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As 'Wi-Fi' Users Multiply, Expensive Bet By Wireless Firms Looks Increasingly Risky


November 29, 2002

At first glance, software executive John Baron would seem to be a cellphone company's dream. He subscribes to the slow Internet browsing option on his cellphone, painfully pecking away on the dial pad to type in Web addresses.

Lately, though, he has found a better way: When on the road, he uses Wi-Fi, the technology that gives him wireless access to the Internet on his laptop computer, at blazing speeds. "It's brilliant," he says. "The phone stuff is pretty clunky."

 Once viewed as little more than a toy for tech hobbyists, Wi-Fi -- short for wireless fidelity -- is starting to emerge as a serious force in the Internet business. Chip maker Intel Corp. is integrating it into new microprocessors it's building for laptop computers. Philips Electronics NV is planning to build it into remote controls and stereo systems. And Dell Computer Corp. is similarly seeding its PCs with Wi-Fi. Airports, hotels and Starbucks Corp. outlets are increasingly awash in Wi-Fi radio signals.

 Cellular Headache

While Wi-Fi poses problems for cable companies and conventional phone carriers selling high-speed Internet access, it has the potential to be a major headache for the cellphone business. Cellular carriers have spent billions of dollars over the past two years upgrading their networks to accommodate higher data speeds, and they are betting that consumers will send e-mail, browse the web and make use of other applications from their new phones, laptops and hand-held devices.

 But now an insurgent technology has come along to threaten that strategy -- just as Napster and the Internet itself sprang up from grass-roots followings to challenge the economic models of giant media and technology companies. Wi-Fi equipment works like a cordless telephone. It invisibly extends a fast Internet connection as much as 1,500 feet to any computer equipped with a wireless receiver. That means that, for a small investment in equipment, many users in the same home or neighborhood can theoretically share the same stationary Internet connection, while only paying for a single hook-up.

 More importantly, the speeds offered in such Wi-Fi "hotspots" are so much greater that many users say they're reluctant to make use of the cellular carriers' offerings.

 "What [Wi-Fi] hotspots do is they really kill about 80% of the good near-term applications that the cellular providers were expecting to make money off of," says Danny Briere, chief executive of TeleChoice Inc., a telecommunications consulting firm. One example of a place where Wi-Fi is already supplanting cellular networks: browsing the Internet wirelessly in an airport lounge.

 Race to Deploy

 Now cellular providers are scrambling to offer paid Wi-Fi services before others beat them to it. For instance, Sprint Corp., whose Sprint PCS group is the nation's fourth-biggest wireless provider, has invested in Wi-Fi firm Boingo Wireless and has announced plans to deploy Wi-Fi hotspots with Wyndham International hotels.

Cellular carriers aren't the only ones grappling with Wi-Fi. For the cable television industry, the advent of the fast-growing technology provides a spooky reminder of a problem that has dogged cable companies for years: the piracy of cable television signals. According to a survey by the National Cable Television Association in 2000, cable operators lost an estimated $6.6 billion, or 10% of total revenue, from people who jack into the cable system.

 Wi-Fi presents just the same quandary, allowing one user to share the connection with nonpaying users. Jeff King, president of Road Runner, the high-speed Internet unit of Time Warner Cable, calls the practice of advertising shared Wi-Fi connections "cable theft." His company has cracked down on some people who were allegedly sharing their connections.

Meanwhile, the conventional telephone business, an industry in feeble financial condition, is trying to take part in the Wi-Fi boom. The two biggest players, Verizon Communications Inc. and SBC Communications Inc., are selling Wi-Fi systems directly to their high-speed Internet customers. At first, SBC was worried about the possible abuses, says Alyssa Williams, a product manager for SBC. But eventually, she says, the company decided that "to fight something that's available to someone is kind of fruitless."

 Packets of Data

Wi-Fi dates back to the early 1990s, when a band of engineers focused on the use of "junk" radio-wave spectrum to devise a way for computers to share data without the twist of cables typical of corporate networks. In 1997, after years of experiments with the technology, the Institute of Electrical and Electronics Engineers established a standard for wireless computer networking. Much like the Internet, the technology divides up data into little packets and sends them over the airwaves using radio frequencies. Antennas put in computers "catch" the data packets and reassemble them at the destination.

 At first, the technology was too expensive for most home users. Wi-Fi antennas used to cost $500 apiece and transmitters cost $1,000.

 Still, it started to catch on slowly among corporate users. Car-rental companies bought wireless hand-held computers to use when checking in returning vehicles. And some companies used Wi-Fi to transmit data from their delivery trucks to their offices. Apple Computer Inc. made one of the earliest bets on consumer adoption of the technology, equipping their laptops with Wi-Fi technology in 1999.

 The prices for Wi-Fi equipment have since fallen to about $200 for the whole set-up. Now sales are taking off. In the third quarter of this year, shipments of Wi-Fi equipment nearly doubled to 4.8 million, according to In-Stat/MDR. Sales at the leading maker of home Wi-Fi equipment, Linksys Group Inc., jumped to one million units in the first half of this year from one million during all of 2001.

 In the past two years, self-proclaimed "wireless guerrillas" have started a movement to bring free Internet access to the masses, building shoestring Wi-Fi networks that allow people to get access to the Web at no charge. They are a motley band of neighbors and activists whose wireless "footprints" cover a portion of a city block or small city parks in places such as New York and San Francisco.

