FEBRUARY 28, 2000 Palmed Off
Handheld gadgets are hot today, but the future belongs to
wireless phones
By Jay Palmer
Sidebar: Gadgets of the Moment
The photo splashed across the front page of USA Today caught Steve
Case and Gerald Levin at a relaxed moment, sitting down for a break after
announcing the $350 billion merger of Time Warner and America Online in
early January. The candid shot showed the two chief executives huddled
together on side-by-side chairs, peering down at Levin's tiny pager-sized
handheld device, apparently receiving live up-to-the-minute e-mail reports of
how their two companies' stock prices were faring in the market on the news.
These two are not unique. Handheld personal digital assistants, or PDAs, like
the one carried by Levin, are becoming exceedingly popular nowadays, with
sales shooting higher for Palm Organizers, Handspring Visors,
Hewlett-Packard Jornadas and imported models like the Blackberry from
Canada's Research In Motion and the Revo from Britain's Psion. The big
buyers are, for the most part, white-collar executive types and their
employers. In fact, mingle nowadays with Wall Street investment bankers,
Washington power brokers or senior executives at just about any large U.S.
firm and you'll see these little gizmos everywhere, clipped to belts, slotted into
briefcases and stuffed in pockets.
Investors, too, are jumping on the PDA bandwagon in full force. Over the
past year, Research In Motion's shares have traded up from around 10 to
about 135 on the success of the Blackberry, while Psion's U.S. launch of the
instantly popular Revo at the Las Vegas Comdex last fall has helped that
company's shares soar from 15 to 85 since then. Over the same period,
shares of 3Com, maker of the Palm organizer series, the world's top-selling
PDAs, have shot up from 20 to 83, due in large part to Palm's reigning
popularity -- and the keenly awaited initial public offering this week of
3Com's Palm division.
What all this market excitement overlooks is that
the glory days for the Palm, and for all PDAs,
will soon be over. This may sound heretical,
given that worldwide sales of PDAs grew 50%
last year, to an estimated 5.7 million units, and
forecasts call for 30%-50% annual growth over
the next two or three years. But even as
handhelds grow faster and smarter -- nearly all
will soon offer e-mail and Internet access -- a
mighty competitor lurks that will likely relegate
them to technology's scrap heap by 2005.
The enemy is the cellular phone. No, not the cell
phone you use today, but the phone of the
not-too-distant future. Japan's top cellular
service provider, DoCoMo, last year launched
the world's first cellular network based on third-generation, or G3, phones
capable of accessing the 'Net -- the first significant global step toward a Web
without wires. Demand is high, as users access sites offering everything from
Cosmo-style quizzes and trading posts for teenager collectibles to airline
ticket reservations, banking transfers and, of course, e-mail.
Variations of these new smart phones will start becoming broadly available in
Europe in late 2001, and by 2003 they should arrive in the U.S. With data
transmission speeds equal to today's high-speed cable modems, G3 cell
phones represent a major evolutionary leap over existing mobile technology.
Moreover, in addition to making phone calls, they will also do everything that
handhelds do today -- and much more.
"Every handheld sold in history equals no more than one good week's worth
of cellular phone sales," says David Levin, chief executive of Britain's Psion,
one of the companies now riding the crest of the handheld bonanza. "As
mobile phones continue to expand, the category we now call handhelds will
disappear completely."
For now, of course, handheld devices like the Palm are remarkably useful
and, for the most part, remarkably inexpensive. Indeed, anyone on the fence
about investing in a new Palm or Blackberry or Handspring should not
hesitate to do so. In Gadgets of the Moment, we run through the pros and
cons of each. But investing in the stocks of the handheld-device makers is
another issue altogether.
Consider for a moment the Palm IPO, which is due this week. A recent story
in the New York Times slobbered all over the offering, cooing, "The Palm
deal has almost everything an investor could want in a new issue." Indeed, this
offering is said to be oversubscribed by a factor of four and will certainly pop
when it comes out of the chute.
But Palm faces serious problems, not the least of which is that the visionaries
who created the Palm Pilot in the first place, Jeff Hawkins and Donna
Dubinsky, left the company last year to start rival Handspring.
Then there is the Palm operating system, which is rapidly becoming outdated.
