Hello, Internet

Phones that surf the Web are back after a false start and aimed at new markets

AT&T has been crushing rivals like Sprint Corp. in the wireless phone market ever since it introduced its Digital One Rate service with free roaming and no long-distance fees last year. But deep in their corporate offices in Westwood, Kan., Sprint executives are plotting their revenge. As early as next month, Sprint plans to unveil whizzy new wireless phones from Samsung Co. and upstart Innovative Global Solution that will let customers tap into the vast power of the World Wide Web. Sprint is hush-hush about details, but its executives clearly think they've got a blockbuster on their hands. "When you have something as special as this, it's worth being secretive about it," says Andrew Sukawaty, CEO of Sprint PCS, the company's wireless operation.

As excited as Sprint is, these phones will be but a small preview of an all-new era in wireless communications. In the next few months, phone makers will unleash handsets that can swap E-mail, snatch data off the Internet, deliver your favorite songs, and, oh yeah, handle those old-fashioned conversations. It's the long-awaited coming of wireless communications so sophisticated--and so stable--that they can handily zap data to anyone, anywhere. "We're going to see an explosion in wireless data," says Dennis F. Strigl, CEO of Bell Atlantic Corp.'s mobile unit.

But don't expect the same kind of Net connection you get on a computer--at least not yet. The information these phones will deliver is mostly text without all the fancy graphics and colors on the Web. But as wireless-data speeds increase 100-fold with the advent of so-called Third Generation technology, Net phone capabilities will soar. Already, at the Yokosuka Research Park outside of Tokyo, wireless carrier NTT DoCoMo is using the technology to demonstrate how to view video clips on mobile phones. Two or three years out, Third Generation equipment will be widely available. Then, for example, a real estate broker will simply phone prospective home buyers photos of houses for sale. "One day, you will watch your favorite soap opera in the car on your way home," says Sven-Christer Nilsson, Ericsson's chief executive.

To get a glimpse of what lies ahead in the U.S., look to Europe and Asia. In South Korea, Samsung's phones let customers check out train schedules and news headlines. British Telecom sells a service that sends an E-mail message to a customer's phone if, for example, Manchester United scores a goal. The customer can then touch a button to hear an audio replay. And in Finland, school children have become so adept at zapping messages to each other that teachers confiscate their phones before exams so they don't cheat.

With such capabilities, Net phones are headed for mass-market status. Of today's 64 million U.S. mobile-phone customers, 15% use them for data, according to market researcher International Data Corp. That's expected to explode to 70% of 108 million customers by 2002. IDC hasn't estimated how many wireless data users there will be worldwide, but if the same percentages hold globally, those using wireless phones to get data will increase tenfold over the next four years, to 385 million people. "The potential is just huge," says Robert Fox, head of the worldwide telecom practice at consultant Mercer Management Consulting Inc.

FAMILIAR PROMISES. Look for the transition to shake up telecom markets around the world. Companies that move to wireless data quickly, such as Sonera Ltd. in Finland and Sprint in the U. S., will boost their revenues, customer loyalty, and market share. Already, Sonera, Finland's largest phone company, gets 5% of its wireless revenue--or $47 million--from data services.

Skeptical that Net phones are ready for prime time? No one could blame you. Rewind to 1996, and some of the biggest names in the business were making all the same promises. AT&T and Nokia, in particular, were pumping up the idea of "Net phones" that could pull stock quotes and headlines off the Web. Even with such firepower behind them, the phones flopped, with only tens of thousands sold. For starters, the handsets were bulky and, at up to

$1,000, expensive. The rates were pricey, too: AT&T charged a minimum of $40 a month for its PocketNet service. "They've been a disaster," says Andrew Seybold, editor-in-chief of the newsletter Outlook, which covers mobile computing.

