We continue Break Down August with Phone.com (Nasdaq: PHCM), the littlest monopoly.
Phone.com produces technology that allows wireless handsets to communicate with the Web, and it controls 90% of the global market. Phone.com was one of four charter members in the Wireless Application Protocol (WAP) Forum -- the others were Nokia (NYSE: NOK), Ericsson (Nasdaq: ERICY), and Motorola (NYSE: MOT). The Forum's raison d'ï¿½tre is WAP, an open source standard enabling wireless Internet communications, which has its basis in several proprietary Phone.com technologies.
The WAP forum now sports 350 members and, as a result, Phone.com's software is interoperable with companies representing 96% of all cellular phone volume. In addition, Phone.com has a server suite that some of the largest wireless network operators have licensed, including Vodaphone Group (NYSE: VOD), Verizon Communications (NYSE: VZ), AT&T Wireless (NYSE: AWE), and Deutsche Telekom (NYSE: DT).
Phone.com recently changed radically by announcing a merger worth more than $6 billion with e-mail server specialist Software.com (Nasdaq: SWCM). The company churned things even further by hiring Donald Listwin, former executive vice president at Cisco Systems (Nasdaq: CSCO), to be its CEO.
The two companies bring complementary technologies that could finally provide something that has been promised for years, but has only peripherally been delivered: unified messaging service. Should the companies' combination go as planned, they will be able to offer a way of abstracting telecommunications signals from various devices: e-mail, voicemail, fax, and short messaging services. The ability to tie in these platforms, along with the wireless browser plans from Phone.com's existing technology pipeline, will make this a company that is on top of not just one, but several, multi-billion-dollar markets.
As with any Rule Breaker, the key words here are "if," "if," and "if." Certainly, cellular phone growth is going to be there, with an estimated 500 million Internet-ready handsets in use in 2003. And, certainly, Phone.com is sitting in a sweet spot, a tollbooth in which it gets paid a residual for every user on a network using its browser. But, just as certainly, there are big potential competitors for Phone.com's infrastructure services market, including rumblings from Nokia and Microsoft (Nasdaq: MSFT). Phone.com's merger put pressure squarely on the world's largest wireless e-mail provider, NTT DoCoMo (NYSE: NTT), which uses iMode, a proprietary standard.
Still, Phone.com holds an agnosticism that the other players do not -- few manufacturers want to be handing browser business over to Nokia, the biggest dog on the block -- and just as many worry what Microsoft's hegemony over wireless browsers would mean for the industry. Another problem is WAP's poor reviews thus far. Granted, this is similar to using a TRS-80 in 1984 and deciding that "PCs suck," but wireless Internet still awaits the killer app that will make it as indispensable as the wired Internet has become.
As with any Rule Breaker, the question is not really "What is?" but "What does what exists now insinuate for the future?" In the earliest stages, though, the pre-merger Phone.com has annual revenue growth of 500% per year and a willingness to pay for acquisitions and research & development (60% of revenues) to extend the usefulness of its products and services. 'Course, they also HAVE to spend heavily on R&D (TRS-80 argument and all that).
Still, there may be no company in the wireless realm with a more intriguing patent, technology, and partnership portfolio than Phone.com, and investors have noticed. The company trades at 86 times trailing 12-month sales, so the chances of us getting a scoop on this company are pretty slim.
Top dog and first-mover in an important, emerging industry
Well, sure... Phone.com is the premiere software provider for wireless Internet providers. The wireless Internet is in its nascent stage, with about 4.1 million services and another 12 million using the Phone.com browser. But, what's more important is that 96% of all WAP phones are compatible with Phone.com, with a total of 150 models under development. While the early adapters of wireless Web have not given it rave reviews yet, success is no more than a killer app away.
Phone.com, for its part, roughly serves three market segments: Software, servers, and applications. Each segment addresses a different part of the same arena -- wireless Internet. The addition of Software.com will press out Phone.com's service to include one of the holy grails of communications convergence: Unified messaging between PC, voicemail, fax, and e-mail.
1. Software -- This is primarily provided to wireless device manufacturers and marketed under Phone.com's UP trademark. The UP.Browser is the most adopted platform for wireless users to search e-mail, access content provider sites, accept user inputs, and interpret alphanumeric entries. Phone.com's browser also serves as a universal mailbox that can inform the user of e-mail or voicemail messages. One of the unique problems with wireless Internet interfaces is that they generally have much smaller memory, CPU, and graphic space than PCs, meaning that PC-based Internet sites cannot simply be converted into a smaller wireless version. Phone.com's differentiation is that it gives its software away, but receives a royalty from the operating carrier, based on user base.
2. Servers -- The Phone.com server suites are the dominant equipment for interface between carriers and wireless Internet phones. The servers provide the backbone for a complete "rollout" of wireless services to carriers, based once again on the WAP protocol and Phone.com's proprietary technology. Phone.com addicts the carriers further by providing full programming education for network managers, in the same way that Cisco Systems does -- ensuring that the companies build up an installed base of intellectual capital, making the decision to switch to another vendor quite expensive. The beauty is that Phone.com is willing to provide interoperability support for any other class of equipment providing wireless services, permitting Phone.com to be the standard interface.
3. Applications -- This is where the Software.com acquisition is going to make things interesting. The company currently provides mail and organizer applications to end users, and a Web interface for carriers that wish to provide customer care information. Once the Software.com e-mail applications are added, the company will have all of the technology pieces to provide unified messaging -- if it can execute. These applications would then provide comparable service to the proprietary NTT DoCoMo iMode architecture, but in an open environment with full interconnect capability and access to users on other services also using WAP.
The Result: Does Phone.com have the sauce?
Undoubtedly. The company has a full layer of wireless application solutions that far overshadows any of its competitors'. Companies that cause the most concern, particularly Nokia, are noteworthy only due to their enormous research and development capabilities. Phone.com could be overtaken with concerted effort. Still, even Nokia knows better than to completely buck a good thing -- it is a signatory to WAP and its phones will be interoperable with, and even running on, Phone.com technology.
In Part 2, we'll run Phone.com through the other five criteria. Until then, stop by the Rule Breaker Companies discussion board and let us know what you think.
Finally tonight, what do Maria Bartiromo, Richard Branson, and David Bowie have in common? They're castaways in Fool Survivor, of course. The TV show may be over, but you can still have some fun and walk away with $2000, a Handspring Visor, or one of many other prizes. Head on over to our Fun & Folly area for more details on how you can win!
Bill Mann, TMFOtter on the Fool Discussion Boards
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