What's Next for Tropos?

On the surface, the new year has been promising for Tropos Networks Inc. On Friday, EarthLink Inc. (Nasdaq: ELNK) announced that it had reached terms with the city of San Francisco to build out a city-wide network using Tropos mesh WiFi gear, and today, the city of Philadelphia launched its 15-sq.-mile pilot network, also using EarthLink as the service provider and Tropos as the supplier, with a one-month free trial period.

Noteworthy network deals for 2006, says VP of marketing Bert Williams, include San Francisco, Anaheim, and Las Vegas, plus a few dozen lesser-known metropolises such as Longmont, Colo., and Rock Hill, S.C. While several industry sources suggest to Unstrung that Tropos has been less active in lining up new deals in the last six months or so, Williams says that the company continues to win new customers at a healthy clip.

In fact Tropos, the early market leader among mesh network gear vendors and the lead supplier on several high-profile projects, faces the same challenges in 2007 as other mesh startups like Strix Systems Inc. , BelAir Networks Inc. , and SkyPilot Networks Inc. : not enough lucrative projects, slower-than-expected revenue streams, larger players coming into the market, and threats both from existing technologies, like the spread of 3G cellular data networks, and new ones like mobile WiMax, particularly the nationwide system planned for late-2007 launch by Sprint Nextel Corp. (NYSE: S).

Also like rivals at other mesh providers, Tropos management acknowledges that contraction in the market is inevitable, given the entry of such deep-pocketed players as Motorola Inc. (NYSE: MOT) and Cisco Systems Inc. (Nasdaq: CSCO), but asserts that they intend to be among the survivors. (See Motorola, Cisco Win Mesh Deals .)

Not for Sale, Yet
So is Tropos on the block? Asked about possible acquisition scenarios for his company, Williams goes into boilerplate mode: "We are dedicated to building a company that's built to last, and our intention is to position ourselves as an independent company. Obviously things happen, and if offers are made the board would have a fiduciary duty to examine them."

Translation: Sure, if you make a good enough offer, we'll take it.

"As an independent company, I don't think they have any business trying to compete," says Ellen Kirk, the former VP of marketing at Tropos who left last August and is in the process of founding a municipal wireless consultancy. "When the shakeout comes, the competitors will be solutions providers" -- i.e., not pure network plays like Tropos.

As the early market leader in mesh buildouts, Tropos faces both unique advantages and particular challenges. The decision of founder and chief architect Narasimha Chari and CEO Ron Sege to stick with a single-radio node product until well into 2006 has caused Tropos to be "pooh-poohed in the industry as technology laggards," as Williams acknowledges. Tropos released its first dual-radio model, the 5320 MetroMesh router, in August of last year, but that has not changed this perception, says Godfrey Chua, research manager for wireless and mobile infrastructure at IDC. (See Tropos Raises the Bet.)

"The 5320 was supposed to begin shipping only in October 2006, and no major contracts for it have been announced, though it may be too early too tell," remarks Chua. "Also, the 5320 promised further enhancements (MIMO, WiMax, etc.), but the same thing is true there -- no further developments yet."

At the same time, Tropos' wealth of on-the-ground experience in places like Mountain View, Calif. and St. Cloud, Fla. gives it a huge early-mover advantage, particularly in a technology that has proved immensely tricky to successfully deploy.

"At the risk of sounding Rusmfeldian, when it comes to mesh networks, you don’t know what you don’t know," points out Williams. "We haven't learned what we've learned by gazing at our navels: we've figured it out because we were out there blazing trails, doing what had not been done before and learning a lot of things in the process."

The dual-mode 5320 is being deployed now in municipal projects, Williams adds, but he declines to specify the cities.

3G Threat
Several people in the mesh industry have mentioned to Unstrung that Tropos is no longer going after major international RFPs such as the Singapore contract, awarded last year to Cisco and Firetide Inc. . Williams says that's not accurate.

The company, he says, is proceeding in "a more focused, more targeted fashion" on the international front and expects to have some significant overseas deployments to announce in the first quarter of 2006.

At the same time, the initial fervor for citywide WiFi could fade as rival technologies begin to encroach on the muni turf.

"I think if I were running Tropos what would scare me the most is the huge proliferation of 3G-WiFi bridges," says Kirk. "Look at what's coming out of CES -- everybody and their dog is producing some kind of 3G-WiFi bridge. That becomes a huge threat to metro-scale WiFi."

So both market realities and future technology pathways means that obviously, exit strategies have to be on the minds of the management of Tropos and its rivals. Tropos' enviable existing portfolio could actually be a hindrance in that endgame, says Chua: "Acquisition would make sense to bring stability and improve market reach; the challenge for Tropos is that their scale and experience would demand a premium.

"A potential acquirer would likely focus more on technology rather than on the installed base."

While it's impossible to say definitively who the most likely acquirers would be, industry speculation has centered around Alcatel-Lucent (NYSE: ALU) and around Nortel Networks Ltd. , whose ambitious citywide mesh deployment in Taipei has reportedly been slow getting off the ground.

"Municipal wireless is one of the key strategic areas that will help drive Nortel's business momentum and growth," Dietmar Wendt, Nortel's president of global services, said last month, "and we plan to invest heavily in new resources that will help us lead this market."

"As long as all we're talking about is getting the networks to run, Tropos is way out in front," adds Kirk. "That can't be that exciting for very much longer."

— Richard Martin, Senior Editor, Unstrung