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Inching Toward the RFID Revolution

Somewhere in Neuss-Norf, Germany, a customer is approaching NCR's new FastLane self-checkout machine. Using radio-frequency IDs, or smart tags, on every item, the customer's groceries are being scanned on-the-spot and tallied up -- no need to take them out of the cart. At the same time, the RFID tags are being automatically disabled so security sensors will know the customer isn't shoplifting.

The store, called Metro Group's RFID Innovation Center, is a mock-up of a retail environment that displays the bleeding edge of RFID for suppliers. RFID systems, the successor to bar codes, use wireless technology within tiny chips -- or tags -- to track items as they move from the factory floor to store shelf to checkout. The buzz around RFID has been steadily building over the past two years, promising labor savings and improved inventory management.

If the scene at the Metro store sounds more like science fiction than reality that's because -- at least for now -- it mostly is (see BW, 4/26/04, "Test-Flying Tomorrow's Supermarket"). Metro is just one of a handful of large retailers and purchasers, including Wal-Mart (WMT), Tesco (TSCDY), and the Defense Dept., that have mandated that their suppliers begin using the new technology during the next few months. That means RFID is still in its infancy with many technology, cost, and privacy hurdles yet to be jumped.

BACKROOM GENESIS. In the U.S., Wal-Mart has handed down the biggest edict. By Jan. 1, 2005, the behemoth's top 100 suppliers must begin RFID tagging on certain cases and pallets going to three Texas warehouses. Most vendors, consultants, and analysts say those mandates will be met.

When that begins, the predicted revolution in so-called smart tags will begin. RFID spending is set to explode in the next few years, growing from $1 billion this year to $4.6 billion in 2007, estimates Wall Street research firm Robert W. Baird & Co. Almost all of this will be in backroom warehouses and distribution centers -- not on grocery shelves or mall store racks.

Consultants and analysts have been spinning tales about the virtues of RFID, such as digitally encoding receipts for paperless returns and warranty claims. But most of these sophisticated uses require tagging on the item level. That's happening in a few pilot tests of high-price or high-margin goods. But among North American manufacturers that expect to start using RFID in 2005, only 3% will do so at this level, according to Accenture (ACN).

That means instead of putting tags on individual Coke cans, they'll slap them only on pallets of Cokes. Tagging of individual items won't be prevalent for more than eight years, estimates Ellen Boerger, director of RFID at NCR (NCR) in Dayton, Ohio.

WHICH COMES FIRST? Consultants and analysts expect tags to replace bar codes one day, but substantial roadblocks are in the way. The most obvious is cost. Tags still hover around 25 cents each, and that's if you're buying in high volume. If not, they can cost 75 cents. That's down from more than $1 a year ago but still too expensive for most consumer goods.

The goal is 5 cents, and chipmakers say they can get there, but it'll take scale. It's a bit of the chicken and the egg, says Stavro E. Prodromou, chief executive of Alien Technology in Morgan Hill, Calif., a venture-backed chipmaker. The more customers buy, the faster cost will fall, but mass adoption won't happen in some areas until the price falls. That's why the mandates have been important in pushing RFID out of the labs and into real use.

But in June, chipmaker Intermec Technologies, one of the top three RFID tag-makers, further complicated matters. It filed a suit in U.S. federal court against a competitor, privately held Matrics, alleging patent infringement. Matrics has since been acquired by Symbol Technologies (SBL) in Holtsville, N.Y., which declined to comment for this story.

"MINOR ROYALTY"? No one knows how the lawsuit will play out, but it flies in the face of the Electronic Product Code Global group's plan to set a standard -- and hence jump-start adoption -- by companies giving up claims to licenses and royalties. The fear is that royalty payments will keep tag costs high, stalling widespread adoption.

Intermec, which has been investing in RFID since its earliest incarnations in 1966, says it's willing to share its entire portfolio of 135 patents with competitors -- just not for free. "You can use the cost argument for any kind of technology, it doesn't give them the right to take someone else's intellectual property," says Intermec President Tom Miller. "Some sort of minor royalty is not going to hold the market back."

Besides, he says, costs will fall naturally as technology gets better and volume increases. He's not sure RFID tags have to get to five cents per chip to be an important, money-saving technology.

EASTERN FRONT. This wrangle is affecting standardization, too. EPC Global is now formulating what the third generation of tags will be, and concern is rising about stepping on possible patents.

China is also proving to be an impediment. Speculation is rife that Chinese retailers may adopt a different standard, creating a problem for global manufacturers wanting to sell to the world's biggest consumer market. While analysts are hopeful Wal-Mart could influence China to join ranks, Intermec's lawsuit could complicate matters, Prodromou says. "One thing China is dead-set against is paying royalties," he says.

RFID has other problems, but most won't become issues until individual items start being tagged. One is the basic laws of physics. Radio waves can't penetrate metal or liquid easily. Today, you couldn't mark an individual package of Baby Wipes inside of a big case or pallet and expect the RFID readers to pick it up.

TOO MUCH INFO? But companies say they'll be able to place the chips, say, on top of the cases, where readers could detect the data. And chip technology is improving. More expensive tags with a battery have a wider range and more robust signal.

Then there's the privacy issue. Some consumer groups have expressed fear that RFID tags will gather too much personal shopping data on consumers. The idea EPC Global is floating now is that the tags can be disabled at checkout or stay enabled if people want easy returns or quick filing for warranty claims. To many observers, this is a repeat of the privacy worries that surfaced when bar codes and grocery-store loyalty cards first proliferated. But when most people got accustomed to these technologies, fears subsided.

A GIANT'S SHOVE. Established companies see the opportunity to grab a piece of this growing market. For Sun Microsystems (SUNW) in Santa Clara, Calif., the concept of moving information about every item in a store onto a bigger network plays into its long-term mantra, "the network is the computer." Sun is shipping software that captures data from the readers and databases to pass along to supply-chain partners, says Juan Carlos Soto, a Sun director. The struggling computer maker is betting that RFID software will spur sales of servers and services as well.

Many laud retailers like Wal-Mart for pushing the RFID manufacturers. Alien Technology, like Intermec, is one of the top three RFID chipmakers. By yearend, it expects to produce 10 million chips a month. Alien is chewing through $130 million in funding and will likely raise another round of capital, due largely to investor demand, says Prodromou.

Anyone short of a Wal-Mart would have had a hard time getting RFID off the ground. It has taken suppliers $13 million to $23 million and a good deal of scrambling to get in shape to meet these mandates. Only a handful of retailers, including Target (TGT) and Albertson's (ABS) in the U.S. and Metro and Tesco in Europe have announced RFID plans.

A WAYS TO GO. "What retailers are doing right now is looking at the market leaders to set a direction," says Marco Ziegler, a partner in Accenture's retail and consumer-goods practice. "Once Wal-Mart is working for a few months, you'll see lots of mandates coming out."

Until then, consumers can continue to fear the invasion of privacy or daydream about a time they can breeze through a checkout line, flashing little more than a RFID-enabled loyalty card and a smile. But with ubiquitous item tagging more than a decade off, it'll be just talk for some time to come. By Sarah Lacy in Silicon Valley

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