Smart Phones

They're the next phase in the tech revolution, and soon they may change your life

A 15-year-old girl strolls through London's Berkeley Square. Suddenly she hears a beep from her cell phone and looks at the screen. A message sponsored by Starbucks informs her that two friends from her "buddy list" are walking nearby. Would she like to send them an instant message to meet for coffee at the nearest Starbucks around the corner? She merely has to click "yes" on her smart phone to send the message. And she gets an electronic coupon worth $1 off a Frappuccino.

An e-commerce fantasy? Hardly. Such a scene could happen in London next year. That's because, from Tokyo to Stockholm to Silicon Valley, telephone companies, software designers, and phone-equipment suppliers are all revving up strategies for the next tech revolution: wireless access to the Internet. Already in Europe--and to a limited extent in the U.S.--customers can call to receive e-mail, weather reports, and other specialty packages via their cell phones. By next year, tens of millions of users in Europe should be linked to the Web all day long. All they have to do is keep their cell phones on. "It will be the exception when you're not connected," predicts Petri Poyhonen, a manager of radio access systems at Nokia Networks. In Japan, 3 million cell-phone users are already staying continuously connected to the Net.

Clearly, some tantalizing visions of the wireless Net may fizzle in the marketplace. Applications may be too unwieldy for a handheld machine. And while data costs should be moderate--a few cents for most downloads--many users may object to the likely blitz of advertising and keep their pocket browsers switched off. Still, a portable and constant link to the information world could change lifestyles--and offer business opportunities--just as much as the Web has up to now. The Japanese government predicts that its domestic wireless market, tied in to the Web, will be worth $130 billion in annual revenues by 2005. Europe's could be three times larger.

From AT&T to Sony Corp., companies are staking out their claim to the mobile Net, fueled by fear that their competitors will get there first. It was Sprint Corp.'s coveted mobile network, and the prospect of turning it into an extension of the Internet, that led MCI WorldCom to buy Sprint on Oct. 5 in a $115 billion deal. Meanwhile, Nokia Corp., Motorola Inc., and others are rolling out Web-surfing smart phones this fall. Media heavies such as CNN, ESPN, and Reuters are marketing news nuggets. And software companies, from mighty Microsoft to startups in Stockholm and Milan, are devising pocket-size applications for the new mobile Net.

All these companies have their eyes on Europe. That's because the old world is quickly becoming the biggest laboratory for introducing leading-edge Internet services. It is just as likely to be a battleground for companies scrambling to get a piece of the action. Foreigners and locals alike are pouring research money into Europe. Lucent Technologies, Texas Instruments, Japan's NEC, and Canada's Nortel Networks are all beefing up mobile phone operations on the Continent.

For Europe, it's a rich opportunity. The race for the wireless Internet offers the Continent its best chance yet to launch its own tech-driven New Economy. In the 1970s and 1980s, Europe missed out on the personal-computer revolution as its protected national champions Bull, Nixdorf, and Olivetti got creamed by Americans. In the 1990s the Continent lagged in Internet development.

But when it comes to mobile phones, the positions are reversed: America trails, its market fractured by competing wireless standards. Europe, meanwhile, has steamed ahead, powered by its common standard for cellular communications, known as GSM. The standard has since spread to 120 countries, from China to South Africa.

To serve this fast-growing global market, a powerful industry has sprung up. Finland's Nokia has rocketed to world leadership in handsets. Britain's Vodafone has become the world's first global cell-phone provider since it outbid Bell Atlantic for San Francisco-based AirTouch early this year in a $65.9 billion deal.

Supplying these stars is a huge industry, ranging from French-Italian chipmaker STMicroelectronics to Symbian, the London-based software joint venture linking Ericsson, Nokia, Motorola, and Japan's NTT DoCoMo. Symbian's new operating system for wireless Internet phones is going head to head with Microsoft Corp.'s Windows CE. That challenge has spurred Microsoft to invest in wireless companies in Europe, including STNC, a Cambridge-based microbrowser company, and Sendit, a Stockholm company specializing in mobile phone e-mail.

Now the wireless Internet offers Europe new opportunities to expand its high-tech industrial base. By 2003, analysts expect much of the Continent to follow the example of Finland, where more than 6 out of 10 people own cell phones. If that happens, 248 million Europeans would own them, up from 141 million today. Most of these phones will be capable of tapping in to the Net. Add it all up, and the mobile Internet could soon have the old world swaying to a California beat: European companies and their foreign rivals could pour even more money into developing new products and services. And venture capital, already trickling into Europe, could start to gush into startups in software and Web appliances.

ANSWERING CALLS. To see where Europe could be heading, take a look at Scandinavia. Engineering students in Stockholm used to head for the laboratories of Ericsson and Nokia after graduation. Now they're setting up companies, signing development agreements with the phone giants, and answering calls from eager venture capitalists, including foreigners such as Britain's 3I and Alta Berkeley Associates. "Companies that would have had trouble raising $1 million a year ago are raising $10 million today," says William Cardwell, managing director of Eqvitek Advisors in Helsinki.

