Runcom: Get ready for the next revolution

Five facts about Israeli start-up Runcom Technologies:

1. The people: Zion Hadad and Dr. Joseph Perl founded Runcom. Perl once served as the CEO of DSPC, and was a member of the US West team that was developing CDMA broadband cellular technology in New York and conducting research to create a WCDMA standard. The group was also working on third generation UMTS cellular technology, an extension of GSM. Upon his return to Israel, Perl was appointed VP Development of both Innowave and CTO, then a Tadiran subsidiary and today a part of ECI Telecom (Nasdaq: ECIL). He left in 1997 to follow his Runcom dream.

2. The funds: Vertex Management Israel and Concord Ventures have invested in Runcom. Concord general partner in charge of telecoms Avi Domoshevizki, who founded Radnet, which was sold to Siemens, sits on Runcom’s board of directors.

3. The sales: Boston-based WIDEX, a subsidiary of a Taiwanese operator, has ordered base stations and 50,000 chips from Runcom for $8 million. WIDEX is an ISP and VoIP company that provides services through AOL. The company plans to broadcast in the future and become a full communications network, complete with 3.5 Ghz antennae. Meanwhile, it has one base station and four of its customers are running tests.

4. The technology: Runcom has developed OFDMA, which is intended for the era when content will be inseparable from infrastructure. The technology’s uniqueness lies in its facilitation of wireless systems and interactive cable broadcasts.

5. The plan: OFDMA will probably become the basis of a new standard, called Digital Video Broadcasting Terrestrial (DVB-T), which allows companies to provide wireless digital and Internet television reception, including two-way video conferencing, at up to 32 Mbps. DVB-T will in fact be wireless interactive television, and compete against the interactive television that cable will provide. DVB-T will also probably become the fourth generation cellular standard.

“This technology will probably be at the forefront of the fourth generation of cellular systems,” declares Hadad. Is this an omen of the initial signs of insanity, or is it a sophisticated sense of humor? No, the man is absolutely serious.

160 million subscribers by 2007

In these hard times, when start-ups are looking for charity merely in order to keep going and only the strong survive, there are two kinds of survivors: start-ups with solid business plans showing near-term profits; and start-ups with truly revolutionary technology that will engender social changes.

Runcom is the second type, based on its activities in two fields:

1. Broadband wireless communications;

2. The integration of wireless-based broadcasting and communications, and the fusion of content and infrastructure. Two-way broadcasting can be implemented in vehicles and televisions, as well as fourth generation cellular phones with speeds of over 20 Mbps.

Studies indicate there will be a potential market of 160 million subscribers by 2007, as consumers switch to digital television. One of the system’s major advantages is that wireless does not require line-of-sight. Only a household antenna is needed, and the broadcast arrives through the wall or window. Runcom is developing the chips for the end units, as well as base stations and communications traffic management software.

The potential of 30 million customers within five years has aroused the interest of US-based MMDS (Multichannel Multipoint Distribution Service) providers. A portion of the customers are integrators with IP switches that will install Runcom’s base stations into their networks. Television and PC manufacturers will also be part of Runcom’s customer base.

Runcom completed its first financing round in November 20000, holding a private placement of $8 million, at a company value of $56 million, after money. The company raised funds from Concord ($6 million) and Vertex ($2 million). Runcom originally planned to raise $20 million at a much greater valuation, but the current climate dictated the reduced amount and terms.

Runcom has a 30-member staff. The company was founded in 1997 by Zion Hadad, and has survived until now by providing consultancy services and selling other wireless products. Hadad says the company’s current equity will last until Q3 2002, when he plans to go public.

“Globes”: Why haven’t you brought in strategic partners?

Hadad: “I’ve had problems with strategic partners in our field. I don’t want them on our board, acquiring information.”

Several months ago, you were negotiating with Terayon (Nasdaq: TERN), who wanted to acquire you.

“True. They initially offered $80 million and later raised it to $110 million. I am now getting bids four times larger.”

So there is something to talk about?

“We have set ourselves a goal of an IPO in a year, but are not rejecting an M&A. We’re talking about it, but discreetly. My feeling is that by the end of the year, we will either be a public company or will be in an M&A process. I am now talking to strategic partners.”

You said you’re keeping your distance from strategic partners.

“It is now possible to bring them in because we are stronger. They will be observers of the board, not members of it. This is a winning situation for both parties.”

What is OFDMA?

“OFDMA is end-user access technology. OFDMA receives broadband information at speeds of up to 32 Mbps, distributes it across several narrowband frequencies, and broadcasts them in parallel. The frequencies are arranged in orthogonal axes (parallel axes that do not disturb each other), thereby saving bandwidth. Each frequency carries a part of the information, which the end-user’s equipment collects and decodes. OFDMA also statistically allocates the frequencies between different users, according to their needs and location relative to the base station. Another crucial property provides users with non-line-of-sight wireless communications. This means it can penetrate homes using an internal antenna, i.e. the antenna does not have to be installed on the roof or outside the window.”

What’s the problem with ordinary bandwidth? Why is it preferable to integrate narrowband?

