[Street.com] Investing in Thin Air

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From: Linda (joelinda1@home.com)
Date: Fri Oct 20 2000 - 21:29:38 PDT

[We may well be in wireless Web bubble: RIMM's market cap is back
at over 8 Billion :)



Investing in Thin Air
By Rakesh Sood
Special to TheStreet.com
10/17/00 4:32 PM ET

That swooshing sound you hear is the air coming out of the wireless
Web balloon. Sooner than you think, billions of dollars in market
capitalization will disappear into that very thin air.

Much has been made of the wireless Web opportunity. Estimates by Wall
Street analysts and market researchers suggest no less than
100 million mobile Internet subscribers in the U.S. over the next
five years, with more than $25 billion in revenue for infrastructure,
access, applications, advertising and m-commerce, or mobile commerce.

While getting stock quotes or the precise whereabouts of a nearby
Italian restaurant may be mildly interesting applications for the
Web-enabled Nokia (NOK:NYSE ADR - news - boards) phone or other
personal digital assistant (PDA), it is more likely that that this
unbridled enthusiasm vis-a-vis the wireless opportunity may evaporate
over the next few months.

Expect multiples of public wireless Web companies and valuations of
private equity financings to deflate as investors come to grips
with the realities of slower adoption in this marketplace. This wave
could be reminiscent of the cresting of similar waves in B2C, and most
recently in B2B.

Cell phone usage has become pervasive over the past three or four years.
With more than 100 million wireless subscribers in the U.S.,
penetration is now over 30%. It's even greater than 80% in parts of
Scandinavia, with extremely strong growth in parts of Asia, especially
Japan. While the U.S. attained computing pre-eminence, it has lagged
behind Europe in pervasiveness of wireless usage, and behind Japan in
speed of deployment of state-of-the-art packet-based technologies.

While Europe embraced a common GSM standard, entrepreneurial diversity
in the U.S. gave rise to multiple standards ( CDMA, GSM, TDMA, etc.).
Furthermore, the U.S. is largely based on second-generation, or 2G,
analog technology transmitting data at slow modem speeds of 9600 bps
over a circuit-switched network.

Compare that to Japan, which has deployed a halfway step, a 2.5G
packet-switched network enabling quick setup and tear-down (or "always
on" should you choose to operate that way) of connections. In Japan,
NTT DoCoMo's popularized i-mode service has won plaudits and subscribers
(more than 12 million in 18 months, and ramping) with an array of
messaging, location-based services and commerce options.

Since it's come dangerously close to running out of spectrum, Japan
has been aggressively moving to launch its new 3G network -- expected
to debut next spring -- which promises wireless data rates of up to 2
Mbps, enabling a greatly expanded range of applications and content.
As far as the U.S. is concerned, 3G is probably four years away.

It is ironic that while the U.S. should be so far ahead of the rest of
the world in computing, it should lag behind in wireless. As if the
above impediments were not limiting enough, U.S. subscribers suffer
from another unique handicap, namely that recipients of calls pay
airtime charges as well, unlike their counterparts in Europe and Asia
where only the caller pays. All these limitations create a greater
growth opportunity overseas than within the U.S., so that the U.S. is
expected to represent less that 15% of the world's wireless subscribers
over the long term.

Tracking the Wireless Bubble

A large number of public companies have benefited from the hype
surrounding the wireless Web opportunity. These include the various
sectors of wireless:

Service providers/Existing carriers -- OmniSky (OMNY:Nasdaq - news -
boards), GoAmerica (GOAM:Nasdaq - news - boards), Research In Motion
(RIMM:Nasdaq - news - boards).

Phone and hardware infrastructure providers -- Nokia, Motorola
(MOT:NYSE - news - boards), Ericsson (ERICY:Nasdaq ADR - news - boards).

Software and service infrastructure providers -- Phone.com (PHCM:Nasdaq
- news - boards), InfoSpace (INSP:Nasdaq - news- boards), Aether
Systems (AETH:Nasdaq - news - boards), 724 Solutions (SVNX:Nasdaq -
news - boards), Comverse Technology (CMVT:Nasdaq - news - boards).

Content providers -- Yahoo! (YHOO:Nasdaq - news - boards), i3 Mobile
(IIIM:Nasdaq - news - boards) as well as current e-commerce providers
positioning themselves as potential m-commerce leaders.


(Continued) Investing in Thin Air
By Rakesh Sood
Special to TheStreet.com
10/17/00 4:28 PM ET


From Boom to Bubble?

Fast on the heels of lofty valuations of public companies, a large
number of private companies are getting financed with the expectation
that they can tap into "The Next Big Thing." Chances are this unbridled
optimism is likely to be reined in considerably when reality sets in.

