Subj: "Making Sense of the Wireless Internet" by Bill Gurley
Date: 8/14/00 6:44:09 PM Eastern Daylight Time
From: Above_the_Crowd@atc.unitymail.net (Above the Crowd)
ABOVE THE CROWD
By Bill Gurley
Making Sense of the Wireless Internet
"I'm just a soul who's intentions are good
Oh Lord, please don't let me be misunderstood"
--Eric Burden and the Animals
When the Internet burst on the business scene
five years ago, several companies were criticized
for "not getting it" and not moving their business
to the Web fast enough. Just as we are gaining a
better understanding of that dislocation, a new one
has emerged on the horizon asking many of the
same questions: the wireless Internet. Unfortunately,
in many ways the wireless Web is more complex and
confusing than its wired brother. This article will
attempt to simplify this world in two phases.
First, I will walk through an overview of the
current infrastructure from a global perspective.
Then I will discuss what I see as the five most
important issues that confront the business
executive when thinking about a wireless strategy.
Perhaps the most discussed issue with regards to
the wireless Internet is the fact that the United
States trails both Japan and Europe in terms of
innovation and progress. Many executives in the
United States, particularly those involved directly
with the wireless industry, will debate this issue,
but in the end the numbers speak for themselves.
Leading the world is NTT DoCoMo, with its i-mode
wireless data service in Japan. The Number of
i-mode subscribers is quickly approaching
10 million from a standing start in February 1999.
In addition, the features and functionality of
the company's phones far outweigh anything
available here in the states. Europe is
probably closer to the United States than to
Japan in terms of progress, but is still
somewhat ahead. The primary innovation in Europe
is SMS, which is a cross-carrier cellular phone
version of Instant Messenger. SMS users are expected
to top 50 million by year-end, and the number
of SMS messages per month exceeds 1 billion.
Why is Japan ahead of the United States and Europe?
The main reason is that they were the first to
implement a "packet switched" infrastructure
(as opposed to "circuit switched"). In the United
States and Europe, data transmission is
accomplished by connecting via a normal phone
call to a bank of modems that handle data
transmission. The differential is almost identical
to the difference between using a dial-up modem
vs. connecting directly to the Internet via a
corporate LAN. Packet-based networks are ideally
suited for bursty data and result in a better
"always-on" user experience and a lower cost.
Although Europe is still circuit switched, it
still has advantages over the United States.
First and foremost, the carriers in Europe have
been far more accepting of common industry
standards. All the carriers use the same
underlying GSM technology, which results in
much better interoperability and allows for
equipment innovations to be shared. This
standardization philosophy also enables inter-
carrier functionality such as SMS (we still
don't have interoperable instant messaging on
the wired Internet in the United States).
The other primary European advantage is cell
phone penetration, which is well above 50 percent
in some countries.
Another interesting difference pertains to email.
In Europe and Japan, many people obtain their
first personal email addresses through their
cellular phones. We all know that email was one
of the original killer apps of the Internet. Well,
that same phenomenon is driving the acceptance of
the wireless Internet overseas. The cell phone has
become the primary email device for most consumers.
If you read about wireless, you are likely to
encounter the letter "G" used to describe different
evolutions in wireless Internet technologies. This
can be much simpler than it sounds. 2G refers to
today's technology. With the exception of NTT in
Japan, this means dial-up connectivity with a
maximum throughput of about 9.6K. 2.5G, expected
to launch in 2001, represents the implementation
of packet-switched networks with a maximum throughput
of just over 100K. 3G, the current Holy Grail, will
of course be packet switched as well and will support
speeds up to 2MB. 3G should launch in Japan as
early as 2001, but don't expect broad rollout
elsewhere until about 2003.
When thinking about the wireless data
infrastructure, keep these two things in mind.