“It is mostly a matter of echo. When you transmit a byte on a 1-megabyte bandwidth, a micron for example, you get a very disturbing echo. In contrast, if you transmit the same byte on 1,000 separate nanometer frequencies, you render the echo problem insignificant.”

LMDS technology isn’t effective?

“It is effective provided you maintain line-of-sight.”

A matter of standards

Runcom is about to join the restricted club of Israeli companies leading the development of international standards. Two standards committees are important. One, comprising 250 companies, is currently formulating the final standard for DVB-T.

There is a clear trend toward digital broadcasting in the television market, which is a necessary condition for the future development of a land-based, integrated television and IT market, as well as communications and television broadcasting. The transition to digital reduces costs and alleviates the severe bandwidth shortage. An OVUM Consultancy report states DTT platforms will control over 60% of the market worldwide, and over 55 million users worldwide will sign up for land-based digital television by 2007.

In addition, by developing the return channel, Runcom allows users to receive interactive wireless television. Today, digital video broadcasting is based on an uplink channel without a downlink channel. A concrete example is Yes satellite company’s broadcasts. Yes operates a separate phone line for its return channel, and each converter is hooked up to an ordinary telephone line. If a customer orders a pay-per-view movie, for example, the order is placed by phone. When the wireless application is finally authorized, it will become a major competitor of the parallel cable television standard.

Hadad says, “We succeeded, with great effort, to prove that our method is the most advanced, and the Comite Europeen de Normalisation (CEN) accepted it. Eight months ago, we passed the IEEE (Institute of Electrical and Electronic Engineers) DVB Technical Module, and we have since submitted two improved versions, which have also been approved. Everyone is waiting for the standard to be published at the committee’s next meeting in a month. When it receives the approval of the CEN, it will become the international standard.”

What does this mean for you?

“The moment there is a standard, it means all suppliers will be buying the same thing. Then our chips will certainly sell.”

It doesn’t prevent others from developing chips and competing against you.

“True, but we already have patents.”

Does this make you the sole runners in the race?

“We are the only ones in terms of know-how, because everyone else has to develop based on our know-how. We are protected against other organizations. They can develop, but they have to get a license from us, and they will pay for it.”

The second committee handling Runcom’s technology is the US-based IEEE, which formulates standards for MMDS broadband wireless access technology. The institute regulates technology that provides wireless access for telephony networks operating at frequencies below 11 Ghz.

Hadad says, “We submitted a first round bid that took first place among the 25 bidders. We now have two main bids, based on OEDM technology. We worked on our bid together and wrote the standard together. Last week, we submitted a bid on behalf of 35 companies, including Nortel and Intel. There is no question that our bid will be accepted. The question is whether the second bid by High Bridge will be rejected or be accepted as an additional, marginal standard.”

All the companies cooperating with you at IEEE are your potential competitors. How does that work?

“I do not consider them to be competitors, but partners and competitors.”

Sounds rather self-righteous.

“When you lead something big, you have a lot of competitors who work with you and contribute to the standard. If it works, we all have a much larger pie to compete for. There was a competitive atmosphere in the beginning with companies like Philips and Thompson. When we explained our product to them, we became partners. We set up a joint consortium under the auspices of the EU, in order to develop the technology, more advanced chips, and more advanced future capabilities. In this field, if one thing is developed badly, it is enough to ruin everything.”

Where does Davidi Gilo’s Vyyo (Nasdaq: VYYO) stand in all of this?

“Vyyo announced it is working on OFDMA technology, and is a member of our group.”

We have had strong input in this area

“We expect 14 countries to be using the DVB-T standard by the end of 2002 or early 2003. This should be a major breakthrough. Ultimately, we plan to have the technology in every cellular phone and every television converter. Cellular telephones will be able to surf the web at speeds of 1 Gigabyte per 1,000 subscribers.”

Where does your development stand at the moment?

“We are minimizing the chips in order to make them cheaper. The first round will be in three months, and we plan to make sales at the end of the year. LMDS systems cost $3,000 per line, and WLL systems cost $500. We’re talking about(a cost of) less than $200 per line.”

This should interest companies such as Ofek, Barak and Golden Lines that want to compete in Israel’s inland communications market.

“When we have a mature technology, they will definitely approach us. At the moment, we are not a candidate for them because they are using existing, not future, technologies. We are currently helping Ofek.”

What does that mean?

“They ask me questions, and I give them answers.”

I saw several international partners in your profile. Can you comment?

“There is a group within the DVD organization that was set up to examine combining DVB-T with third generation cellular systems. We lead the group that includes Nokia, Siemens, Philips, France Telecom and other companies. We have a special relationship with Nokia.”

What is a special relationship?

“We talk a lot about cooperation and the direction of fourth generation cellular systems. Things have not developed to the level of a memorandum of understanding.”

There is a debate in the world, including Israel, about whether interactive television is broadcasting or communications. Your development is intensifying the debate.

“The debate would not have happened if interactive television technologies had never developed. We have made it possible through wireless. The regulators now have to decide what to do. I am too humble to make that decision, but I know that we have had strong input in this area.”

Published by Israel's Business Arena on 15 March 2001