Subject: [NEXTEL-1] Bill Gurley: "802.11 & Cellular: Competitor or Compliment?"

From: Marcel <[email-masked]>
Date: Fri, 10 Jan 2003 14:56:35 -0500

Bill Gurley: "802.11 & Cellular: Competitor or Compliment?"

"Same as it ever was...
Same as it ever was...
Same as it ever was..."
-Talking Heads, Once in a Lifetime

One of today's most popular debates is the potential long-term impact of the wireless
Ethernet technology known as 802.11, or
WiFi. Some suggest that the technology is over-hyped, but others continue to preach that
this is not simply a new technology,
but rather the next big thing - a "disruptive" technology that will change the world as we
know it. One industry that is particularly
attuned to this debate is the cellular industry. While some analysts have suggested that
802.11 is competitive with cellular data
offerings, such as 3G, the currently trendy perspective - driven largely by the cellular
industry itself - is that the two technologies
are wonderfully complementary.

WiFi is to 3G as the personal computer was to the mainframe.

It is important to realize that the 802.11 vs. 3G issue is not black and white. WiFi will
neither be completely competitive nor
completely complimentary with data offerings from cellular carriers. There will likely be
elements of both. So the real question is
just how competitive and/or complimentary will WiFi be? And what will be the resulting
balance of power in terms of both
revenue and market capitalization? Consider the following analogy as a way to answer this
all-important question: WiFi is to 3G
as the personal computer was to the mainframe.

The first obvious similarity between the rise of 802.11 and that of the personal computer
is the commitment of an entire industry
to a single open-standard architecture. Just as the large box computer market had three or
four leading stovepipe architectures
(IBM, Tandem, DEC, etc), the cellular market has three or four competing technology
architectures (GSM, W-CDMA,
CDMA-2000, IDEN, etc). Meanwhile, 802.11 is an interoperable standard that is embraced by
the entire technology industry.
Cisco, Dell, Intel, IBM, Toshiba, Microsoft, Broadcom, Texas Instruments, Intersil, Agere,
Hewlett-Packard, Proxim and
numerous other public and private companies all support this single, open-standard,
interoperable platform.

>From a market dominance standpoint, open-standard technologies have many advantages over
more closely controlled
architectures. First, the presence of many competing players with interoperable products
allows the consumer to benefit from
the aggregated R&D dollars of all participants implying accelerated product improvement.
Also, with aggregated R&D dollars
chasing the same core technology, Moore's Law is sure to shine. As a result you receive
the dual benefit of rapidly advancing
innovation AND rapidly declining costs. Ironically, falling costs lead to an
ever-expanding market as lower prices attract more
users and make more applications feasible. The expanding market attracts more suppliers,
which results in more R&D dollars
and the entire cycle starts over again.

In the early days of the PC, most people considered the initial market for the
IBM/Intel/Microsoft-based personal computer to
be fairly narrow. In 1980, no one envisioned that one day you might run your company's
entire ERP system, or power a
massive array of web sites on this technical architecture. However, the "increasing
return" forces highlighted above eventually
created a product that, from both a feature perspective and cost perspective, was
appealing to a much broader array of
applications and uses than ever previously envisioned.

This exact thing is currently happening with 802.11. This tiny, and increasingly
inexpensive radio is already shockingly versatile.
The same $30 radio can be used to serve wireless connectivity in your office, connect both
your PCs and your multimedia in
your home, and provide coverage to a police force across an entire downtown area. Add a
Pringles can as a directional
antenna (no kidding!), and this $30 radio is capable of providing high-speed,
line-of-sight connectivity at a distance of 10 miles.
In fact, the majority of the volume in the line-of-sight fixed wireless market has shifted
almost entirely to low-cost 802.11
radios.

Originally designed to connect PCs and handheld computers to the network, people are now
using these low cost radios for an
increasing number of diverse customer applications. In remote areas, 802.11 can be used as
a DSL alternative. Hospitals are
using 802.11 not just to connect doctors and nurses but also to connect hospital
equipment. 802.11 is a wonderful solution for
industrial sensors in remote monitoring as well as control equipment designed to
intelligently manage such things as power and
HVAC systems. You can even use 802.11 to build an extremely cost effective video
surveillance network. It is also feasible
that 802.11 will be the driving force behind a wholesale conversion to VOIP and an
entirely new phone structure in the
enterprise.

