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HUGHES SAYS NEXTWAVE IS POSITIVE STEP

Hughes Network Systems Inc. aspires to accomplish a great deal more than just to supply $1 billion of network equipment to NextWave Telecom Inc.

“This goes beyond equipment supply. That’s why we took the equity position,” said Pradeep Kaul, executive vice president of Hughes Networks Systems.

Hughes will provide NextWave with a $50 million equity investment in equipment. Hughes also has the option to finance and supply up to $755 million in additional infrastructure equipment, according to the 6-year agreement.

NextWave holds the highest bid on 63 personal communications services licenses for basic trading areas nationwide. The company intends to build an enormous network and sell airtime at wholesale. The equity investment will give Hughes almost 3 percent of the venture.

NextWave has agreed to provide Hughes with “favorable” airtime rates.

“We see how we can leverage NextWave’s wireless data capability, so we will develop jointly those services and offer it over their network,” Kaul said.

Hughes intends to use NextWave’s network in conjunction with its extensive satellite service. One Hughes service is Direct PC, which provides access to the Internet.

“Our Direct PC downlink from satellite works economically, but the return channel uses telephone lines because it’s not economical through the satellite,” Kaul said. Using NextWave’s network would be a competitive access-type application.

Also, Hughes is very experienced in wireless local loop. They claim to have captured the world WLL market, with systems up in the Czech Republic, Indonesia, Russia, Brazil, Vietnam and Africa.

Airtime from NextWave would allow Hughes to offer WLL service in the United States as well.

“We now have about 10 percent of the U.S. equipment market in wireless, not including satellite. We want to improve that 10 percent and get to somewhere in the 20s,” Kaul said.

Germantown, Md.-based Hughes Network Systems was created in 1991, and is a wholly owned subsidiary of Hughes Electronics Corp., which is owned by General Motors Corp.

The company jumped into the wireless scene just when the argument was beginning between Time Division Multiple Access and Code Division Multiple Access supporters.

“For 25 years, we have been involved in spread spectrum through the military side of our business. With our background, we understood CDMA and when the debate ensued in the early 1990s, we thought it wasn’t ready for prime time. It needed advancements and we were concerned about commercial viability,” Kaul said.

So, Hughes bet on TDMA. “We were fresh kids on the block, naive as all outdoors. We developed an enhanced TDMA. Motorola was stepping away from TDMA, so we got BellSouth (Corp.) to prove TDMA, and built an E-TDMA network in Mobile, Ala.”

“But we couldn’t standardize it. We ran into a brick wall because the CDMA camp wasn’t going to support it and the TDMA camp was concerned that if they supported us, it would delay TDMA. So, they deployed their TDMA and it wasn’t a big success. We took our E-TDMA into the fixed wireless local loop market and for the last five years have enjoyed a position in the marketplace no one can compete with,” Kaul said.

A year-and-a-half ago, Hughes started its CDMA product development cycle and now is ready to build CDMA infrastructure equipment. NextWave is the company’s first CDMA contract.

“We’ve been pacing ourselves but we have concluded now that the time was right. Our internal plans show us an opportunity between domestic and international markets with CDMA of potentially $5 billion in seven to eight years,” Kaul said.

Hughes isn’t intimidated by the CDMA equipment market lead of Motorola Inc., Lucent Technologies Inc., Northern Telecom Ltd. or even the Korean vendors.

“The Koreans will be tough, but the Hughes name is more powerful internationally than AT&T, especially in Russia and other countries that have been dominated by defense. When we go to Russia or China, there is instant acceptance. They consider us on par, if not more advanced, than the Northerns or Lucents of the world,” Kaul said.

Hughes contracted with Qualcomm Inc. a few months ago to license CDMA technology and to acquire enough CDMA infrastructure equipment to get Hughes into the CDMA market quickly. Qualcomm will have access to Hughes’ product development and will buy products Hughes develops.

Hughes Network Systems has factories in Gaitherburg, Md., San Diego, Mexico, the United Kingdom and China. The company supplies 50 percent of the equipment for Cellular Digital Packet Data systems.

“We took our E-TDMA platforms, which are software-based modems, and reprogrammed them to do analog and TDMA and CDPD or fixed TDMA. We manufacture the same radio, but just add the software that customizes it for the need,” Kaul said.

Also, Hughes is a partner in the PACS Edge solution, providing the radio systems for the microcellular PCS system. Hughes expects PACS will be popular with D- and E-block PCS auction winners and believes the PACS business will take off in the next few years.

“In 1998, you’ll see major players like RBOCs with PACS, when the wireline side of their business starts getting cannibalized and they will have to come back with a wireless response,” Kaul said.

Hughes has granted Geotek Communications Inc. $100 million in vendor financing, with the return of being a nonexclusive sales representative for Geotek in other countries. Hughes builds handsets and radio systems for Geotek’s Frequency Hopping Multiple Access systems.

Hughes also supports the cellular networks of BellSouth Cellular Corp., having just completed a switch conversion in 15 BellSouth cities.

Hughes said it is confident that NextWave will be a step in the right direction.

“We spent three or four months of analysis on NextWave. We are confident they will receive their licenses. The risk is execution of the network. They have a large task ahead of them and need to raise a lot of money,” Kaul said.

“But here’s why we think they are low risk. They have two major tasks. The operations will be easiest because they have attracted the cream of the industry already. The second part, marketing, as a wholesaler is mitigated. With five guys reselling their service with different strategies, the likelihood of succeeding increases,” Kaul said.

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