Subject: [NEXTEL-1] Is a Wi-Fi Bubble Building?

From: [email-masked]
Date: Fri, 23 May 2003 12:01:56 -0400

MAY 22, 2003

Is a Wi-Fi Bubble Building?

As one of tech's few growth areas, it's luring startups and VC cash --
in a familiar pattern. First to feel a pop may be consumer outfits
A year ago, Sean Marzola was the CEO of one of Silicon Valley's hottest
Wi-Fi startups. Embedded Wireless Devices in Pleasanton, Calif., had set
out to design chips for Wi-Fi (wireless fidelity) access points -- "hot
spots" -- that permit wireless Internet access within a radius of 300
feet. But about 18 weeks before EWD's first product could start being
manufactured, investors pulled the plug. Last August, EWD quietly closed
its doors, leaving Marzola an entrepreneur without a home.

EWD's story could soon become more commonplace. Wi-Fi is the
increasingly popular technology that lets anyone with a laptop and a
wireless card surf the Web from home or work, in airports or cafés. In
2002, according to Allied Business Intelligence in Oyster Bay, N.Y.,
worldwide sales of Wi-Fi equipment soared by 25%, to $1.25 billion -- an
anomaly in the current economy. This year, ABI expects orders for such
gear to jump 33%, to $1.67 billion. Wowed by such projections, venture
capitalists poured more than $2 billion into various Wi-Fi outfits in
2002, according to one major venture firm.

THE NEW NEW THING.  Wi-Fi may be the hottest tech market to come along
since the Web itself. And while that's cheery news, it's also raising
red flags in some quarters -- a concern that just as the Web spawned
excess investment based on careless projections of future demand, the
same thing could be starting to happen in Wi-Fi. True, this market
remains far from saturated. And most major advances in technology
initially attract more players than the market can ultimately sustain,
leading to a shakeout at some point.

Yet more and more analysts worry that euphoria over the one segment that
has shown some life during the most prolonged tech downturn in recent
memory could lead to overexpansion and an imbalance of supply vs. demand
-- creating the type of capacity surplus that has shattered the
telecom-equipment business over the past three years. One of the biggest
worriers is Andrew Cole, an analyst with wireless consultancy Adventis
in Boston. "Wi-Fi is overrated and headed for a fall," he declares.

The situation isn't that simple. Wi-Fi is really two markets -- one
consumer, the other corporate. And at the moment, they seem to be headed
for divergent paths -- one difficult, the other more promising.

WHITHER USAGE?  In consumer Wi-Fi, the question of the moment is: How
strong will demand be? The number of hot spots available to the public
worldwide should grow from 12,235 in 2002 to 145,417 in 2007, predicts
market consultancy Cahners In-Stat. But whether their usage will grow
nearly that fast isn't certain. Analysts say wireless service provider
T-Mobile, which operates 2,300 hot spots in the U.S., recently lowered
its Wi-Fi access prices from 25 cents to 10 cents a minute because
demand is turning out to be only a quarter of what it expected.
(T-Mobile hasn't returned repeated calls seeking comment.)

Demand could be squishy partly because, like the Web itself, the Wi-Fi
consumer market started life as a movement of geeks who sponged off any
node within 100 yards. So from the start, a big challenge for any Wi-Fi
service provider has been to convert such freeloaders to paying
customers in densely populated areas where no-charge nodes are numerous.
Those that can't end up folding -- like a New York company called
Joltage did last February.

Another growth deterrent is that Wi-Fi isn't easy for an average person
to use. It requires setting up an antenna, reconfiguring a computer, and
signing up for broadband service. And that doesn't count trying to use
Wi-Fi on the road. Jeff Belk, senior vice-president for marketing at
Qualcomm (QCOM ), which makes chips for cell phones, likes to tell of
how he recently picked a small hotel in London because it had a Wi-Fi
network. It turned out that the employees couldn't explain how to get
onto the network, and he would have had to download special software to
log on -- and then uninstall it afterward to avoid corrupting his files.

MURDEROUS COMPETITION.  Even if demand turns out to be robust,
competition in consumer Wi-Fi could be murderous. Barriers to entry in
that business are low -- a few hundred dollars worth of gear for the
tiniest startups, plus a monthly broadband subscription of, perhaps,
$50.