This time, it should be different. The new batch of Net phones are far superior. AT&T's approach was to use one technology for voice and another for data, so the phones weighed a hefty nine ounces and had to be crowbarred into a jacket pocket. The new handsets are a mere five or six ounces and look like the latest, sleekest mobile phones. "First and foremost, we've stressed that it has to be a very good phone," says William Y. Son, CEO of Innovative Global Solution, based in La Jolla, Calif.

And you won't need to be a pinstripe warrior on an expense account to phone the Net, either. When AT&T introduced its PocketNet service, it charged one rate for voice calls and a different rate for data calls. To add to the confusion, you paid for the data service based on the number of bits you sent or received--not the number of minutes you used. Sprint won't disclose its pricing plans, but analysts think it will charge the same flat per-minute rate for data calls that it collects for voice calls. With simplicity and more competitors, "we anticipate prices are going to come down," says senior analyst Julie Rietman of IDC.

The biggest reason these new phones will succeed is the allure of the Net itself. Wireless companies are looking for new competitive weapons--and the booming popularity of the Web could make it a killer. As the number of cybersurfers worldwide soars to 143 million this year from 82 million in 1997, more people care about having access to E-mail and the Net.

It helps that Net companies are just as eager to tap into the mobile-phone market. That's crucial because Web pages have to be modified before wireless customers can download them onto tiny phone screens. Today, Web site operators are busy stripping out the graphics and reworking content into simple text that can be read in a small space, typically with a standard called Wireless Application Protocol, or WAP. "The mobile-phone market is one of our most important markets," says Ellen Siminoff, vice-president for business development and strategic planning at Internet portal Yahoo! Inc.

Wireless phones won't be the only way to stay connected on the road. 3Com Corp. has teamed up with BellSouth Corp. to develop a version of its popular Palm organizer, the Palm VII, that incorporates BellSouth's two-way messaging capabilities. Users will be able to check quotes and trade stocks online, buy airline tickets, and get sightseeing tips over the Web. "We really look for that to make a big splash," says analyst Matt Hoffman of market researcher Dataquest Inc.

STILL EARLY. Mobile-phone players are betting Net services can help their bottom lines, too. By offering data, companies can improve loyalty and lower "churn" rates--the number of customers who leave carriers each year. For example, a French wireless player called SFR dropped its churn to 8% from 25% after introducing data services. That's no small thing: Wireless carriers have an average churn of about 30% per year, and it costs $300 to win a new customer. A company with 1 million customers is paying $90 million each year to replace the subscribers it's losing. Dropping the churn rate to 8% saves $66 million each year.

Still, for all the new, cool stuff that Web phones will offer, these are just the early days of wireless data. The services that carriers are rolling out this year typically transmit data at poky speeds of 14.4 kilobits per second--only one half or one quarter the speed that most people get from their PC modems. That's not bad for now, but it's far from enough to look at eye-catching Web sites, much less video clips.

For that, phone companies need to push the pedal to the metal. The first stage of improvement will be to pump data speeds up to 56 or even 128 kbps. Most of this equipment has been developed by the likes of Ericsson and Lucent Technologies Inc., but it's not widely deployed yet because it's expensive and there are too few phones to take advantage of it. By 2001, most U.S. wireless players expect they'll be zipping data along at 56 kbps.

Wireless data will truly hit demon speeds, though, when something called 3G, or the Third Generation, arrives. Analog was the first, digital voice was the second--data the third. How will 3G supercharge the delivery of wireless data? Instead of using a 25 kilohertz radio channel as a typical voice call does, a 3G data call could grab eight 25 kilohertz channels at once--increasing speeds eightfold. What's more, it could move data in superefficient bits--or "packets"--instead of traditional circuits. The result will be a hundredfold increase in data speeds, to as much as 2 megabits per second. "You can probably get any song that has ever been recorded anywhere in history, and you can listen to it anyplace," says Dave M. Poticny, vice-president of wireless infrastructure strategy at Lucent.

