JERUSALEM -(Dow Jones)- Cellular phone carriers, caught between piles of debt and a ballooning number of subscribers, are looking to squeeze every last drop out of existing and future networks.
That`s propelling a billion-dollar-and-growing market for companies such as Israel`s Schema, which are using technology, rather than expensive new infrastructure, to boost the capacity and quality of mobile systems.
"In this harsh economic climate, it`s more important to look at existing tools that enable you to get more out of the existing infrastructure than to deploy new infrastructure, regardless of whether the network performance boost is 10, 20, 30 or 50 per cent," said Lars Godell, a European telecommunications analyst at Forrester Research, Inc.
There are two ways to expand network capacity without degrading quality. One is to add multiple base stations, which cost between $100,000 and $350,000 each to build, plus annual operating expenses. The other is to use technology to increase the number of traffic-carrying channels in spectrums that are finite and sometimes scarce, or to fine tune parameters such as antenna tilt, direction and power.
Privately-held Schema claims it can wring 20% to 50% more capacity out of a wireless network and improve quality by applying an optimization engine to a mathematical model of a customer`s cellular network.
Chief executive Yosi Ben-Dov says Schema`s advantage over technology-based competitors is that while they offer either an optimization engine or mathematical modeling, his company offers both. Ben-Dov says Schema`s models also probe networks more deeply than competitors` do to give a more accurate picture - not only of existing "second generation" networks - but also of forthcoming third generation systems that will enable high-speed Internet access.
"Their unique software algorithms differentiate them from their competitors in the market," says Michael Walkley, a wireless communications analyst at RBC Capital Markets.
Schema has landed contracts with leading U.S. wireless operators and this past year raised $25.8 million - nearly $11 million above target - in venture capital. All told, the company has raised $38 million since it was founded in 1995, from investors including BRM Capital, TL Ventures, EnerTech Capital Partners, the Israel branch of Walden International and Docor International BV.
Schema`s executives "aren`t building the company to sell it," Ben-Dov said. "If market conditions are conducive, we`ll try to raise money from the public," he said, but offered no timetable.
Schema generates revenues by leasing its technology, generally in multiyear contracts. It earned revenues of $1.5 million in 2000, its first year of sales, and expects $8 million to $9 million this year, and double that in 2002. It sees break-even for the full year in 2003.
Schema`s new to the wireless scene, having entered it in 1998, but the timing couldn`t be better. With an explosion of data set to consume more capacity on wireless networks than voice services do, operators are scrambling to cut infrastructure costs not only on existing 2G networks, but also on expensive 2.5G and 3G infrastructure.
"Given all the uncertainties about the UMTS (Universal Mobile Telecommunications System) business case - reduced mobile operator valuations and declining profits, and the debt mountains from UMTS licenses in Europe - the pressure on (operators) to boost their economic performance is quite intense," said Forrester`s Godell.
Schema says one major U.S. mobile network boosted capacity in a small coverage area by 56% using Schema technology that cost $1.2 million. To achieve the same increase with additional base stations, the operator would have had to spend $19.5 million, the company says.
Godell says companies that have been in the mobile industry longer don`t think it`s as easy to boost capacity as Schema claims. "The truth probably lies somewhere in the middle," he said.
But Tzvi Shechori, vice president for research and technology at customer Cellcom Israel Ltd., says skepticism is unwarranted. Schema technology typically boosts capacity by 20% and performance, as measured by completed calls, by 24%, Shechori says. Networks that don`t have strong engineering departments would be able to boost capacity by 50%, he said.
Because its algorithm does in hours what other computer programs require months, if not years, to do, Schema can quickly produce a network optimization strategy based on both simulation and real data, Shechori said. His company took part in Schema`s beta testing and received a discount on some of its technology.
Mark Austin, director of radio technology and planning at another customer, Cingular Wireless, says Schema`s technology gives an accurate picture of the quality/capacity tradeoff, thereby allowing the network "to make higher-level decisions, rather than worry about the actual frequencies a given cellsite uses. Disadvantages are that it still takes a lot of initial startup time to get a good input that you can trust."
Schema`s major U.S. and European rivals are Agilent NetMetrix Solutions, a division of Agilent Technologies Inc.(A), ScoreBoard Inc., Celplan Technologies Inc., AIRCOM International, FORSK and MSI, a unit of Marconi PLC (MONI).
Large equipment suppliers also have network optimization solutions, "but carriers want something independent like a Schema, because Nokia and Ericsson are also in the business of selling base stations, so there`s a conflict of interest there," RBC`s Walkley said.
Schema customers include the two biggest U.S. cellular operators, Verizon Wireless and Cingular, U.S. Cellular Corp. (USM), U.S.-based Cellcom Greenbay, Cellcom and Israel`s Pele-Phone Communications Ltd. The Israeli press has reported that AT&T Wireless Services Inc. is another customer, but there is no official confirmation.
Being a relative newcomer, Schema is disadvantaged by facing established competitors in the U.S. market, said Martin Roetter, vice president of communications technology at Arthur D. Little in Cambridge, Mass. But, "the fact that they`ve got contracts with Verizon and Cingular I think is an excellent point in their favor," Roetter said. "These are the big guys. There`s a certain amount of consolidation going on. If you`re a Schema, you`ve got to make sure you`re in with some reasonable subset of the few ones who manifestly are going to survive."
Last week, Schema announced that Wireless Facilities Inc., a U.S.-based company that designs, deploys and operates wireless networks for carriers and equipment suppliers, would provide the Israeli company with radio frequency engineering support on current and future contracts. Competitor Scoreboard also has an outsourcing agreement with WFI.
Before the alliance was announced, Roetter observed that it would be "important for Schema to establish relations" with organizations such as WFI in order to "address the greatest possible share of the overall market."
Most Schema sales have been in the U.S., where cellular telephony is less mature than in Europe, and spectrum is tighter. Because Cingular and AT&T Wireless are migrating from TDMA (Time-Division Multiple Access) technology to GSM (Global System for Mobile), they`re reluctant to invest in the orphan infrastructure to provide additional capacity.
Schema expects to sign up its first European, Asian and Latin American customers in 2002. Susan Passoni, director of technology research at Credit Suisse First Boston in New York, rates the company`s prospects for breaking into these markets "very attractive, especially as these carriers are looking for greater cost-cutting tools to improve operating efficiencies."
Like many other Israeli companies, Schema traces its roots to the military, developing optimization technology for mid-trajectory missile flight shifts. It later developed optimization tools for the shipping industry, and then went on to wireless, where it says it intends to stay.
"We reached the conclusion that we have to be experts in our domain," Ben-Dov said. "It`s not enough to be algorithm experts or great mathematicians...so now we`re looking for new problems in wireless...not new optimization problems."
New applications it`s working on include optimizing the connection between base stations and system backbones; optimizing capacity and quality within buildings; and optimizing the wireless network`s tie-in with the Internet.
Company Web site:
www.schema.com 
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