First, the move to packet switched is more
important than raw speed; therefore, 2.5G is
more important than 3G. Also, watch out for
the word "up-to"--the first 2.5G implementations
will be well below 100K. Second, for all
practical purposes, it looks as if Japan
will extend its lead, and the United States
will continue to follow. NTT DoCoMo will clearly
be the first to implement 3G and is well in front
in terms of understanding business models and
customer NPVs. The United States must overcome
interoperability issues and needs some help from
the government, which has been slow to clean up
spectrum issues that could hinder 3G rollout
locally.
Now, let's move on to the five key unresolved
issues that are most likely to affect those that
are implementing a wireless strategy.
To WAP or not to WAP?
Most wireless Internet users in Europe and the
United States access their wireless data through
the Wireless Application Protocol. WAP is a set
of standards that describes how a cell phone
accesses data over the Internet. WAP supporters
argue that a cell phone's latency, interface
challenges and low processing power require a
separate set of technologies than those used
on the Internet (HTTP and HTML for example).
The anti-WAP forces argue that these same three
things will go away, particularly once we move
to packet-switched networks (2.5G+). Supporting
this argument is the fact that i-mode, the only
packet-based network operating today, relies on
HTML, not WAP.
PC, cell phone, PDA?
Another interesting question is which device will
be the primary Internet access device for most
people. The PC seems like the natural choice,
primarily because of the large installed base, the
richness of the experience, and the relatively high
connectivity speeds. However, the installed base of
cell phones is about twice that of PCs, and some
argue that being "always with you" is a critical
advantage. The PDA has a richer user interface than
the phone, but the installed base numbers are much
lower. One interesting question is, Will the PDA
become a phone, or will the phone become a PDA?
Killer app?
Everyone likes to talk about the killer app, which
is usually defined as an application that drives
customer adoption. You will see a lot of articles
and press releases talking about corporate
applications, contact information or "m-commerce,"
but the applications driving adoption in Japan are
fundamentally consumer-focused. Games, daily
screensavers, daily rings and instant messaging
are the apps that are most popular. We should
ignore the market's current distaste for
business-to-consumer as we plan the future of the
wireless Internet. This is a social medium more
than anything else.
Is there a business model?
The best way to answer this question is to look at
i-mode. NTT has been successful in charging people
per-bit fees as well as subscriptions for extra
services. One key to this has been using the
billing relationship with the customer and using
this billing infrastructure as a one-click payment
alternative for content providers. In other words,
they piggyback on DoCoMo's bill. Of course, on the
broader Internet, competition has driven many
services to free or near-free, and the same could
happen here. Many start-ups will point to
advertising and e-commerce, but those streams
will likely be limited to those with "portal power."
Who has Portal Power?
Portal Power can be briefly defined as any
company that has a large number of users and
can use those relationships to extract rent
from others who want to reach those customers.
Everyone from cellular carriers, to hardware
manufactures, to portals such as America Online
and Yahoo, and new mobile portals are counting
on having this position. If the carriers can
overcome the mistakes of the ISPs on the
Internet, they should be successful here--
particularly if they use the billing relationship.
Otherwise, the current portals are likely winners.
Just remember this, in the words of the sci-fi thriller "Highlander": "There can
be only one."
It is surprising that even with the rise of the
Internet as a proxy, there are many unknown
questions with regard to the wireless Web. The
good news is that we get to watch NTT DoCoMo
in action and learn from its model-a unique
position for American companies.
J. William Gurley 2000. All rights reserved.
Above the Crowd is a monthly publication focusing
on the evolution and economics of high-technology
business and strategy. This column can also be found on
news.com
online and in Fortune magazine. The information
contained herein has been obtained from sources
believed to be reliable but is not necessarily
complete, and its accuracy cannot be guaranteed.
Any opinions expressed herein are subject to
change without notice. The author is a general
partner of Benchmark Capital, a venture capital
firm in Menlo Park, Calif. Benchmark Capital and
its affiliated companies and/or individuals may,
from time to time, have positions in the securities
discussed herein. ABOVE THE CROWD is a service
mark of J. William Gurley.
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