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Is a Wi-Fi Bubble Building?

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. By Olga Kharif in Portland, Ore.

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