The Big Boys' Mad Dash into Wi-Fi

The wireless Internet is exploding. But will anyone pay for it?

It started just three years ago, when techies began programming their laptops with a new wireless standard and jerry-rigging antennas to their broadband Internet connections. Poof! Suddenly, they could move around in their homes or offices, even into the backyard, and stay connected to the Net.

Now, this technology, known as wireless fidelity, or Wi-Fi, is taking off. Vast, informal networks are sprouting up. Zippy Wi-Fi connections, each one with a range of some 300 feet, now blanket entire neighborhoods from New York to Stockholm to Hong Kong. Some 2 million mobile surfers in North America already use Wi-Fi, and Gartner Inc. expects the number to double by next year. The surge in demand has prompted the Federal Communications Commission to find ways to set aside more spectrum for Wi-Fi.

Wi-Fi is all the rage, and finally, the struggling tech industry is gearing up to cash in on it. In the next year, Dell Computer Inc. (DELL ) will begin equipping practically all of its laptops with Wi-Fi connections. Sony Corp. (SNE ) is putting it into a host of electronic gadgets. Intel Corp. (INTC ), which is investing $150 million in Wi-Fi startups, plans to release new chips with Wi-Fi receivers by spring. And on Dec. 5, AT&T (T ), Intel, and IBM (IBM ) launched a new company called Cometa Networks. Its goal is to bundle thousands of Wi-Fi connections, called hot spots, into one nationwide network--and to convert this grass-roots phenomenon into a bona fide, billable business.

How will it work? Phone or cable companies will either buy access from a wholesaler such as Cometa or stitch together a network themselves. Then they'll likely offer subscribers national or regional Wi-Fi service for an extra $10 or $15 a month. In this new business, which analysts expect to take shape in consumer and corporate markets within a year, a subscriber in San Francisco will be able to take the laptop or PDA to Detroit or Atlanta, knowing that it links up wirelessly to the Net in airports, hotels, and probably even ballparks. "My feeling is that Wi-Fi starts to become pretty prevalent during the second half of next year," says Christopher Fine, an analyst at Goldman, Sachs & Co.

But the path to Wi-Fi riches is strewn with obstacles. Lots of users already have Wi-Fi hookups in their homes but will resist an extra charge to take the Net on the road. And before Wi-Fi conquers the corporate world, the industry must come up with strong security software. Last May, retailer Best Buy Co. (BBY ) temporarily shut down its wireless network after a security analyst in a parking lot managed to intercept data, including credit-card numbers, from the company's wireless cash registers. Best Buy soon plugged the gap and turned the network back on. Analysts predict that software protections will be sturdy enough for the broad corporate market by next year.

Wireless phone companies are facing perhaps the biggest challenge of all. The industry is gearing up for a multi-billion-dollar rollout of high-speed wireless networks known as Third Generation, or 3G. Soon, Wi-Fi may offer many of the same mobile services. True, it works only in stationary hot spots, and not, say, in a moving car. But it's far cheaper. Cometa, for example, is hoping to pull together its Wi-Fi network for a mere $30 million --chicken feed by 3G standards. The danger is that customers will log onto the mobile Internet through Wi-Fi and blow off 3G.

For now, phone companies have little choice but to race into Wi-Fi. T-Mobile USA Inc. (DT ), which has already set up hot spots in 2,000 Starbucks Corp. (SBUX ) cafes, is spending $100 million to build a nationwide Wi-Fi network. The goal: to hook users on Wi-Fi, then to push them toward 3G. "It's going to be difficult for anyone to make a business case just serving Wi-Fi," says John W. Stanton, chairman of T-Mobile USA. "It's a piece of the puzzle."

It's by far the hottest piece of the mobile Internet. With the price for home networks dropping below $200, hardware sales are expected to grow from about $1.5 billion to $2.3 billion this year, according to Synergy Research Inc. The trick now is to lure all these home networkers outside, onto the broader Wi-Fi networks--and bill them for it. It's the tech sector's next big step toward mastering the mobile Internet.

By Heather Green in New York, with Ben Elgin in San Mateo, Calif.

— With assistance by Benjamin Elgin

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