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Wireless Web set for take-off
by J.K. Riggin
As wonderful as the Internet may be, it is often a royal pain to use.
Aside from negotiating the ins and outs of working with an Internet service provider, you always have to play around with your computer. And for most people, changing the configuration of your PC means screwing something else up that up until then worked just fine.
It's been said that PCs are a lot like Swiss army knives -- while they can do a lot of neat things, they tend to not do any single thing really well. Which means that the home computer platform that helped enable the fantastic growth of the Internet may very well become an obstacle to further growth.
For scads of content and commerce plays, the stakes are largely based on ever-growing Internet usage among Mr. and Mrs. Jones and their 2.3 brats. And price is no longer a barrier. A basic workhorse PC can now be had for less than US$100 if you sign up for three years of AOL, Compuserv or the Microsoft Network for US$19.95 a month.
The real barrier to entry is ease of use. Witness the resurgence of Apple. And no matter what Steve Jobs says, getting online is still a far more daunting task than plugging in a television set.
Besides ease of use, mobility is critical. American consumers crave convenience. If you give people the opportunity to distract themselves with data without being tied down to a desktop PC, they'll grab it faster than Robert Downey Jr. reaching for the straw and mirror.
Voice first, then data
Today, only three million subscribers can access the Internet over wireless links. According to a recent Yankee Group study, that number will jump to more than 50 million subscribers by the year 2004. Although the study assumes that the five-year growth period will be sparked by increased use of wireless technology by mobile office workers, the popularity of accessing the Internet from any place at any time is about to seize the mass market.
More important to wireless service providers, the anticipated flood of new users will translate into huge revenue opportunities. According to the study, the overall wireless market will generate about US$6.6 billion in revenue by the end of 2004. Additional revenue is also expected to come from mobile commerce over the Internet, and related advertising and content distribution opportunities.
Wireless companies have seen the future, and it's more than a flip phone on every belt. In 1998, the US$9.1 billion merger of Northern Telecom Ltd. and Bay Networks Inc. laid the groundwork for things to come. This particular deal was relatively historic because it was the first acquisition of a data networking company by a major wireless infrastructure manufacturer, not to mention one of the biggest acquisitions in Silicon Valley history. The new company, Nortel Networks (NT - NYSE), uses Internet protocols in integrated networks, enabling faster data rates and more commercial applications. Nortel's stock has nearly tripled in value over the past year.
Nortel is not alone in its efforts to build out the wireless Internet communications infrastructure. Manufacturers such as Lucent Technologies Inc. (LU - NYSE), Ericsson Inc. (ERICY - NASDAQ) and Motorola Inc. (MOT - NYSE) have forged wireless Internet strategies, and many carriers are moving in that direction too. The Internet protocol allows carriers to transmit more information and do it more efficiently than a traditional circuit-switched network. This means lower costs and increased profitability.
The biggest impact of Internet protocol on the wireless industry is expected to be data. Less than five percent of today's wireless traffic is devoted to data, but some analysts have predicted it will rise as high as 50 percent in five years. And, as has been proven by the "wired" Internet, that traffic means billions in commerce and advertising revenue.
Agile gorilla
In a space populated by 800-pound gorillas, Nokia (NOK - NYSE), the world's number one mobile phone maker, is the company to watch. Their wireless Internet strategy focuses on three areas: 1) putting basic Internet capabilities (such as email and the Web) on wireless handsets, 2) expanding the viability of wireless broadband Internet access and 3) expanding the capabilities of consumer wireless devices (such as television remote controls).
Nokia's role in the expansion of wireless Internet was confirmed in its recently announced partnership with IBM. IBM will distribute Nokia's wireless application protocol (WAP) server software on Big Blue's Netfinity servers running Microsoft's Windows NT. The bottom line for customers is that connecting to the Internet using a mobile phone will get a lot easier very soon. The bottom line for Nokia is that they've pretty much locked in WAP as the global standard for wireless Internet activity for the foreseeable future.
While Nokia faces stiff competition from other mobile phone makers, they consistently win, place or show in bringing first-rate technology to market. And more importantly, the company demonstrates an intrinsic understanding for the dynamics of a networked world. The company is organized with a non-hierarchy hierarchy; the president is as accessible as a customer service rep. So far, this has resulted in shorter product development cycles and more rapid decision-making in the heat of a fast-moving industry. Look to Nokia for long-term growth and continuing to drive the state-of-the-art in wireless networking activity.
Handset Net
Anticipating the growing platform for wireless Internet content and commerce, a handful of companies have made an early rush for IPO cash with plans to pump data through your wireless phone. Given the advanced stage of development, two of these companies should become attractive performers in the IPO aftermarket.
With software applications like its "microbrowser," Phone.com (PHCM - NASDAQ) helps users of mass-market wireless telephones access Internet-based information such as email, news, stocks, weather, travel and sports. The company had one of the summer's better-received IPOs in June, more than doubling in its first month. After a sell-off in late July, however, a number of strategic announcements have fed a climb that has seen a fourfold increase in the company's stock value.
