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Profiting from Free Internet

Written By Jason Stutman

Posted July 3, 2013

I want you to take a look at the image below:

white space map

If you think that’s the weekly weather forecast, you’re mistaken. It’s actually a TV white space spectrum map provided by Google (NASDAQ: GOOG), and it is helping to provide high speed Internet to an under-served market…

Let me explain:

Your radio, television, Wi-Fi, and mobile devices all operate somewhere on what is called the electromagnetic spectrum. This spectrum enables us to send wireless signals from one place to another by riding waves of photons traveling at different frequencies.

That all sounds pretty high-tech, but the fact is, the practical use of the electromagnetic spectrum began as early as 1887 with the use of Morse code. Since that time, frequency bands of multiple wavelengths have been secured and licensed to a wide array of different parties for a multitude of uses.

And though photons are virtually limitless, the electromagnetic spectrum is not. In other words, there are only so many frequencies and wavelengths available for use. If multiple parties attempt to send information across the same frequency in the same area, these signals can get mixed, and clear communication is lost.

A good way to think of this is when you can hear one radio station overtake another as you drive towards a different location. When you hear two stations overlapping, this is because they are competing for the same frequency.

Likewise, when you hear static, that is also an issue of frequency – except in the case of static, the issue is not one of surplus but rather emptiness. These areas of the electromagnetic spectrum with frequencies or channels not being used in a local area are what we can refer to as “white spaces”.

Google to the Rescue

Historically, white spaces have been difficult to access due to poor allocation management and FCC regulation of the spectrum.

The FCC divides the spectrum into two categories: licensed and unlicensed. Licensed spectrum bands are allocated by the FCC, while unlicensed bands are open to anyone using a regulated and capable device (i.e. Wi-Fi routers).

Within the unlicensed spectrum are TV white spaces, or unused channels in broadcast television. These empty channels are important because they can be used to transmit high-speed Wi-Fi Internet as far as 10 miles – pretty impressive considering my Wi-Fi router loses half its signal when I’m in my kitchen…

The kicker here is that there are a ton of TV white space channels in the United States, but the ability to see which channels are available in which areas has been limited. However, the FCC has officially decided to approve Google’s TV white space database, which provides us with the map above as well as the ability to search for open white space channels by location.

When referring to the map, we can see that most of the U.S. is covered in white, meaning that the majority of the nation has at least 45 open TV white space channels. In other words, white space broadband could be available to the vast majority of American consumers.

The greatest implication of all this surrounds rural Internet. These areas have the highest number of white space channels and are too sparse to justify the cost of wired broadband infrastructure. So while much the United States is stuck with dial up speeds of .056 Mbps, white space Internet offers 4 Mbps.

Oh, and did I forget to mention it’s free? Well, sort of…


Money From “Free”

Because white spaces inherently exists within unlicensed territory, companies cannot technically charge customers for the use of these channels. However, they may charge for allocation, networking, and database services.

Of course, this might make you wonder why Google is going through the trouble of running a nationwide database at no charge…

The fact is, Google isn’t doing this for kicks. Google derives about 90 percent of its revenue from Internet advertisements. By providing what some are calling “Wi-Fi on steroids”, Google will increase its number of paid clicks and boost its revenue in turn.

And this isn’t Google’s only attempt to connect more users to the web – the company recently launched an initiative to provide Internet through a network of balloons. As Internet traffic continues to explode, Google’s revenue will move right along with it.

But there are better ways to play the emerging use of white spaces. Despite these channels being free for use, users still need specific white space devices and software, which companies like ISB Corp (TYO: 9702) and Hitachi Kokusai Electric Inc. (TYO: 6756) are already providing.

These two stocks have offered a one year return of 31 percent and 110 percent respectively and have seen strong revenue growth over the past four quarters. Both companies boast low P/B ratios and healthy profit margins, but I like Hitachi more due to its steady positive trend (ISB has been erratic as of late) and higher revenue growth.

Turning progress to profits,

  JS Sig

Jason Stutman

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