The problem is that Palm runs on a 16-bit operating system in a world that is
rapidly migrating to 32-bit systems. The difference between the two in terms
of speed and efficiency is enormous, as anyone who's upgraded his children's
16-bit Nintendo game player to a 32-bit Sony Playstation can testify.
Competitor Psion, on the other hand, runs on the 32-bit EPOC operating
system.
Why not simply rewrite the software? In a word: cost. By some estimates, the
work involved in upgrading the Palm operating system to run on a 32-bit
processor would take 100 man years.
Granted, Palm has formed an alliance with cellular leader Nokia. But there is
less here than meets the eye. According to Olli-Pekka Kallasuuo, Nokia's
chief financial officer, what Nokia is licensing from Palm is not the operating
system but the stylus-based screen interface and handwriting recognition
software. For an operating system, Nokia is more likely to turn to Psion's
EPOC. Because of their company's impending offering, Palm officials were
unable to comment on these issues. (For more on the Palm IPO, see
Offerings in the Offing.)
As recently as a decade ago, cellular phones were considered an executive
plaything. Today they are an inexorable force, with worldwide sales last year
rising about 65% to 275 million units -- one-third in the U.S. Sales are
projected to continue climbing at a fast clip both here and abroad as world
cellular penetration rises further and existing users upgrade to better phones.
By 2003, Nokia projects that one billion cell phones will be in use around the
world, up from 500 million today.
In time, this combination of wider ownership and smarter phones will
inevitably revolutionize the way we store data, communicate and shop.
To some degree, you can see the future today in Japan and Finland. In Japan,
DoCoMo says that the rising number of mobile subscribers will top that of
falling fixed-line phone subscribers for the first time ever next month. On the
other side of the world, Finland has become a virtual laboratory for mobile
linkage. Roughly 68% of the population carry cell phones, more than almost
anywhere else in the world, while, among Finns aged 14-to-25, the
percentage with mobiles is as near 100% as can be measured.
Wander into the Cafe Engel in downtown Helsinki and you'll find the place
crowded with students from the nearby university downing espressos and
debating the ills of the world. At first glance, it all seems quite normal. But, as
an American, you'll then note something odd. Hardly is there a moment when
you can't hear a cell phone ringing, and see five or six people chatting away
on their mobiles. Some will even be hunched over their phone screens,
perhaps using the device to send short messages to friends, tap into their bank
accounts, pay bills, hunt for apartments, check out movie listings or just order
chocolates and flowers to be delivered as a gift. By the best estimates, some
250 such services are available to Finnish cell phone users and more are being
added daily.
And the Finnish phones, almost exclusively from Nokia, Finland's largest
company, are still fairly rudimentary compared to what is to come. Known as
G2 1/2 phones, because they bridge the generation gap between existing
digital G2 phones and the new smart G3 phones, they offer the same
synchronization features as handhelds, storing names and appointments
downloaded from a PC and displaying the information on screens far larger
than those of current U.S. phones. They also offer Internet access (and thus
the ability to send and receive e-mail) on a par with Palm's top-of-the-line
Palm VII. All in one tidy package.
Indeed,
'Net-enabled cell
phones won't just
be running circles
around handheld
devices. By
2003, Nokia
projects that they
will outnumber
'Net-enabled
PCs. Dataquest,
the independent
research firm,
goes further, suggesting that, by that same year, 40% of European
e-commerce will be done over mobile devices, with that percentage rising
sharply from there on out.
That's good news for phone makers like Nokia, Motorola, Ericsson and
Samsung and bad news for the likes of Palm, Research In Motion and Psion.
Though G3 phones have debuted in Japan, the "smart" phones that will hit
Europe and the U.S. over the next few years are still in development. And the
important thing to understand about these phones of the not-too-distant future
is that they won't necessarily look like the cell phones of today. Nokia, for
example, figures that very different models will play to different markets.
Some will be large, with color screens for 'Net access, while others will be
small, just for phone calls and e-mail. Some will have built in keyboards,
others will use a Palm-like stylus or even voice activation. Still others may
incorporate tiny cameras to allow instant video calls. There will be no such
thing as a typical cell phone.
Nokia is not alone. Motorola and Ericsson all plan to make a range of G3
phones.
