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The Wireless World

  • August 27, 2002
  • By Prentice Hall
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As far as the economy is concerned, we've been here before. In 2000, some farsighted stock market analysts compared the 1920s to the 2000s, implying that the economic boom of the 2000s, like that of the 1920s, would result in a huge crash and worldwide depression. So far, the bears have been accurate. The actual similarities are scarier than that, because the two booms also share the same driving technology—wireless.

In the 1920s, wireless was everywhere. Radio was a new technology that, like the wireless Internet today, people believed would change the world. Though investors lost a lot of money, the people developing the technology were ultimately proven right. Companies fell, but radio did change the world, and that change hasn't finished yet.

Moore's Law (named after Intel cofounder Gordon Moore) states that the number of circuits packed into a given area of a silicon chip doubles approximately every 18 months, leading to a similar improvement in processing power. Today's supercomputer is tomorrow's wristwatch. In the late 1990s, the rate of advance actually increased: Mobile computing is accelerating at a rate faster than Moore's Law.

The Wireless Economy

The wireless industry got caught up in the Internet bubble of 1998–2000 and in the subsequent crash. Although this means that many people and companies may have made bad investments, it doesn't mean that wireless (or the Internet) has no future. Some companies will go bankrupt, but the infrastructure they build will live on. Unlike Enron and most of the dot-coms, wireless network operators are creating something that is permanent and useful. They may fall, but their legacy can benefit everybody.

Companies such as Iridium and Metricom have already demonstrated this: They were at opposite ends of the mobile networking scale—Iridium built a global satellite network for voice traffic, whereas Metricom built a high data rate system that served just a few cities—but their rise and fall followed similar paths. Both won plaudits for their technology but few customers. Both went bankrupt months after they began service, leaving behind networks so useful that the military or police kept them going even after they'd officially been shut down. Both were eventually bought by new companies for about a hundredth of what they cost to build. With the networks already in place, the new companies hoped to operate them profitably—bad news for the stockholders in the original companies but good news for everybody else.

Many mobile phone operators, particularly in Europe, have spent vast sums of money on licenses to operate 3G networks. Paying so much was probably a mistake for the companies involved, but again, it is good news for everybody else. European governments are using the revenues from these to cut taxes and increase spending on services that benefit their entire population. Perversely, the large amount already spent may actually encourage the companies to spend even more on actually constructing networks. The licenses are nonrefundable and are automatically cancelled if the operators fail to meet an aggressive deadline for network buildout. The only way that the companies can hope to recoup their costs is to build a network and operate it profitably. The odds of doing this may be slim, but like gamblers who refuse to take a loss, they have no choice but to double up and take an even larger gamble.

Some economists argue that companies who follow this path are committing the Concorde fallacy—throwing good money after bad. It's named after the plane developed by the British and French governments in the 1970s, which took far longer to develop than originally planned and cost millions of pounds more than estimated. At more than one point during the development cycle, the governments realized that the costs of finishing the project would be more than the potential revenues it could generate. In this case, the rational economic choice was to cancel the Concorde and write off the millions already spent. Economists argue that the same applies to 3G: The costs of actually building a network are more than some estimates of the potential revenues, so the companies should just abandon their licenses and try to invest their money in other, more profitable services.

Concorde wasn't cancelled, for reasons of national pride and to avoid political embarrassment. Similarly, 3G won't be cancelled, because many wireless operators have said that high-speed mobile data is their whole raison d'être. Individual shareholders are free to take a loss and try to find a better investment—indeed, many have done so, hence the fall in the stock prices of companies holding 3G licenses—but companies often are not. In the case of Concorde, the losers were the British and French taxpayers, while the winners were a few transatlantic business travelers and frequent-flying celebrities. In the case of 3G, the losers are likely to be investors in wireless operators and the winners everyone.

Japan's experience during the 1990s shows that wireless technology can make great advances, even during an economic depression. It can even be profitable, as both NTT DoCoMo and many smaller companies have found. Similarly, the U.S. computer networking industry suffered its worst ever year in 2001, thanks to the bursting dot-com bubble. One of the few bright spots was the wireless LAN market, which continued to grow even as the economy shrank.

Visions of the Future

Companies pushing wireless technology often make extreme predictions, such as one prediction that human brains will be wirelessly networked to each other by the year 2030. (This came from British Telecom, back when it still ran a mobile network.) Some of this hype is justified, but much of it isn't. In the late 1990s, the industry was burned by underestimating the potential of wireless technology: The first phones to provide even limited Internet access were snapped up so fast when first launched in mid-1999 that many people had to wait a year before they could get one. Analysts repeatedly had to raise their predictions of the mobile phone's popularity in Europe as it became ubiquitous, first in Finland and then in Norway, Sweden, and Britain.

Two years later, mobile technologies were failing to live up to their hype. They arrived late, they didn't perform as expected, and they weren't as popular as most of the cell phone companies had hoped. Their predictions for market growth usually relied on cell phone penetration reaching more than 100%—often 400% or 500%, which would mean people buying and operating four or five cell phones each. The companies envisaged customers maintaining one for business, one for the home, and several for various different social activities.

This hasn't happened: Though a large proportion of cell phone users have bought or owned more than one during their lives, this is only because their previous model has been broken, or stolen, or has become obsolete. People do not buy several different cell phones and keep them all active at once, because a mobile phone subscription usually costs at least $20 per month (and often a lot more). Some critics remarked that this was blatantly obvious: The market for almost anything will stop growing once everybody already has one.

Although some new wireless technologies seem disappointing, these are just the first versions. WAP has been a lot less popular than mobile operators hoped, but it has actually grown faster than the wired Web did in its early years. Some of this growth could be due to hype, but other types of wireless Internet service are popular. As of January 2002, the world's largest Internet Service Provider (ISP) is NTT DoCoMo. It has over 30 million users, more than AOL or any other ISP that offers wireline access. All of these are in one country (Japan), all access the Web via a cell phone, and the majority actually pay for content.

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