The company recently inked deals with NEC, Sony, Hitachi, Motorola, Sprint and Philips, among others, to put Phone.com's "microbrowser" on these companies' handsets, enabling those phones to browse Phone.com's version of the Web. More recently, Phone.com and database software giant Oracle announced plans to work together to develop software which will provide wireless e-commerce capabilities and Internet access to corporate enterprise networks. And Phone.com has put its stock run-up to good use, acquiring Irish wireless application protocol (WAP) software developer APiON. The acquisition will enable Phone.com to develop wireless Internet applications for European markets.
Though operating at a loss, the company's earnings are encouraging. Quarterly revenue is tracking up year-over-year at over 400%, and up quarter-to-quarter at nearly 100%; the company's quarterly net loss was a little more than double the year's previous quarter. The company has been plowing cash into R&D and marketing, and its recent licensing success with the major handset manufacturers seems to have justified the investment.
Aether Systems also provides wireless data services and systems, but focuses on financial information and transactions. Aether's products include Reuters MarketClip (real-time financial market information, graphs, alerts and news stories) and TradeRunner from Discover Brokerage. TradeRunner packages the MarketClip information with the capability to place trades.
Aether recently announced a huge deal with online broker Charles Schwab (NYSE:SCH) to partner in the development of a wireless trading service. The service will enable customers to access their accounts and conduct transactions from a wide range of mobile information appliances.
In August, the company announced its acquisition of mobeo, another wireless financial information provider specializing in foreign market data. It is estimated that nearly 80 percent of all foreign exchange traders use mobeo-enabled pagers to receive real-time financial market information.
Aether Systems filed its S-1 prior to the mobeo acquisition. After filing its amended registration statement with the SEC, the company is expected to price very soon. It will be listed on the Nasdaq National Market with the ticker symbol "AETH." While Aether Systems is not quite the wireless data category-killer Phone.com is, its rapid foothold in the financial information space should attract the attention of more than a few institutional investors.
What about Craig?
Perhaps no single individual has derived as much wealth from the mobile phone business as Craig McCaw. And since selling McCaw Cellular to AT&T for US$11.5 billion in 1993, he's been busy. In 1994, he founded Nextlink (NXLK - Nasdaq) a competitive local exchange carrier (CLEC) delivering communications services to businesses over fiber optic and fixed wireless broadband facilities. Nextlink is the largest holder of fixed wireless spectrum in North America. Its licenses cover 95 percent of the population in the top 30 markets in the United States.
In addition, Nextlink has acquired exclusive rights to a 16,000 mile, high-speed, fiber optic backbone network connecting more than 50 U.S. and Canadian cities. The backbone network is currently under construction, with completion expected by the end of 2001.
Between its local loop, national Internet backbone and fixed wireless facilities, Nextlink aims to bypass local telephone companies to deliver a premium digital telecommunications infrastructure. And Nextlink is not a "network company" selling bandwidth and connectivity to other telecommunications companies. The company is building its own customer base for services including local, long distance, data, Internet and video.
Though operating at a loss, Nextlink's stock price has been a one-way ride up, climbing to just north of $60 per share since opening the year below $20. Between its clean-slate approach, savvy acquisitions and McCaw's reputation, Nextlink will continue to be a popular and dominant force in the move toward wireless Internet access.
New technology, new acronym
Nextlink's success will be at least partially driven by the success of a new technology called local multipoint distribution service (LMDS) which enables an office building to connect to the Internet with an antenna instead of a T-1 line. A single LMDS cell can get data throughputs equivalent to T-1 speed and support the equivalent of 3,800 telephone lines. Nextlink owns virtually all of the available spectrum in North America, but what about the rest of the world?
Enter Denver-based Formus Communications, which provides LMDS -- or fixed wireless -- Internet service to European markets. The opportunity for Formus is compelling for two reasons. First, because European Internet access has lagged behind that of the United States, it is now catching up at a faster rate. Analysts predict peak hour traffic for voice, Internet and corporate data in Europe will increase 87% annually through 2005. Second, Europe's government-owned telecommunications behemoths have been slow to implement the necessary infrastructure capable of delivering affordable and reliable broadband Internet connectivity.
LMDS is not perfect. A heavy fog might bring your network down if your antenna is on top of a 100-story skyscraper. Still, Formus has a great story to tell, and the company has found an audience. Since 1996, the company has raised more than $200 million in venture financing. Investors include Intel, BancBoston, and Chase Capital Partners, among others.
Formus Communications filed its S-1 in early October. Its ticker symbol will be FMUS on the Nasdaq National Market.
Song remains the same
Like everything else with the blink-and-you-missed-the-future nature of the Internet, ubiquitous wireless access to the Web and email is virtually upon us. Fixed wireless will likely join DSL and cable modems to displace leased T-1 lines as our primary model for broadband carriage. The winners obviously will be those who have the technology to offer the most bandwidth at the lowest price. And regardless of how customers are connected to the Internet, content and commerce plays will there waiting for them.
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