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Wireless Goes Boom

The tech boom of the late '90s became notorious for its wild optimism. (AMZN) stock was supposed to be valued at $400 a share. The Internet economy was going to be worth $1.7 trillion in just a few short years. And there were supposed to be 1 billion wireless phone users by 2002.

Those projections proved wrong, with one notable exception. Traders did once push Amazon shares to the magic mark, but they're worth only about $45 apiece today -- a fraction of their former value, even after splits. The value of the Internet economy is nowhere near $1.7 trillion. But the wireless market blew past the 1 billion mark right on time. Today, there are a stunning 2 billion regular paying cell-phone customers around the world, according to telecom analyst Albert Lin of American Technology Research.

Evidence of the wireless market's vigor is accumulating almost daily. Cellular handset leader Nokia (NOK) announced Oct. 20 that profit for the most recent quarter rose 29%, beating expectations. Motorola (MOT), which ranks No. 2, said Oct. 18 that profit for the September period tripled. And U.S. mobile phone services leader Cingular Wireless, a joint venture of BellSouth (BLS) and SBC Communications (SBC), said Oct. 19 that its quarterly profit rose 56%. Profit expansion in the wireless industry is outpacing the broader market -- S&P 500 earnings are up 15.6% so far for the third quarter, according to Thomson Financial.

CONVERGENCE WITH COMPUTING. Reports from other wireless service providers due in coming days are also expected to reflect strength. Third-quarter sales at Sprint Nextel (S) likely rose 18% and at Verizon Wireless, owned by Verizon (VZ) and Vodafone Group (VOD), revenue probably gained 15%, according to Merrill Lynch.

The industry's growth is creating seismic shifts in the tech market and beyond. The wireless industry dwarfs other markets. On a global basis, the sector will sell about 750 million handsets this year and 850 million next year, according to Lin. That's three times the size of the global PC business. And as wireless phones and networks become more sophisticated, they will increasingly rival desktop and laptop computers. "Wireless devices are becoming a primary means of accessing data," Lin says.

Indeed, just as industry experts had predicted, the wireless and computing fields are converging. Companies such as Microsoft (MSFT), the world's largest software maker, and chipmaker nVidia (NVDA) and are turning to the wireless market for growth. Intel (INTC) and other outfits are pouring billions into the development of mobile networking technologies such as Wi-Fi and WiMax, which make wireless high-speed Internet access available across large areas.

ERASING THE LINE. The development of ubiquitous wireless broadband could help turn cell-phone service into an Internet application on small, mobile devices made by computer companies such as Hewlett Packard (HPQ) (see BW Online, 10/5/05, "Why WiMax Could Hit the Hotspot"). Cell phones are even in the early stages of incorporating hybrid music players. A new phone from Motorola plays music using Apple's (AAPL) iTunes software (see BW, 9/19/05, "Apple's Phone Isn't Ringing Any Chimes").

And the rising prevalence of open computing standards in the telecom world is helping break down the distinction between wireless and wireline phone service. Wireless devices may end up as cordless extensions of a single IP network that doesn't know or care whether the user is seated at a desk or walking down the street.

At a time when results for the broader tech sector are mixed (see BW Online, 10/19/05, "The Tech Party Isn't Over"), investors find wireless particularly compelling. Take Ryan Jacob, manager of the $70 million Jacob Internet Fund. By picking up stakes in wireless infrastructure companies such as Alvarion (ALVR) and Airspan (AIRN), he has boosted the fund's wireless exposure to the 15% to 20% range, compared with less than 5% last year. "I think wireless is very exciting, and for that reason we have been and continue to increase our exposure there," Jacob says.

CAUTION, NOT CYNICISM. There's plenty of evidence to support his view. Intel, the world's largest chipmaker, said Oct. 18 that the sale of wireless communication chips was a highlight of the recent quarter. The outlook for overall sales in the current quarter failed to meet analysts' expectations.

Grand visions of the technological future often fail to come to pass. Despite the rise of a few robotic vacuum cleaners, people are still waiting for electro-servants to bring the tea or carry on a conversation. But the wireless industry has come closer than most tech sectors to fulfilling past promises. Can it keep delivering the goods?

There's good reason to think that it will. The pace of growth may slow, and the benefits might not be evenly distributed to all players or customers. But that's reason for caution, not cynicism or despair. Handset sales are expected to rise 16%, to 750 million, this year, and 13%, to 850 million, in 2006, according to Lin. He doesn't have a forecast for 2007 but says the profusion of new features, such as mobile TV, could result in gains in the same volume or even greater. That should help handset makers such as Nokia and Motorola continue to expand.

MIGHTY CHINA. The biggest gains seem to be going to the leading handset makers. As is so often the case in tech, winning is something close to an all-or-nothing proposition. According to researcher IDC, third-quarter cell-phone shipments reached 208.3 million, up 19.1% from the same quarter in 2004. Each of the top five vendors hit record shipments in the quarter. Nokia, Motorola, Samsung, LG, and Sony Ericsson collectively gained almost nine points of market share, while the rest of the industry saw its collective share fall to just 22.5% of the market.

And Nokia's new results show that its financial strength is rising. Unit sales climbed 30%, and its operating margin increased to 15.6%, from 15% a year earlier. Profitability improved even as average prices fell, thanks to Nokia's efficiency and economies of scale.

The outlook for wireless carriers is strong, too. Lin expects the number of regular paying customers to rise 12.5%, to about 2.25 billion, in 2006, and 11%, to about 2.5 billion, in 2007. And the gains in certain regional markets could be even greater. Growth in China is enormous (see BW Online, 8/11/05, "Baidu: 'We've Seen This Movie Before'"). China's largest wireless carrier, China Mobile, already has 200 million subscribers. That's more than the entire U.S. market, which has a total of about 180 million subscribers.

THE COMING GENERATION. Still, there are some risks to growth. The cost of networking equipment is plummeting, which could pave the way for more competition. Analyst Rudy Baca of researchers The Precursor Group, says wireless "fourth-generation" (4G) base stations available in 2008 will be able to connect people to the Internet at speeds several times faster than 3G networks, which are only now becoming available in the U.S.

Yet those next-generation base stations will cost about 25% the price of 3G base stations. That could ease the entry of big new rivals such as cable TV concerns, which so far have been content to lease wireless service from carriers such as Sprint Nextel and resell it under their own name. "One risk is that we could see the price competition that has harmed the wireline telecom business spread to the wireless sector," Jacob says.

It's not clear whether the rise of wireless will have a lasting benefit for infrastructure companies such as Lucent (LU) and Nortel (NT). These companies have benefited recently from wireless carriers' spending. Lucent picked up a big order from Cingular this month.

"RESETTING THE TERMS." But price pressure on wireless equipment could hurt the gearmakers in the future. Capital spending on wireless equipment rose 12% last year and is expected to rise 14% this year, according to Merrill Lynch. But the forecast for next year is a gloomy 5% decline. However, a new round of spending on 4G networks -- which will combine 3G with higher-speed signals and Internet Protocol -- toward the end of the decade could spark another round of buying and investment.

At Cisco (CSCO), which built its reputation as an Internet router company in the '90s, hopes for the future will revolve around wireless. At the company's wireless unit, which makes Linksys Wi-Fi equipment and other products, sales are rising at the rate of 25%. That's about twice as fast as the company as a whole.

Alan Cohen, Cisco's director of wireless marketing, thinks the growth will continue. "Wireless is resetting the terms of business," he says. That means wireless could be a driver for tech and the overall economy for years to come.


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