The invention of the microprocessor, which eventually powered the personal computer, led
to an "order of magnitude" leap in
price performance with respect to computing. And with the help of Moore's Law and the open
market dynamic outlined above,
this advantage has only increased over time. By 1990, a single Intel microprocessor had
the processing power of a mainframe
built just four years earlier - and obviously at a fraction of the cost. While people have
tried to build faster, richer, better
computing architectures since the birth of the PC, all have fallen short due to the
seemingly "unfair" advantage of the
open-standard technology.

Companies deploying 802.11 systems are finding a similar experience. In the case of fixed
wireless space, companies are
replacing proprietary closed spectrum radios with 802.11 systems that are easily ten times
cheaper than that of their
predecessors. With respect to broad-based wireless data coverage, a similar case can be
made. Most 2.5/3G system
providers are currently pricing high-speed data services at somewhere between
$1-$4/megabyte (despite the fact that some
experts put the opportunity costs of the voice capacity of this transmission at
$1.30/megabyte). At this price, a one-time daily
synch of your email inbox could cost as much as $100. Hook a $600 T1 to an 802.11 node,
and assume only 10% usage, and
you will find you can deliver high-speed data service for as little as $0.01/megabyte. The
numbers are even better for a
$50/month 384k DSL line.

The economics of 802.11 are advantageous in two other critical and material ways. First,
as 802.11 operates in an open,
unlicensed spectrum, providers pay no fees for spectrum licenses. Proprietary licenses
obviously cost billions and billions of
dollars and are a key component of the excessive cellular cost structure. Second, and
equally important, the price of 802.11
customer equipment is rapidly approaching zero. This compares with a number as high as
$400-$500 for a cell phone that
exploits a new technical breakthrough. So, why is WiFi almost free? The answer is (1)
because the price of the parts could go
as low as $5 over the next five years, and (2) because the entire PC industry has a vested
interest in seeing 802.11 dominate
over 3G. As such, within a matter of years, 802.11 will be a standard feature on every
single portable computer, with a
marginal cost to the consumer of $0.00.

The last key similarity between the personal computer and 802.11 is denial and lack of
respect. All along the way, large system
proponents would argue that the PC was a "toy" that would never be capable of real-world
computing. Likewise, the large
cellular providers argue that 802.11 is fine for delivering service to a coffee shop, but
will never be a true alternative to broad
based city-wide coverage. This is despite the fact that Metricom has already proven you
can build a high-speed citywide
network leveraging open spectrum radios. They should also know that the 802.11 market
doesn't need deep pocketed
believers. Thousands and thousands of small ISPs are experimenting with a variety of
802.11 deployments. While service
providers wait for solutions to high-end problems like roaming and billing integration,
"cowboy" providers like San Francisco's
Surf 'N Sip have already deployed at 170 locations.

So is 802.11 complimentary to cellular? Perhaps it is complimentary in the way that chips
and salsa are complimentary to a
Mexican entrée. They are not directly the same, but if you eat a ton of chips when you
first sit down, you just aren't as hungry
for the Chile Relleno later. Prior to the emergence of WiFi, there were thousands and
thousands of presentations given on why
data services over cellular networks made sense. In those presentations, executives
described scenarios and locations where
users would interact with these valuable services. The problem is that the primary
locations in these historic scenarios are the
exact same locations where 802.11 hotspots are already deployed today (airports, hotels,
coffee shops). 802.11 has stolen the
heart of the market, leaving high speed cellular data services to fill the niche that
Satellite phones fill in the voice market.

It is undeniable that the arrival and continued success of the personal computer did not
obliterate the mainframe. It did,
however, curtail the growth by "stealing" the incremental market opportunity. The combined
market capitalization of IBM,
Hewlett-Packard (Compaq, DEC, Tandem), and Sun is $201B (and this includes some PC value).
The combined market
capitalization of Intel, Microsoft, and Dell is $469B. So you tell me, was the PC
competitive or complimentary to the
mainframe?

If you have feedback or comments, please send them to [email-masked]

The Above the Crowd newsletter focuses on the evolution and economics of high-technology
business and strategy. The
information contained herein has been obtained from sources believed to be reliable but is
not necessarily complete, and its
accuracy cannot be guaranteed. Any opinions expressed herein are subject to change without
notice. The author is a general
partner of Benchmark Capital, a venture capital firm in Menlo Park, Calif. Benchmark
Capital and its affiliated companies
and/or individuals may have economic interests in the companies discussed herein.  J.
William Gurley 2003.

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