This reality is likely to manifest itself along several dimensions:

1) We remain behind: The U.S. uses a predominantly computer-centric
approach to Web access. The rest of the world, having lagged in
embracing the computer-centric Internet model, is much further
along in wireless usage. While the speed of innovations on the Web
front has benefited the U.S., it is likely to be an anchor in the
race toward wireless applications.

Witness the attempts by U.S. vendors to morph into the wireless
paradigm, including:

Repeated attempts by devices based on the Windows CE operating system
to masquerade as wireless PDAs.

Use of the Palm operating system as a wireless operating system.

Transitory use of wireless access protocol to provide "dummied-down"
HTML-based content.

Delays in launching browser-based phones.

The incumbent wireless carriers could have seized the moment. But
they have been mired in servicing voice-oriented customers using
prehistoric analog technology, and are stymied by slow progress in
standardization toward third-generation technology.

2) Lack of standardization: As somebody once said, "The nice thing
about standards is that there are so many to choose from." That
precisely is why the U.S. is in such a mess. The patchwork of
coverage, technologies, access charges and reciprocal roaming
arrangements makes ubiquitous access difficult -- until we get to
a single standard for voice and data.

3) Device usability: Issues of battery life, screen size, etc., are
compounded when you tie voice and data into a single device. The
convergence theory just hasn't worked in the past as people carried
a pager, a cell phone and a Palm V. The tradeoffs involved make it
very difficult to do a whole lot of useful stuff.

4) Content and applications of limited use: This is a Catch-22 scenario,
with limited availability of fresh content specifically targeted at
wireless devices, rather than repurposed computer-centric content.
Ditto for applications, especially those targeted at corporate users.

5) Cost: While one-rate plans are proliferating, carriers need to
emulate flat-rate pricing common with Internet service providers. Such
a pricing strategy by carriers runs counter to the kind of additional
revenue opportunities driven by data services, and will therefore
create a lot of angst for them to embrace it anytime soon.

For all these reasons, I believe the wireless Web will take a lot
longer to be meaningful, and current valuations for both public
(and commensurately for private financings) will come down as
wireless hype collides with reality.

Expect, too, the sequence of attractive investment to likely parallel
what we've seen in the evolution of the commercial Internet. That means
access first, hardware (devices and infrastructure) second, software
infrastructure/services third, content fourth, and commerce fifth.

The Consumer Comes First

B2C usage is likely to precede B2B adoption. And advertising will be
a lot more challenging, given the small device sizes, as well
as heightened privacy concerns on the part of the user. These issues
loom large in the handheld device arena precisely because of the
specificity of a person's location, as well as the accessibility of
his/her personal information.

Instant messaging is an obvious application, having been popularized
in Japan and Europe. Given that U.S. carriers are heavily Balkanized,
and that IM has run into issues of standardization, I'm less than
sanguine about the prospects of wireless IM in the near term.

What About Portals?

The battle lines are drawn between the portals and carriers. Will
carriers use their existing service and device power and billing
relationships with their customers to extend their reach into
data-centric services? Will portals with extensive reach, "stickiness"
and content rise to serve the needs of the wireless customer?

Or yet still, will new companies (e.g. OmniSky) leverage an existing
installed base to become gorillas over time? This last is more than
likely because that is exactly what happened with the launch of the
commercial Internet five years ago.

Multiple approaches likely will succeed over time -- but over a longer
period than what most people are contemplating. Clearly, those who
recognize that this is primarily a non-U.S., rest-of-world market and
expand (or partner) accordingly will be better-positioned.

As Janice Webb, senior vice president of Motorola's Networks Group, has
said, "Over the next few years, expect your phone to become a remote
control for your life."

That may well happen, though a "few" years could turn out to be three
or five ... or even 10. The wide-eyed dreams of billions and billions
of dollars in advertising and M-commerce may remain dreams for quite
some time. After all, let's not mistake the clarity of a vision for its

Rakesh Sood is a general partner of the Sprout Group, Donaldson,
Lufkin & Jenrette's venture capital affiliate. Prior to that, he was
a leading Internet/E-Commerce analyst at Goldman Sachs. At the time
of publication, Sood held no positions in any of the securities
mentioned in this column, although holdings can change at any time.
Sprout has venture investments in OmniSky


Phone.com's CFO Alan Black on WAP hype:
"To put it into perspective, I was in London in late March and
catching a plane home and on comes 'WAP Wednesday' on CNBC
-- over an hour-long discussion about the wireless Internet in
Europe, and if that's not over the top, I don't know what is."

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