Part of what will make these smart phones such powerful tools -- and such a
powerful competitor to PDAs -- is the fact that virtually all G3 phones will be
built around three open standards. The most important is wireless application
protocol, or WAP, programming language adopted by more than 240
companies worldwide that filters the graphic-rich Web down through a small
screen and allows mobile phones to tap into the Internet.
The second standard is Bluetooth, named after a 9th century Viking chief who
united warring tribes. Bluetooth allows totally different kinds of devices --
from a PC or handheld to a car computer, web-enabled watch or cellular
phone -- to talk to each other and exchange information by way of special
radio signals. To date, more than 1,000 major companies have signed up to
participate.
The third standard is the EPOC operating system which has been adopted,
through an alliance known as Symbian, by just about all the world's major cell
phone makers as the common operating system of that industry.
In practical terms, those in the business can predict how some of the
technology will work in action. Your smart cell phone will know your habits
and shopping preferences, either because you have told it or it has deduced it
from your actions. In any event, when you wander through the mall, Bluetooth
transmissions will alert you to the fact that the bookstore around the corner
has your favorite author's new offering or that the department store down the
row has a special on clothing for people your size.
"We're going to have all sorts of neat things," says Janiece Webb, senior vice
president of Motorola's networks group. "Over the next few years, expect
your phone to become a remote control for your life. Four things are colliding
here -- communications, the Internet, entertainment and computing. The
market will be hot, but the race is only beginning."
Indeed, much more is expected in terms of phone-based e-commerce. By
2003, Nokia estimates that some 500 million people will be connected to the
Internet worldwide by wireless phones. And with those connections will come
billions of dollars worth of transactions.
With the value of U.S. e-commerce transactions forecast to explode from
$20 billion last year to as much as $185 billion in 2003, wireless will create a
gigantic new market. And you can bet that wireless service providers like
Sprint, Vodafone AirTouch and AT&T -- not to mention Internet service
providers like AOL and portals like Yahoo -- will all be fighting to get a piece
of it.
For U.S. cellular users who have gotten used to dropped calls as matter of
course, this may all sound like a pipe dream. Incompatible standards for
cellular equipment and the vast expanse of geography to be covered have
conspired to make our cellular service among the worst in the world. Wireless
penetration in Western Europe ranges from under 30% in Germany to nearly
50% in Italy -- and is significantly higher in Scandinavia. In the U.S., however,
it remains a relatively low 30%.
A second disadvantage for U.S. wireless operators comes from the fact that
cellular users are billed for air time when calls come into them. Not so in
Europe and Asia. As a result, U.S. users leave their phones off most of the
time, wiping out a huge potential source of calling traffic.
These things will change in time. The new G3 system will operate on one
basic standard around the world. Wireless service providers are working flat
out to build towers and upgrade their equipment. And most industry-watchers
expect that the Federal Communications Commission will soon change its
regulations so that the person making a call to a wireless phone will pay for
the connection. At that point, Americans are likely to start jumping on the
wireless bandwagon -- and by extension, off today's rollicking bandwagon for
handheld devices.
The stock market, however, seems to discount the growth of the handheld
market into the hereafter. Research In Motion, for example, at a recent 135,
trades at 840 times 2000 earnings. Psion, at 85, trades at 400 times forward
earnings.
Compared with that, the highflying cellular phone makers
look relatively cheap. Nokia, at a recent 206, trades at 71
times 2000 earnings. Ericsson, at 93, trades at 80 times
forward earnings. Motorola, at 164, trades at 52 times
earnings. Look for other big players, like Philips and Sony, to
muscle their way into this market as well. Philips, for
example, has grabbed a 6% share of the global market for
wireless phones in the last three years alone and is
aggressively moving to capture more ("The End of
Disappointment," February 21).
The handheld makers, for their part, are not giving up. "It's a
very big battlefield and a lot of land grabbing is going on,"
says Jeff Hawkins, president at Handspring and creator of the
Palm Organizer. "It's my personal opinion that the collision
between cell phones and handhelds will not be head-on. I
think cell phone users want the smallest, skinniest unit while
PDA users want functionality."
Adds Jim Balsillie, the co-chief executive and founder of Research In Motion:
"The Blackberry will evolve over time into a wireless wallet. Smart phones are
a competitor but there are fundamental flaws in their approach." |
