering by saying telephony would come within months of its October 2003 launch.

Its broadband service also launched with glitches. IT and media columnist Russell Brown reported that many early customers got "patchy coverage and poor performance".

Coverage areas were later tightened up for better service.

Woosh is in the vanguard of global companies using the new technology of United States supplier IPWireless, so implementation problems were an expected part of the deal.

It was in 1999 that Rod Inglis founded Walker Wireless as a spin-off from Walker Datavision, a technology company that had created wireless local area networks and data acquisition and identification systems.

In 2000 a so-called "who's who" of New Zealand investors - Tindall, Heatley and Todd Capital - were lined up by sharebroking firm JBWere to put in a reported $20 million-plus to secure 40 per cent of the company, with Inglis retaining most of the rest.

In April 2002, Walker Wireless raised more money and attracted a new investor, Clarity Partners, the American fund that specialises in media and telecommunications investments.

In 2003, an ad-man came up with the name Woosh.

Last year, it pulled in the New Zealand Australia Private Equity Fund - a seven-year US$100 million fund managed by local company I-Cap and underwritten by Kuwait Finance House, a specialist in "Islamically compliant banking and investment products".

(Woosh says its shareholder's values have not required gestures - symbolic or otherwise - towards Islam.)

One of the early enthusiasts for wireless communication services was National Business Review publisher Barry Colman, whose fledgling technology business was folded into Walker Wireless in 2000.

Quizzed this week, Colman said the big promise held out by wireless services - "very low-cost communication outside of Telecom" - had never quite materialised as Telecom pulled costs down, closing the gap.

"So, that has really meant that any sort of 'super return' seems unlikely."

The other problem has been reliability - technology that "sort of works" is not good enough.

However, Colman said: "You've got to admire their tenacity, don't you? They keep on keeping on. They have managed to secure funding so far."

Through his past dealings, he retains an option to buy 2.2 million shares if Woosh floats on the stock exchange. Vodafone, a leading telecommunications player that has worked with Woosh, has an option to buy up to 19.9 per cent of the company, expiring on September 1.

The 53c a share paid by ACC last year suggests a value of $167 million for the company's 315 million shares.