More daunting, of course, is competition from major players. This month,
Verizon (VZ ) announced that it will offer Wi-Fi service in New York
City free to its DSL (digital subscriber line) customers (see BW Online,
5/14/03, "Verizon's Equalizer vs. the Cable Guys?"). And GRIC (GRIC ), a
provider of mobile communications for corporations, offers Wi-Fi for an
additional fee to business customers as an add-on to its dial-up
Internet service. Stand-alone dial-up access costs $25 a month -- or $50
when bundled with Wi-Fi access at 1,400 hot spots. The service is
"growing pretty rapidly," says Bharat Dave, GRIC's president and CEO.

Competition is turning out to be just as fierce among Wi-Fi equipment
makers, who now get 60% of their revenues from the consumer market.
Cisco Systems' (CSCO ) $500 million stock purchase in December of
consumer Wi-Fi gearmaker Linksys reassured those who worried that Wi-Fi
might not be ready for prime time -- but also made survival problematic
for many small players in the business. Cisco lowered prices on its
Wi-Fi gear by about 25% last year to remain competitive, says Bill
Rossi, vice-president and general manager of Cisco's wireless-networking
business.

FEWER CHIPMAKERS?  The next candidates for consolidation could be makers
of Wi-Fi chips, whose prices fell about 25% last year. New generations
of chips coming out this year should stabilize pricing only temporarily,
Merrill Lynch analyst Joseph Osha believes. Thus, although the Wi-Fi
chip market more than doubled in 2002, to $415 million, and should grow
to $591 million this year, in 2004 it could fall 1.3%, to $583 million,
Osha estimates.

While In-Stat analyst Alan Nogee doesn't think overall revenue from
Wi-Fi chips will decline until after 2005, he does expect the number of
manufacturers to drop from 40 to 20 over the next year as competition
heats up. That may already be starting: In December, Royal Phillips
Electronics (PHG ) acquired Wi-Fi chipmaker Systemonec. Ultimately,
established semiconductor producers such as Intersil (ISIL ), Broadcom
(BRCM ), and Texas Instruments (TXN ) will dominate this market, Nogee
predicts.

Conversely, one market with room for ample growth appears to be Wi-Fi
equipment for corporations. "We're still in the early days of enterprise
Wi-Fi, which is the big opportunity," says Martin Dunsby, vice-president
for operations at wireless consultancy InCode Telecom in La Jolla,
Calif. Today, about 40% of U.S. companies have some type of Wi-Fi
network -- and about one-third of those plan to expand their networks in
the next 18 months, according to wireless researcher ON World.

SHOPPING WITH WI-FI.  Many companies have found that incorporating Wi-Fi
cuts their telecom costs and helps employees be more productive. Now,
they're searching for ways to better manage their Wi-Fi networks and
make them more secure. Cisco, among others, claims to have the solution.
It expects to continue charging $400 to $500 per hot spot (of which some
companies have thousands) by offering wrinkles such as guest Wi-Fi
access or integration with VoIP, or voice over Internet protocol, which
allows phone calls over the Internet, says Rossi.

The corporate Wi-Fi market is likely to benefit from increasing
innovation. Over the next 12 months, wireless-systems manufacturer
Symbol Technologies (SBL ) plans to roll out a variety of location-based
services, says Gary Singh, a senior marketing director at the company.
One will allow factories or hospitals to tag valuable equipment and
track its location using Wi-Fi.

In Europe, a similar system is already used at some grocery stores.
Customers can pick up a handheld Wi-Fi-enabled device and insert their
credit card. Then, they can scan their purchases into the device, which
transmits the info to a computer in the store. When customers check out,
the total is billed to their credit card.

Besides grocery stores, Wi-Fi could yet become pervasive in cell phones,
allowing for seamless roaming between cellular service providers and
Wi-Fi networks, says Marzola, who after EWD's demise became president
and CEO of Digital Communication Technologies, a London-based
microprocessor maker. Despite his experience with EWD, he still believes
that the sky is the limit for Wi-Fi. For dozens of startups, however,
the sky may soon be falling.

http://yahoo.businessweek.com:/print/technology/content/may2003/tc20030522_7618_tc119.htm?tc

------------------------ Yahoo! Groups Sponsor ---------------------~-->
Get A Free Psychic Reading! Your Online Answer To Life's Important Questions.
http://us.click.yahoo.com/Lj3uPC/Me7FAA/uetFAA/61FxlB/TM
---------------------------------------------------------------------~->

Your use of Yahoo! Groups is subject to http://docs.yahoo.com/info/terms/