Subject: [NEXTEL-1] Wi-Fi Internet Access Is Hot, But Its Profit Potential Is Tepid

From: Marcel <[email-masked]>
Date: Mon, 09 Dec 2002 01:50:19 -0500

http://www.nytimes.com/2002/12/09/technology/09WIFI.html

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Wi-Fi Internet Access Is Hot, But Its Profit Potential Is Tepid
By BARNABY J. FEDER

ith the Wi-Fi wireless Internet access standard becoming a bandwagon that even big players like AT&T, I.B.M. and Intel are joining, equipment companies big and small are hoping to ride along. But many industry analysts say it could be hard to make money in Wi-Fi, which is unlikely to represent more than a tiny fraction of the overall telecommunications equipment market for at least several years.

Many of the early leaders in Wi-Fi are obscure companies like Proxim, Buffalo, Linksys and Dlink. And those that do not sell gear directly to consumers must rely on selling to Wi-Fi service providers that are themselves start-ups still trying to find their way, companies like Boingo Wireless, HereUAre Communications, FatPort and Surf and Sip. The service providers set up "hot spots" at places like airport lounges or Starbucks coffee shops, where anyone with a laptop computer or other device equipped for Wi-Fi can go online.

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While analysts hesitate to predict that any of these companies will survive to become widely recognized brands like Netscape, the resemblance to the Internet craze of the 1990's has been widely noted.
"There is a bit of a bubble here," said Dylan Brooks, a wireless communications analyst at Jupiter Research. "We've had more than $2 billion in venture capital money flowing in, more than total revenues."

Most of those ventures are destined to flop, analysts say. Even established technology companies — like Cisco Systems, the leading seller of Wi-Fi gear; Symbol Technologies; and the Hewlett-Packard Company — face an uphill battle to earn profits with Wi-Fi because competition is driving prices down so rapidly.

Meanwhile, specialty chip makers like Intersil, Broadcom and Agere have been facing growing competition in the Wi-Fi market from their counterparts in Asia. And with Intel leading the charge to make Wi-Fi part of every device that carries an Intel processor, business may be tough for companies like Intermec Technologies and Linksys, which have been making some of their money from Wi-Fi adapter cards sold separately to computer owners.

With prices of Wi-Fi chips and networking equipment plummeting even as unit sales are soaring, the industry's revenues are not expected to top $3 billion — 1 percent of the worldwide market for telecommunications equipment — before 2006, according to Synergy Research.

Wi-Fi received perhaps its biggest publicity push yet when Cometa Networks, a new company whose backers include Intel, AT&T and International Business Machines, said last week that it would roll out a nationwide wireless network for Internet access based on Wi-Fi.

The term Wi-Fi is shorthand for wireless fidelity. Wi-Fi covers a set of design rules formally known as 802.11, which were developed by the Institute of Electrical and Electronics Engineers, a nonprofit group.

The 802.11 standards differ from another fast-growing new wireless standard called Bluetooth in that they are best suited for transmitting data over distances of up to a few hundred feet instead of just a few feet. The most popular Wi-Fi variant at the moment, 802.11b, is also much faster than Bluetooth, operating at up to 11 million bits per second — or about eight times the speed of D.S.L. and cable modems. But today's Wi-Fi chips are power-hungry, making them less practical for small devices like hand-held computers or cellphones.

Companies are racing to come up with innovative antennas that extend Wi-Fi's range, chip designs that increase its speed and, by adapting software developed to make free phone calls over the Internet, methods to carry voice as well as data traffic on Wi-Fi networks. But whether the innovation can be translated into profits is far from clear. As with other forms of high-speed, or broadband, communications, consumers may embrace Wi-Fi only to the extent that they can figure out how to pay little or nothing for it.

Nearly all major business users are experimenting with Wi-Fi, but they are not buying nearly as many Wi-Fi installations as small businesses and homeowners are. That is bad news for vendors because a big corporate customer often pays $1,000 or more for an access point, compared with $200 or less for the simpler setups.

"Most corporations are holding back because the suppliers cannot provide good security or tools for closely monitoring how the networks are performing," said Stan Schatt, a wireless analyst for Giga Information Group, which advises many large companies on communications technology.

So far, of an estimated two million potential Wi-Fi sites at commercial sites like stores, gasoline stations and restaurants, only about 3,000 have been installed, according to Sky Dayton, Boingo's founder, who spoke last week at an industry conference in Santa Clara, Calif. Some entrepreneurs say the potential market includes apartment buildings and small office buildings.

HereUAre, which is based in Menlo Park, Calif., intends to locate Wi-Fi access sites in apartment buildings and charge residents $29.95 per month. "It costs us an average of $7 per customer to set up," said Benedict Van, president and chief executive of the eCapital Group, the investment firm that controls privately held HereUAre.

"There is no way the cable and phone companies can compete," said Mr. Van, who wants to take the company public and then sell it to a large broadband provider. But Mr. Van is not confident enough to borrow heavily to finance a rapid expansion.

Many analysts initially predicted that Wi-Fi would undercut the expensive effort of major carriers to build out new cellphone networks capable of delivering video and other streams of data to hand-held devices. Now some are arguing that Wi-Fi and cellphone technologies may end up working together to spur demand for such services and cut the costs of delivering them.

In such a world, the communications giants that operate wide-area networks may very likely become controlling partners, if not the outright owners, of localized Wi-Fi networks in order to manage their broadband business efficiently.

"The more attention it gets, the more the big players get involved," said Andrew Seybold, an analyst whose company, Outlook 4Mobility, follows wireless communications. "It's not an industry that is going to create the next Netscape or the next Microsoft."

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Kim Kulish for The New York Times

Michael Gopikanth of Seattle used his laptop last week at the 802.11 Planet wireless trade show in Santa Clara, Calif. The 802.11 design rules, created by a nonprofit engineering association, cover wireless fidelity on the Internet, which is known as Wi-Fi.

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Kim Kulish for The New York Times

Michael Youssefmir used the network set up by Boingo Wireless, a start-up company, at a trade show.

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