One hot Swedish startup is Melody, founded a year ago by 25-year-old Per Mosseby and financed in part by Norwegian telephone company Telenor. Mosseby, who dropped out of a master's program in computer science to start his business, now has a 21-person team developing phone Web pages for Scandinavian businesses. Eventually, Mosseby hopes to pioneer "location technology" that will help local businesses such as corner sandwich shops grab customers by sending messages to their phones as they pass by. "I want to hire a CEO," he says, "so I can focus on business creation."

Melody's older competitors are already debuting on the northern stock exchanges with an eye to listing later on Germany's Neuer Markt and Nasdaq. Nocom, a Stockholm company that prepares mini corporate Web sites for transmission on cell phones, listed its shares on the Stockholm exchange in January. The stock has jumped from $5.35 to $16.25. "We want to be up and running with mobile sites before November," says CEO Anders Jonson. The next step: follow partners Nokia and Vodafone into global markets.

These Scandinavian successes are already spilling over into the rest of Europe. French startup Webraska sells up-to-date images of Paris' traffic jams, which pop up on commuters' cell-phone screens. Ubiquity, a Milan developer, is equipping Italian banks with bank-by-cell-phone software. This march to the mobile Internet, says Tim Sheedy, a telecom analyst at International Data Corp., "gives Europe the opportunity to catch up to the U.S." in tech-related fields.

Of course, the Europeans face stiff competition from the Americans, the reigning kings of the Internet. From Cisco to 3Com, they're maneuvering to grab big chunks of the global mobile business. In early October, 3Com signed a deal with Inc. to develop wireless shopping for Palm Pilot--one of the strongest competitors Europe's smart phones face.

Perhaps the biggest battle will rage over the so-called mobile portal. This is the online screen that phone users go through as they hunt for information, from sports scores to movie listings. Phone companies are angling to control the portal, an advertising gold mine. But here they face competition from cash-rich U.S. titans Yahoo! Inc. and America Online Inc., which are already developing phone offerings. They know that in a few years the number of cell phones tied in to the Internet could far exceed online PCs.

Japan also stands to challenge Europe's lead in the mobile market. Long isolated from the rest of the cell-phone world by its unique standard, Japan has barely made a dent globally. Now, though, Japan is leading the drive into mobile data with a popular wireless Internet service introduced seven months ago by NTT Mobile Communications Network. And in 2001, Japan will be the first market to leap into the "third generation" of mobile telephony. 3G, as it is known, is a high-speed data technology that will reach a blinding 2 megabits per second by 2003--40 times faster than an average dial-up modem. It will pave the way for videoconferencing, stereo Web surfing, and virtually any mobile service for which markets can be found.

3G will give Japan a headstart on global expansion in the mobile Net market. Even now, the Japanese are pouring R&D money into Europe to gain position. In a laboratory outside Paris, Matsushita Communication Industrial is teaming up with Nortel to experiment with cell phones that can offer videoconferencing, video-game playing, and music downloading. "Japan is going to knock the pants off everyone when it comes to 3G," boasts Seiji Sanda, founder and CEO of Japan Communications Inc., a cell-phone service reseller.

LOOKING GOOD. For now, the Europeans, Americans, and Japanese are racing to develop the right machines for today's more rudimentary mobile Internet services. Nokia's first offering is a bulb-headed phone called the 7110, priced at $500. It's fitted with a browser for WAP, or Wireless Application Protocol--a standard that converts Web pages to fit onto mobile phones. The phone features a rolling scroll key under the screen. Ericsson and Alcatel are coming out later this year with offerings featuring fold-down keyboards and larger screens.

The phones look good, but for now they offer ho-hum services. Mobile surfers can dial in to a server for Zurich stock quotes, Madrid weather forecasts, or schedules for the Frankfurt bus. But the service is slow. In Helsinki, it takes 10 seconds to get a stock quote via wireless Internet phone.

Far livelier services are coming soon. By next spring, phone companies around Europe will be testing transmission systems to keep smart phones online constantly. With data dispatched in packets, the way the Internet does it, users will no longer have to make calls to transmit. The phone, like a corporate Intranet terminal, will simply shuttle data all day and night, whenever it's on. This will force phone companies to come up with new ways to bill, while providing them with new advertising platforms. And it should turn the data phone from a gimmick into a tool. "That's when smart phones will go mainstream," predicts Kent Thexton, a marketing director at Britain's BT Cellnet.

The Europeans have settled on a step-by-step rollout of the mobile Internet. As phone companies upgrade their transmission stations to handle data, wireless Internet services will move to broadband video and stereo by 2003. That will provide a steady jumbo market for equipment suppliers, led by Ericsson, Nokia, Nortel, and Lucent. Analysts estimate that the demand for GSM transmission equipment will reach $15 billion this year. The market will likely double within five years.

SLOW MOVER. With each jump in sophistication, phonemakers aim to hawk pricey new handsets. Nokia, for example, plans to issue new, top-of-the-line phones every year. The company's latest data phones, the 7110s, won't allow the continuous Internet access that will be technically possible next year. For that, consumers will require another Web-surfing machine, probably costing $500 to $1,000. If that sounds outrageous, consider that European executives already change their phones about once a year as a matter of course.

In contrast to Europe and Japan, the U.S. is likely to move more slowly to set up a wireless Internet world. It may take five or six years for the Americans to catch up with their overseas rivals. That gives European companies half a decade--a lot of time at Net speed--to strengthen their global market position. Success could be just a few billion phone calls away.

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