A Long Wait for the Wireless Web
A Long Wait for the Wireless Web
By Hal Plotkin
Silicon Valley Correspondent
You have heard it over and over again: The wireless Internet will be the Next Really Big Thing.
Now hear this: Not only are high-speed wireless Internet services further off than you have been led to believe, they may not turn out to be such a big deal after all.
As of now, the technology isn’t ready, user demand remains largely untested and, more alarmingly, no one seems really sure yet how or if companies that have targeted that market will make money over the long term.
Taken together, that means it could be a rather long time, as much as two years or even more, before leading wireless enabler stocks, such as Aether Systems Inc. {AETH}, Motient Corp. {MTNT} and Phone.com Inc. {PHCM}, revisit the highs they hit earlier this year. That is, if they ever do.
Hopes for a very rapid rollout of broadband wireless Internet applications are beginning to fade. Careful observers have already spotted the initial warning signs. First, there was the news earlier this year of disappointing cell-phone sales, which took down the stocks of the leading handset makers, Nokia Corp. {NOK}, Motorola Inc. {MOT} and Ericsson {ERICY}.
And then, earlier this week, National Semiconductor Corp. {NSM} said sales for its fiscal second and third quarters may be below the $641 million the company reported in the August fiscal first quarter. The news sent National Semiconductor’s stock into a tailspin. The company, which now says sales for its fiscal second quarter ending Nov. 26 will be 6% to 8% below fiscal first-quarter sales, put much of the blame on slower-than-expected sales of chips for mobile phones.
Just two years ago, Menlo Park, Calif.-based market-research firm Frost & Sullivan predicted that the market for broadband wireless equipment would grow at an annual compound rate of 26.6%, from $330 million in 1998 to more than $3.73 billion by 2005.
The hope and expectation was for that growth to quickly translate into a variety of profitable opportunities for the so-called pure-play wireless enablers that are creating the software infrastructure needed to roll out next-generation wireless Internet applications. The fanciful applications envisioned, at least some of which are already common in parts of Asia and Europe, include mobile electronic point-click-and-pay wallets, sometimes called micropayment tools, and mobile information services that deliver everything from restaurant reviews based on your physical location to online shopping to on-the-spot medical advice.
That may all still happen. But it is going to be a much-slower adoption curve than many analysts, and certainly most investors who bought the sector’s leading stocks, had hoped.
“To establish an effective micropayment channel, mobile operators need to sign up with a multitude of merchants to ensure that a number of retail outlet systems can communicate with the wireless network,” says Phoebe Leet, an analyst at Gartner Group’s Dataquest in San Jose, Calif.
That is just one of the problems facing companies trying to make money off the mobile Internet. There are at least nine other serious obstacles to overcome before mobile e-commerce can become a reality, according to a just-published report by Andrew Bartels, an analyst at the Giga Information Group in New York.
Bartels is a particularly prescient skeptic. He was one of the first, for example, to predict disappointments for many dot-com retailers, such as BUY.COM Inc. {BUYX}, Pets.com Inc. {IPET} and priceline.com Inc. {PCLN}, long before those firms went public. At the time, Bartels warned investors against buying into the dot-com hype, saying the market wasn’t ready, the technology was too clunky and that it would be years at best before most dot-com retailers generated stable, predictable and profitable results.
He is saying the same thing about mobile e-commerce companies today.
The issues Bartels says must be overcome may seem obvious to some, but many investors appear to have overlooked them. They include still-narrow bandwidth, which makes downloads slow and unreliable; small screens and keyboards, which make doing anything other than pointing and clicking terribly cumbersome’ batteries that can die in the middle of crucial operations; poor cellular reception because of “dead zones”; competing wireless technical standards; and what he says are very limited examples of value-added mobile e-commerce.
“Perhaps the biggest barrier to mobile e-commerce is the gap between the talked-about promise and the greatly limited current reality,” Bartels says. “Buying Cokes at a vending machine with your cell phone may be convenient, but it’s not going to make a lot of money for anybody.”
The excitement over wireless Internet markets in the United States has been largely driven by comparisons with European countries such as Finland where those applications got an earlier start.
But the European situation may not be as rosy at it first appeared.
More recent data show that more than half of Europe’s pioneering wireless e-commerce projects have failed to meet expectations, according to a report published last month by Forrester Research.
“Just because a retail sale is possible on a device doesn’t make it probable,” wrote Carsten Schmidt, the associate analyst for Forrester Research, based in Amsterdam, who conducted the research.
Forrester now projects that mobile phones will account for a meager 3% of total European online retail by 2005.
“PCs will capture more than 80% of online retail sales,” Schmidt wrote. “The PC’s rich input and display, wealth of competing sellers and seasoned population of shoppers will not only capture the majority of retail sales in each category but claim the biggest share in the biggest categories.” Personal digital assistants, such as Palm Inc.’s {PALM} Palm Pilot and other similar devices will make up the balance of those sales, according to the Forrester report, but much of those sales are likely to be low-cost, low-margin impulse buys.
To be sure, the sector still has many, many defenders.
Matt Finick, an analyst at Thomas Weisel Partners, based in San Francisco, for example, particularly likes Phone.com’s stock right now. He rates it “buy,” which is his firm’s second-highest recommendation but he doesn’t have a current price target.
“If there is one stock you own in this space, its Phone.com,” Finick says.
Finick says Phone.com is poised to do well, even in the absence of much traction in
end-user markets, since the company primarily serves telecommunications carriers who, he says, must rush to put mobile e-commerce platforms in place.
“I agree it’s going to be a year or two out before we get real transactions and applications,” Finick adds. “But between now and then, the carriers need a lot of infrastructure.”
Aether Systems, which Finick also likes but slightly less, also provides similar infrastructure but is focused on serving large corporate customers, rather than telecom carriers. The enterprise market is expected to mature more slowly than the carrier market, Finick says.
“Phone.com is our most-aggressive recommendation,” agrees Marianne Wolk, an analyst at Robertson Stephens in New York. Wolk hasn’t, however, published a price target for the stock.
But Wolk shrugs off Bartels’ skeptical assessment of the sector’s overall viability.
“You’re probably not going to want [use wireless devices] to browse or buy CDs,” Wolk says. “But you will want to buy a plane ticket, or get directions when you’re lost, or be alerted when something important to you happens. There will be [wireless application] companies that generate transaction revenue.”
Bo Fifer, an analyst at Deutsche Bank Alex. Brown in New York, recommends Motient’s stock, noting that the company, which enables wireless e-mail, has ported its software to devices made by Research in Motion Ltd. {RIMM}, which feature larger keyboards that he says are more versatile and user-friendly. He rates the stock “buy,” his firm’s second-highest recommendation, along with a 12-month price target of 28.
“I agree you’re never going to get everything on your desktop crammed into some wireless device,” Fifer says. “But there are certain niches, including the one Motient is in, where it’s a natural fit.”
Bartels agrees there are some areas where mobile Internet applications are likely to prove popular over time. But he says the reality of those opportunities pales by comparison with the still sky-high expectations many investors have, at least over the short term.
“The remaining barriers [to mobile e-commerce] need to be factored in as limiting the potential uses of mobile e-commerce at least through 2002, if not longer,” Bartels says.
Bartels may not be right this time. But investors who listened to him last time still have their shirts.
