Wireless providers are rallying around the cry of "spectrum crunch," or the notion that America will soon run out of available broadband capacity as increasingly popular smartphones, tablets, and other mobile devices drain the airwaves. The problem is: That's not entirely true. Carriers have made it sound like more spectrum is the only solution to our growing mobile-phone usage, but there's another way to fill the air. Companies are already developing technology to alleviate the strain of smartphones on the system, and one of them is going to hit the jackpot.
The spectrum crunch problem
The broadcast spectrum is finite -- that's the first problem. The spectrum is made up of radio frequencies, which only exist within certain bands of the electromagnetic spectrum. Compounding this physical limitation are the limitations we've imposed on the bands. We -- rather, the FCC -- have cut up the spectrum into bands and said, "This entity can use this bit, that entity can use that bit, no one can use this one," and so on.
As a result, there are whole sections reserved for companies that aren't interested in using the space they've been allocated, nonadjacent bands are held by the same carrier, and big sections are given over to fading technology. Because the setup is a mess, companies are scrambling to buy up whatever bandwidth they can get their sticky little mitts on.
Last year, AT&T (NYSE: T) made a bandwidth grab by going after T-Mobile. AT&T offered $39 billion for T-Mobile, and it would have entered 128 new markets. While the purchase ultimately failed, it showed just how valuable companies think increased spectrum will be in the future. The problem is that it's all a facade.
The spectrum crunch lie
Spectrum crunch has a great ring to it, but expansion isn't the only answer. The nearsighted allocation of bandwidth and the explosive growth of users mean that there are lots of places where carriers can fix inefficient setups without hogging more airspace. For instance, instead of using more spectrum, companies can use their existing spectrum cut into smaller areas.
Imagine three adjacent towns. Two have coverage, and the other doesn't. As shown below, the carrier can either grab a new piece of spectrum or simply broadcast the existing spectrum in smaller segments.
This is a harder point to rally around, and it drives home the fact that carriers made mistakes -- not just the government. It's also likely that companies will both fight for more spectrum and upgrade existing technology to make things more efficient. This is where we find some unexpected winners.
Feeding the mobile beast
One of the biggest advances on the horizon is the microcell tower. These little transmitters cover much smaller areas, are cheaper to put in place, and allow companies to make full use of their spectrum, all by cutting down on overlap. Imagine the difference between packing a box with bowling balls, which would leave a lot of space between them, and packing it with marbles, which would leave very little space.
Alcatel-Lucent (NYSE: ALU) has had some success with its lightRadio architecture. The small cubes can be used to create smaller areas of coverage than a normal cell tower. This means that the same frequency can be used in a number of locations, even within the same city. The company is also integrating Wi-Fi with the cubes to increase their usefulness (more on this later). While the technology is still new, it has had a lot of interest already: Alcatel-Lucent has announced more than 30 existing contracts worldwide.
Another interesting solution has come from Ericsson (Nasdaq: ERIC). The company announced the creation of a pico base station earlier this year, which would, like the Alcatel-Lucent cube, combine traditional cell broadcasting and Wi-Fi capabilities. This would mean that companies could ease the load running through their networks by offering voice-over-IP services through their smartphones. This would skip the traditional phone system and allow communication through the Internet instead. Users would likely be charged data rates instead of minutes.
The cleverly named joint venture between Nokia (NYSE: NOK) and Siemens (NYSE: SI), Nokia-Siemens, has a different solution. Its Liquid Radio network can adapt broadcasting based on user location and need. This means that if there are a lot of users near the bases, then the system can switch to broadcasting local, low-frequency transmissions, allowing a wider range of spectrum to be used for people farther from the bases.
The takeaway
The spectrum specter can only last so long. Sometime soon, cell towers and the nature of the cellphone network will have to change. That's when these infrastructure providers are really going to shine.
My favorite play here is Nokia. The stock has taken it on the chin over the last year, in part due to a reported loss in the first quarter of this year. Shares are under $3 after trading around the $6 mark for most of 2011. The Liquid Radio technology seems to have taken a bigger-picture view of the problem, and I think carriers are going to get hooked on its reactive nature.
Once all the hype fades, I think Nokia-Siemens is going to come out on top with an industry-leading way of distributing cell signals. But they aren't the only ones looking to profit from the boom in cellphone usage. The Fool has created a free report highlighting one mobile stock ready to pop. Get in before the rest of the market catches on -- get your copy today.
