[Red Herring] Analyst View: Monetizing the wireless Internet

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From: joelinda1@home.com
Date: Fri May 19 2000 - 22:04:33 PDT

[Slightly dated, but a nice summary of different revenue models in
wireless internet. --Linda]


Analyst View: Monetizing the wireless Internet
By Peter C. Friedland
W.R. Hambrecht, April 07, 2000

The kickoff of the wireless Internet game was in June 1999, when
wireless Internet software maker Phone.com (Nasdaq: PHCM) went
public. The receiver was the market, which responded by running up
Phone.com stock 150 percent on its first day of trading. Since then,
tremendous hype has surrounded an industry that encompasses two of the
hottest buzz words in the stock market today: wireless and Internet.

This euphoria raises a key question: how can companies monetize the
wireless Internet? The question is likely to be answered by the
viability of four key revenue sources: access revenues, application
service revenues, electronic-commerce transactions, and advertising.
The companies that are best positioned to garner these revenues will
win the wireless Internet game.

Cellular and PCS carriers have assumed the role of the wireless
Internet service provider (WISP) to supply customers with access.
Wireless carriers such as AT & T (NYSE: T), Bell Atlantic (NYSE:
BEL), and Sprint PCS (NYSE: PCS), for instance, offer their
traditional wireless voice customers the ability to access the
Internet through browser-enabled wireless handsets. Each company has a
different pricing plan, but they all include a wireless add-on to the
regular wireless voice service. For example, AT & T offers Pocketnet,
providing customers with "all-you-can-eat" wireless Internet browsing
for an additional $14.99 to $19.99 per month. In contrast, Sprint PCS
initially priced Wireless Web as a $9.99 monthly add-on for 50
minutes of browsing, plus 30 cents each additional minute. Whatever
the plan, wireless carriers are well-positioned to benefit from the
wireless Internet because they control the wireless pipe to the
customer,which remains a scarce asset. As wireless Internet services
proliferate, they will see a significant increase in the volume of
minutes accessed on their networks, which should translate into
increased revenues.

Another breed of WISP supplies service to Palm (Nasdaq: PALM)
devices, handhelds, and personal digital assistants (PDAs). Most
notable are GoAmerica (proposed Nasdaq symbol: GOAM), which plans to
price an IPO this week; OmniSky, a joint venture between 3Com (Nasdaq:
COMS) and Aether Systems (Nasdaq: AETH); and Palm.net, a unit of Palm.
GoAmerica and OmniSky provide wireless Internet access to handheld
devices via attached modems. Palm.net provides wireless Internet
access to the Palm VII device, which comes equipped with a wireless
modem. Pricing for these service plans ranges from as low as $10 per
month for a limited amount of kilobytes of information, to $45 to $60
for unlimited service. To provide wireless connectivity, GoAmerica,
OmniSky, and Palm.net piggyback on the cellular digital packet data
(CDPD) networks of carriers such as AT & T and Bell Atlantic, and
Bellsouth (NYSE: BLS)'s Mobitex network. GoAmerica, OmniSky, and
Palm.net will see substantial demand for wireless Internet access.
This is primarily because most users of handheld devices tend to be
business professionals, who likely will be among the early adopters
of wireless Internet services.

The next revenue model is the wireless application service provider
(WASP). WASPs enable businesses to adapt their Internet content and
enterprise applications for wireless devices. In addressing this
issue, a business has two options: the company can ramp up its
in-house IT department and solve its own wireless requirements, or
the company can employ the services of a WASP. While the first option
might make sense for large companies such as Yahoo (Nasdaq: YHOO),
Amazon.com (Nasdaq: AMZN), and America Online (NYSE: AOL) that are
willing to devote significant resources to wireless access, the WASP
option is quickly gaining a foothold with companies that believe
wireless solutions are better left to the experts.

WASPs can enable any application. Current WASP offerings include
stock trading, consumer banking, news, e-commerce and access to
applications such as Microsoft (Nasdaq: MSFT) Outlook or IBM (NYSE:
IBM)'s Lotus Notes. Although varying WASP business models exist, the
generic models consist of either hosted or on-site applications. In
the hosted model, a WASP hosts a wireless application on servers
located either on the WASP premises or at an Internet data center.
The on-site WASP model involves placing servers on the customer's
premises. Initially, WASPs receive revenue through a combination of
hosting, license fees, consulting, and service fees. An exciting part
of the WASP model is the potential for recurring subscriber fees or
e-commerce transaction fees generated by the end-users of wireless

Public companies in the WASP space include Aether Systems, 724
Solutions (Nasdaq: SVNX), Datalink.net (AMEX: DLK), Smartserv Online
(OTC BB: SSOL.OB), Geoworks (Nasdaq: GWRX), and Infowave (Toronto:
IW.TO), to name a few. In addition, many private WASPs are emerging
throughout Silicon Valley. We believe there should be a huge market
for WASPs as Internet portals and businesses race to extend their
content and applications to wireless devices.

As wireless access becomes more widespread, we expect to see the same
e-commerce boom that we currently are experiencing in the
traditional wireline Internet. In particular, we believe that
convenience purchases -- such as buying movie tickets or last-minute
gifts - will experience quick uptake through location-based
directories such as Go2online (a unit of privately-owned Go2Systems)
and shoppingservices such as Amazon.com.

The most obvious revenue stream is payment to the e-tailer for
selling a product or service. Beyond that, we believe a wireless
Internet sale will also include transaction fees paid to the WISP for
providing the e-tailer an interface for the customer, and to the WASP,
forproviding the application to complete the transaction.

One of the biggest questions surrounding the wireless Internet is how
to advertise. This is particularly perplexing because wireless
handsets are usually confined to a three- to six-line text display.
Not only would an advertisement be difficult to fit into such a small
space, but it might be so intrusive that it discourages the customer
from using wireless Internet services. Although handheld devices
have larger screens with more real estate for advertisements, we
believe the potential for traditional Internet advertisement banners
is limited. One possibility is that location-intelligent portals could
send a wireless customer an advertisement based on the customer's
personal preferences and location.

Who's got the edge? Though it is uncertain which revenue stream will
ultimately win the wireless Internet game, the best-positioned
companies presently are wireless carriers such as Sprint PCS, AT & T,
Nextel (Nasdaq: NXTL), and Verizon (the Bell Atlantic joint venture
with Vodafone AirTouch). These companies have encouraged their users
to sample wireless Internet services. As bandwidth increases, which
should enable more services, we expect wireless Internet penetration
eventually to surpass 50 percent. The gatekeepers of the wireless
Internet traffic occupy an enviable position, poised not only to
garner access revenues, but also to take a piece of virtually any
service, transaction, or advertisement completed over the wireless
Internet. Yet, despite this potential, we do not believe the market
has granted sufficient credit in the current valuations of wireless
carrier stocks.

As for pure-play wireless Internet stocks like Phone.com, Aether
Systems, 724 Solutions, Datalink.net, Smartserv Online, and Geoworks,
to name a few, the market has clearly rewarded these stocks with high
valuations despite relatively small current revenue streams. However,
given the limited supply of pure-play wireless Internet stocks, we
expect the strong investor interest in this sector to continue to
drive the valuations of these stocks higher.

Peter Friedland, C.F.A, is a wireless analyst with W.R. Hambrecht.
Prior to joining W.R. Hambrecht in March, 2000, Mr. Friedland was a
vice president and senior analyst at ING Barings, where he covered
the wireless telecommunications services sector.

Please note: W.R. Hambrecht is an investment bank and may make a
market or own a position in the companies mentioned in this article.

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