In midtown Manhattan, Bryant Park is wired for Wi-Fi, and the group that operates the free hotspot estimates it generally gets 60 to 70 users a day. Further downtown, the Chelsea Market, an indoor food and cafe market, is also a free Wi-Fi hotspot -- across the street from a Starbucks that requires users to pay. In Portland, Ore., Pioneer Courthouse Square, the city's main downtown plaza, is also wired for free use. And on the island of Hawaii, a former high-school physics teacher has strung together a 300-square-mile free Wi-Fi network using people's homes, schools and small businesses as hotspots.

The potential of such ad hoc wireless networks isn't lost on U.S. national cellular carriers, who have spent roughly $6 billion upgrading their networks to beam data at high speeds through the ether. And they're already out billions of dollars more for spectrum licenses they acquired years ago.

 Wi-Fi, on the other hand, uses spectrum that was set aside by the Federal Communications Commission for oddball devices that happen to use radio frequencies such as some cordless phones and older microwave ovens and hospital equipment. So long as products that use the spectrum live up to some technical requirements, anything goes. Moreover Wi-Fi, piggybacking on high-speed Internet connections, is far faster than cellular carriers' latest-generation offerings.

Wi-Fi technology isn't perfect. Interference from cordless phones, ham radios and microwave ovens is a problem because Wi-Fi uses unlicensed airwaves. If someone creates interference in a traditional cellular network, "I can have them removed," says Jim Straight, the vice president for wireless data and Internet services at Verizon Wireless, a joint venture of Vodafone Group PLC and Verizon. But "if you go into unlicensed spectrum, it's a free-for-all," he says.

What's more, cellular works better than Wi-Fi when the user is walking down the street or riding in a car. Wi-Fi is also subject to obstruction by everything from chimneys to elevator shafts.

Faster and Cheaper

Even so, John Stanton wasn't going to wait for his high-speed wireless business to be eaten away before it even got started. The chairman of wireless carrier T-Mobile USA Inc., formerly called VoiceStream Wireless, who once viewed Wi-Fi "both as a threat and an opportunity," now prefers the latter option. At an investment conference in Sun Valley, Idaho, in 2001, Michael Dell, the chairman and CEO of Dell Computer, shared some surprising information: All of the company's newly manufactured laptops would soon be enabled for Wi-Fi. Mr. Dell's view, Mr. Stanton recalled, was that the speeds offered by wireless carriers simply weren't fast enough for their customers, a common complaint about the cellphone data networks. Wi-Fi turns out to be faster for consumers, and cheaper for carriers to install.

 "The conversation with Michael kind of planted a seed for me that [Wi-Fi] was more real than I had realized," he said.

In January, T-Mobile, a unit of Deutsche Telekom AG, bought MobileStar Network Corp., a bankrupt Wi-Fi provider that had deployed wireless hotspots in more than 500 Starbucks around the country. Mr. Stanton insists that MobileStar's problems don't bode poorly for his own Wi-Fi efforts: MobileStar ran out of money and didn't have an existing infrastructure to support its Wi-Fi network, he says. T-Mobile has expanded the hotspots to 2,000 locations and recently announced plans to go into 100 airline lounges and 400 Borders bookstores. Mr. Stanton says the company has committed to spending more than $100 million for this nationwide build-out of Wi-Fi hotspots, which he considers money well spent. With T-Mobile's regular networks, "I can't get a couple major markets built for $100 million," he says with a chuckle.

T-Mobile users can pay for the Wi-Fi service in a variety of ways. The company offers monthly subscriptions with prices starting at $29.99 -- as well as prepaid and pay-as-you-go plans starting at $2.99 for 15 minutes of access.

Plenty of other wireless carriers are racing to get a piece of the action. Nextel Communications Inc. is working with Motorola Inc. to develop a Wi-Fi handset, and also backs RadioFrame Networks Inc., a company that deploys dual Wi-Fi/cellular networks in corporations.

AT&T Wireless Services Inc. has wired Denver International Airport for Wi-Fi access, and says it is interested in marketing a PC card by Nokia Corp. that would use Wi-Fi networks when available or switch to AT&T Wireless's cellular network when out of range of a Wi-Fi hotspot. Says AT&T Wireless's chairman and chief executive, John Zeglis: "We're going to be real friendly to Wi-Fi."

 'A Commodity Business'

Cellphone companies insist that Wi-Fi presents no threat to their current plans and contend that there's a place for both systems. But some experts are skeptical that Wi-Fi will ever become profitable. "I'm not convinced [Wi-Fi] is a great business," says William G. Crawford, a former telecom analyst at U.S. Bancorp Piper Jaffray. "Water is a wonderful thing, but selling water may not be. It's a commodity business."

Anthony Townsend, co-founder of free Wi-Fi network provider NYCwireless who is trying to spin off a for-profit company, says the telecommunications companies are taking the wrong approach by trying to charge for wireless Internet access at airports and coffee shops. Mr. Townsend's start-up, Cloud Networks, is hoping to make a business out of designing, building and maintaining Wi-Fi networks for owners of apartment and office buildings. "Their model is to put a quarter in your chair to get a light turned on over your chair," he says. "Our model is that the cost of providing light should be part of the cost of your coffee."

Write to Jesse Drucker at jesse.drucker@wsj.com and Julia Angwin at julia.angwin@wsj.com

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