RK on Phone.com in Industry Standard

Sally Khudairi (sk@zotgroup.com)
Fri, 12 Nov 1999 08:28:23 -0500

Sockin' it to 'em with the classic ZOT/4K 1-2 punch.

Way to go, Ro.

- SaL'



Phone.com's Great Expectations

The hot software company hopes to become the Microsoft of the
Internet-enabled cell phone. But is it building its empire on shifting

By Alex Lash

Phone.com can do no wrong. Like Netscape four years ago, it has defined the
right conditions for the next big thing - connecting cell phones to the
Net - and made itself indispensable. As with Netscape, investors have
responded, driving Phone.com's stock to well over $200 in a few short months
since its June IPO. Of course, we all know what happened to Netscape, but
this time there's a big difference.

Phone.com may sound like a hip Valley startup, but it's been around since
late 1994 as Unwired Planet. Only this April did it change its name in a
dot-com makeover in preparation for its IPO. Smart move. There's plenty more
to its success, of course. The company has spent four years forging deals
with wireless carriers and handset makers to put its minibrowser on phone
screens the size of a small Post-it note. Soon, thanks to a technology
Phone.com helped pioneer, those screens and browsers will surf the Web, or
at least a boiled-down version of it.

This up-and-coming technology, called Wireless Application Protocol, or WAP,
is needed because spotty connections, lack of bandwidth and low processing
power in phones makes it impossible to zap mini-Web pages onto a phone
screen. HTML, even whittled down to a bare minimum, won't fit. With WAP, a
content publisher has to rewrite its code in a special markup language. That
code must then travel through a WAP-compliant server before it hits the
airwaves and goes to a phone. No surprise: Phone.com sells WAP servers.
That's where most of its $40 million in anticipated fiscal 2000 revenue - up
from $13 million in 1999 - is expected to come from, with 46 customers
already lined up, says CEO Alain Rossmann. But big rivals in the server
business are queuing: Nokia (NOK) , Ericsson and Motorola (MOT) , all of
which worked with Phone.com to develop WAP.

That means Phone.com has to look elsewhere for revenue. It just announced a
hosted service called MyPhone, a PC-based Web portal that allows users to
sign up for phone-based applications: e-mail, news, sports, stocks, calendar
service, driving instructions and more. Each carrier can brand its own
portal and applications.

The market is just getting started. No one is quite sure which services
phone users will fancy or which business models will stick. Even less
settled is the technology picture. No one but Phone.com is sure that WAP is
the technology of the future. That's why the company has to move fast to
make the wireless protocol indispensable before bandwidth gets better,
phones gets smarter and WAP, as it stands today, becomes obsolete.

"When you have a strong foundation, the future comes from extending it,"
says Rossmann, who likens WAP to Microsoft (MSFT) 's DOS, which became the
underpinning for Windows. "We have all the elements to quickly build that

If he's right, Phone.com could be-come the Microsoft of the Net-enabled cell
phone, with a lion's share of the client software, server software and key
applications that run on the phone.

Phone.com has even cribbed a page from Microsoft's playbook. Certain
wireless carriers that license Phone- .com's server pay per user, even if
some users don't activate WAP features.

But WAP has to survive first. Critics call the technology a short-term
solution that helps move data through today's narrowband airwaves to and
from relatively low-powered phones. Increase bandwidth and make phones more
powerful, though, and the need for the extra step of translating Web pages
into WAP will be eliminated, say critics. In a utopian world, a content
developer should be able to write an application or set of data once and
publish it to a variety of devices.

"The cell phone, from the content provider's point of view, shouldn't be any
different than another access device," says Rohit Khare, a WAP critic and
former member of the World Wide Web Consortium standard-setting body. "WML
[WAP's markup language] has enough quirks that it's an entirely separate
development structure."

As much as Phone.com will benefit from extending WAP technology as far as it
can go, Microsoft wants to pull WAP into what it calls "convergence" with
existing Net standards. But Microsoft has far to go to persuade the telco
industry to move to Windows. Its Windows servers need to prove they can
scale to handle vast volumes of traffic. The scaled-down, device-size
Windows CE has only reached prototype mode on phones and isn't close to
commercial deployment. Microsoft's trump card, aside from vast resources, is
its developer following. If it can produce tools that let developers build
applications for all manner of Windows-based devices, it could shift the
phone platform in its favor. But not anytime soon. "The 1999-2000 cell phone
is not their target market to capture," says Khare. Meanwhile, big content
developers such as Yahoo (YHOO) , CNN and the Weather Channel's Weather.com
will throw in extra resources to cover a format that could make the first
wave of wireless content brands indispensable to millions of users.

Mitch Lazar, the Turner Broadcasting VP in charge of new media, including
the CNN Mobile effort, won't say how much it costs to build WML content but
says he's "comfortable" with the production costs. "We won't create content
that has no audience," he says. "We're compensated by the promise of new
business models. For a lot of people just getting into it, it won't be as

With the legwork Rossmann and his team have done to cement distribution
deals with phone makers, developers who want to reach Net-ready phone users
may not have a choice. "It boils down to volume, volume, volume," says
Rossmann. "If and when volume gets large enough and developers get access to
more users on phone than on PC, then the issue goes away."

But competition won't go away. WAP is an open standard and anyone can build
software based on it. Nokia and Ericsson are building rival servers. Even
Motorola, a key partner, could become a competitor. Mororola is building a
gateway server as part of a turnkey solution for wireless carriers, says
Peter Aloumanis, director of U.S. customer operations for the company's iDEN
group. (Motorola uses the Phone.com browser on its iDEN phones.) "We're
looking at making the browser, too," Aloumanis says. "Long term, we need to
decide whether the browser is strategic enough to build ourselves."

On the portal front, Yahoo and other players want their own online apps, not
Phone.com's, on users' phones. Carriers, which ultimately own the customer
relationship, will have to decide if they prefer their own branded apps
(licensed from Phone.com), or the drawing power of a big-name portal.

"We have 105 million unique users in our network," says Mohan Vishwanath,
Yahoo's VP in charge of putting content on a range of devices. "That's of
tremendous value to [wireless] network operators."

Meanwhile, Phone.com, with its $6.7 billion market capitalization (as of
Nov. 2) must do what previous Net stock superstars have learned to do: flash
the virtual cash. It moved quickly to buy Belfast, Northern Ireland-based
Apion, its biggest WAP gateway rival, for 1.3 million Phone.com shares ($239
million when the deal was announced Oct. 11). The company will also spend
$10 million in the next three quarters to ready its MyPhone portal tools for
commercial deployment in fiscal year 2001, CFO Alan Black told financial
analysts during a recent quarterly earnings call.

The company should enjoy the stock price while it can, and so should its
investors. Even skeptics like Khare, whose April report took WAP to task for
competing with existing Net standards, can't help but laugh: "Having written
that report, I still feel like an idiot for not buying their stock."