FOOL ON THE HILL
An Investment Opinion
There's good news and bad news on this front. The good news is that it's still early. Wireless carriers are in the waking phase of rolling out Internet offerings, so it's too early to have missed anything. AT&T Wireless (NYSE: AWE), Sprint PCS (NYSE: PCS), Nextel (Nasdaq: NXTL), VoiceStream Wireless (Nasdaq: VSTR), SBC Communications (NYSE: SBC), and Verizon Wireless -- the newly named wireless unit that combines assets from Bell Atlantic (NYSE: BEL), Vodafone (NYSE: VOD), and GTE (NYSE: GTE) -- all have wireless services or expect to offer them soon. The companies hope to rake in buckets of additional revenue as the Internet goes wireless.
The bad news is that no one really knows what services people will want, what they'll pay for, or which companies will find ways to turn hot applications into moneymaking businesses that will reward shareholders. If the wireless data craze becomes the next investing theme of the day, investors should tread carefully since it's an emerging market.
Before turning to some of the applications coming down the pike, it's worth a peek at where industry folks think the market is headed. Keep in mind these are just educated guesses on the part of industry observers. Investors should never assume company x can obtain a 10% market share just because their friendly neighborhood stock picker said so, and award the company a billion-dollar market cap. Numbers that define the size of a market should be viewed as guideposts along the road, not places to park.
If you define wireless data as two-way services over any type of wireless network, there were roughly 3.5 million subscribers at the end of 1999, and about 40% of them were cellular/PCS users. (The others are PalmPilot users, wireless messaging users, etc.) They accounted for about $700 million in revenues last year, according to Elliott Hamilton, senior vice president at telecom research firm The Strategis Group. Hamilton expects there will be 25 million wireless subscribers by 2004, and he expects 75% of these users to be cellular/PCS customers, generating about $4.5 billion in annual revenues.
Hamilton isn't the only one who's bullish. Investment bank Lehman Brothers predicts that 18% of cellular revenue and 21% of PCS revenue will come from wireless data by 2007. And Verizon Wireless, which will soon become the country's largest wireless carrier, expects data will account for one-third of its revenues in five years. That's a lot of wampum.
With present wireless data speeds in the 14.4 Kbps to 19.2 Kbps range, browsing is slow and services are very basic. Pretty much all of the carriers offer a stable of basic wireless data services, including stock quotes and weather updates, links to a handful of Internet sites, and home pages that can be personalized. AT&T seems to be pushing the pricing envelope again with its latest PocketNet plan, a wireless package that provides essentially free wireless Net access for about 10 million of its 12.5 million subscribers, provided they buy a Web-enabled phone.
But services will blossom in the next 24 months as companies migrate to 3G technology. The 3G platform, a next-generation technology aimed at delivering high-speed services, will offer access speeds of 144 Kbps and much higher. Digital wireless carrier Sprint PCS, for example, which uses CDMA technology, expects to offer access speeds in the 56 Kbps range this summer thanks to new compression technology. In 2001 it expects to roll out its 3G phones.
Why is 3G so important? Most consumers know that browsing the Web at speeds of 14.4 is pretty much useless. For multimedia applications to blossom and wireless data subscribers to hit critical mass, faster speeds and more efficient use of bandwidth are a must. It may take longer to roll out than expected, but you can bet it's coming. Imagine downloading your favorite CD to a cell phone, or watching a video Web cast on the subway? It's possible once high-bandwidth technology is in place.
The applications getting most of the attention at this point are location-related products, especially in the advertising arena, according to Hamilton. For example, applications that would send electronic coffee coupons to a cell phone user passing in front of a Starbucks (Nasdaq: SBUX) are whipping up the sands. This kind of marketing, which would blend targeted ads with opportunities that could lead to impulse purchases, is the kind of technology that makes venture capital firms drool (though it doesn't necessarily make them good long-term investments).
There are dozens of companies developing applications focused on location-based services, Hamilton said. Vicinity Corp. (Nasdaq: VCNT) of Palo Alto, California, develops products that allow carriers to direct consumers to nearby stores and restaurants. Infomove, a Seattle-based start-up, is focused on offering products related to cars, such as vehicle monitoring, Internet services, and real-time traffic advisory services. It expects that every car will have Internet access by 2005.
I don't mention these companies to endorse them, just as examples of the applications targeted at the wireless data market. Investors interested in the sector need to ask themselves what kind of services they think will be useful, and which companies have the business models and management teams to reward shareholders.
It also makes sense to break the wireless companies into three groups: 1) the carriers, companies like AT&T; 2) the equipment providers, like Lucent (NYSE: LU) and Nokia (NYSE: NOK); 3) the applications companies, like Vicinity.
My conservative bias in an emerging market leads me to favor companies I know will participate -- the carriers and equipment providers. Investors have to choose for themselves.