July 2, 2001 4:40 PM PDT

Metricom files for bankruptcy protection

Metricom, a pioneer in providing wireless Internet access, filed for bankruptcy protection Monday but intends to keep its 41,000 Ricochet subscribers online.

The company's troubles mirror the woes in the wireless industry. Although wireless Internet access was hyped as a major growth area just a year ago, consumers have shown little demand for such services.

Metricom is considered a trailblazer in the industry, having signed up well-known investors such as Microsoft co-founder Paul Allen. Despite such backing, it has been pounded by modest demand and the high cost of introducing its service.

Alan Reiter, head of Wireless and Mobile Computing, a consulting company, said the bankruptcy shouldn't be taken as a death knell for the wireless industry. Metricom wasn't very representative of the wireless industry, offering a wireless service to access just data, like the Internet, for $75 a month.

But the industry analyst said that subscriptions to cellular service--the old-fashioned cell phone capable of just making a voice call--continues to grow. He also pointed out that even though Metricom couldn't attract a lot of customers, it didn't lose the ones it had, he said.

"The concept makes a lot of sense. But the problem is it costs a billion dollars to create a nationwide network," Reiter said. "It's sad. Many people in the wireless industry wanted Metricom to succeed. People want true wireless Internet with a flat rate."

Other wireless companies also have been plagued with service glitches and a high churn rate among customers, forcing them to slash prices for the hardware. The Palm VIIx, for example, now costs just $99--from an original price of $449--with a one-year subscription to its Palm.net wireless Internet service.

Sprint, meanwhile, said earlier this year that of its 1 million wireless Web subscribers, only half were paying a monthly fee. The other half were using the service free as part of a trial offer or were considered "casual" consumers who paid for infrequent access.

Metricom's problems became so acute that in May it announced the need for $500 million in cash to keep operating. That quest for cash was apparently futile.

In a statement Monday, interim CEO Ralph Derrickson said the company was forced to seek bankruptcy protection because of "the depressed state of the capital markets."

"We have been unable to raise necessary additional capital," Derrickson said. "Management and the board of directors decided this action would be in the best interests of all Metricom's stakeholders."

The Nasdaq stock market halted trading in Metricom shares Monday before the announcement. At that time, shares were trading at $1.82--far off a 52-week high of $49.50.

Metricom spokeswoman Nicole Russell said the company intends to keep the wireless Internet service up and running for the time being. The company said there were 40,900 wireless subscribers at the end of the last quarter.

The company sought Chapter 11 bankruptcy protection in U.S. Bankruptcy Court in San Jose, Calif. Under Chapter 11, a company can continue to operate while restructuring its debt. According to the filing, Metricom has about $900 million in assets but more than $1 billion in claims from more than 5,000 creditors.

It also appointed Kevin I. Dowd as the chief restructuring officer. Dowd is a principal at Nightingale & Associates, a Stamford, Conn.-based turnaround specialist.

Metricom is the company that offers the Ricochet wireless service, which is available in 13 cities in the United States. The modem itself, which powers the service and plugs onto handhelds or laptops, is manufactured by Sierra Wireless.

Resellers of the service include Earthlink, Compaq Computer, Worldcom and Juno Online Services. Most of the resellers offer the service for between $70 and $80 per month. The modems cost about $300 a piece.

The spokeswoman would not divulge just how much the company owes. In April, Metricom said it suffered a net loss of $186 million for the first quarter compared to a loss of $32 million for the same quarter last year. Since its inception, the company has accepted nearly $500 million in investments, Russell said.

San Jose, Calif.-based Metricom is a well-known technology name, having been founded in 1985 and gone public in 1992. The company's technology originally was developed to allow utility companies to automatically read consumers' gas and electric meters.

But when the Internet became a commercial success in the mid-1990s, Metricom refocused its efforts on providing wireless access.

Ricochet allowed customers to use their laptops to access Net-based services as if they they were at work or home. Although slow by today's standards, the original version of the service had a faithful following of users in San Francisco, Seattle and Washington D.C.--the only three cities in which it was available at that time.


Gartner analyst Bob Egan says Metricom added to its troubles by choosing to compete in some of the toughest markets in the country.

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After stagnating, stock in Metricom surged in late 1999 as Metricom planned a higher-speed version of the Ricochet mobile Internet service. WorldCom and Allen's Vulcan Ventures increased their investments in the firm about the same time, helping to spark an increase in share price.

Last year, the company embarked on a plan to offer the 128 kbps (kilobits per second) service in several additional cities. However, because of steep a decline in Metricom shares and tepid demand from consumers, Metricom was forced to scale back those plans and to lay off workers.

When the company reported its fourth-quarter results, it warned that it would have enough cash to last through June. That sparked an exodus by several of Metricom's top executives and a further decline in its shares. A later regulatory filing indicated Metricom might continue to operate through August.

The bankruptcy filing marks the latest in a string of bad news for the wireless industry. Already, some carriers have delayed their third-generation wireless networks, which are expected to allow high-speed Internet access to mobile phones.

For example:
 Japan Telecom announced March 7 that it was delaying the launch of its 3G network.
 Nokia said on April 3 that it was working to fix a software glitch that could have affected up to 10 percent of all cell phones sold in the United States.
 NTT DoCoMo announced April 24 that it would delay the introduction of its 3G service for four months.
 NTT DoCoMo announced June 12 that it was replacing defective Sony handsets because of a software glitch.

In addition, many new mobile phones are growing increasingly complex, reducing the need for wireless Net access via laptop.

One of Metricom's customers, Wireless Facilities, said Monday it will have to write off $13.6 million because of the bankruptcy filing. The money represents the entire amount Metricom owes Wireless Facilities, which plans and builds wireless networks, the company said in a statement.

 

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