Don't rush out to get your 3G phone just yet. Japan will probably be the first nation to have the technology widely available--some say as early as 2001. That's largely because its existing wireless networks already are overloaded with voice traffic. Europe will follow in 2002 or so, and the U.S. probably will bring up the rear. American carriers by and large installed second-generation wireless equipment most recently and aren't anxious for a pricey new round of investments.

AT&T'S DILEMMA. Such a dramatic change in wireless technology could create upheaval in the telecom industry. While voice is a commodity that allows for little differentiation, data is tremendously varied. Just think if one phone company lets you get only Web pages on your phone while a competitor provides Web pages, E-mail, notification if stocks you selected moved 10%, and the ability to trade those stocks from your phone. That's a no-brainer. The bottom line: The carriers that quickly incorporate data services in easy-to-use ways will come out on top. Emphasizing E-mail and Net access helped Sweden's Telia increase wireless revenues 18%, to $880 million, in 1998.

The big loser in the U.S. market could be AT&T. Its Digital One Rate has been a huge hit, attracting more than a million new customers so far. But its wireless-data strategy looks problematic. AT&T is planning to combine its existing voice technology with a separate technology called cellular digital packet data (CDPD) to handle data calls. Cramming two technologies into a phone risks making it bulky--exactly the problem with AT&T's first PocketNet phones. What's more, few phone makers are interested in making CDPD phones because they're not sure the technology has wide appeal. AT&T says Mitsubishi is planning to deliver a CDPD phone by the fourth quarter, although it cautions the date is not definite. "We're working with phone manufacturers to come out with another [phone] next year," says Daniel Hesse, chief executive of AT&T Wireless Services.

Here's the dilemma for AT&T: Its existing voice technology--something called time division multiple access, or TDMA--can handle data traffic. But putting data over TDMA would require AT&T to install new equipment in virtually all of its 10,000 cell sites across the U.S. The company is reluctant to do that, since it spent millions of dollars in the mid-1990s to install CDPD equipment nationwide. Moving to TDMA for data would cost the company tens of millions more.

AT&T argues that there's little point to the expense. It says it plans to be one of the first U.S. companies to deploy 3G technology. It plans on rolling out the equipment in 2001 with broad availability by 2002. "We don't want to be distracted doing an interim solution that will become obsolete when we go to 3G," says Kendra VanderMeulen, AT&T's senior vice-president for wireless products. The risk is that the company could be left without a competitive Web phone for three years. "AT&T is in real trouble if data takes off on wireless," warns consultant Seybold.

Other phone companies think that they need an immediate solution. Like AT&T, Bell Atlantic has a CDPD network and a separate wireless voice network. However, it has chosen to upgrade its voice network to handle data rather than use CDPD for the mass market. "[CDPD] is the tank, and it is never going to be a race car," says Richard J. Lynch, chief technology officer at Bell Atlantic's mobile operation. Bell Atlantic will continue to use CDPD for industry-specific tasks like transmitting license-plate information to police squad cars.

Who will benefit from AT&T's problems? Sprint looks the most likely. Although it still has coverage problems in parts of the U.S., Sprint has the advantage of using one wireless technology at one radio frequency. That makes it easier to roll out new data technologies--and with the planned rollout of Net phones this summer, Sprint is pushing the advantage aggressively. "We're on a development path that we think is a generation ahead," says Sukawaty, who plans to install 3G gear as soon as customers demand it.

Other companies are hoping to use the promise of Net phones to improve their competitive position, too. Bell Atlantic is so serious about giving subscribers access to the Web that by the end of this year, it expects that all of the new mobile phones it orders will include Web browsers. MCI WorldCom Inc., which has no wireless presence today, could become a factor if its current negotiations to acquire wireless player Nextel Communications Inc. are completed. Motorola Inc. is planning to roll out a new Nextel phone this summer that includes Web browsing.

So get ready to phone the Internet. With wireless companies scrambling for an edge, Web phones are bound to be real this time.

Before it's here, it's on the Bloomberg Terminal.