INDUSTRY: Wireless Internet: Overview and Outlook P1-3
Part 1 of 3
CIBC World Markets
September 13, 2000
Wireless Communications
Thomas A. Sepenzis (415) 399-5757 Wireless Internet: Overview and
Dale R. Pfau (415) 399-5731 Outlook
Earl Lum (415) 399-5747
UNSTRUNG
The Birth of the Wireless Internet
Executive Summary
The emergence of the Wireless Internet heralds the joining of two of the
fastest growing technologies in history, wireless telecommunications and the
Internet. Worldwide, ubiquitous access to the Internet from anywhere at any
time will bring entire new forms of communication, commerce and opportunities
for investment. The pace of change in the wireless world has been nothing
short of amazing in the past twenty-five years, with no consistency other than
the continual ability for industry pundits to underestimate the magnitude of
the opportunity. Analog networks have been replaced almost entirely by new
digital technologies. The new digital technologies are already pass , and are
about to be replaced once again by higher capacity, higher-speed networks.
There is no shortage of hype and prognostication in the marketplace right now
regarding wireless and the emergence of the Wireless Internet. With the
massive build-outs of 2 and 3rd generation networks, promises of full motion
video, voice-to-text and text-to-voice technologies, color screens, etc., the
next decade should prove to be extremely exciting. Untethered Internet users
will become accustomed to receiving e-mail, stock alerts, driving directions
and other timely information from the web. Business users will enjoy the
ability to access corporate Intranets from a personal digital assistant or
laptop connected to the mobile network.
This report is the beginning of a dialog regarding the emergence of this
entirely new industry. There are a number of areas for investment within the
Wireless Internet universe including equipment, software and services each of
which provide large opportunities. As the industry evolves, so does a new set
of terminology, and we hope this will help guide investors through the current
landscape. While this report attempts to provide a detailed framework for
investing, we refer readers to CIBC World Markets coverage of communications
equipment, software and services for a more complete overview of the
communications industry.
Investment Thesis
Wireless subscribers are projected to reach 1 billion by 2002, approximately
25 years after the first cellular networks were deployed. It took wireline
networks 100 years to accomplish the same feat. The law of accelerating
returns is quickening the pace of technology breakthrough and deployment, and
we expect Wireless Internet services to be no exception.
Improvements in network speed and ubiquity will drive wireless usage. New
process technologies will enable multi-mode, multi-band handsets that can
operate on multiple networks, transparent to the user, decreasing the problems
associated with poor coverage. Color screens will emerge and help drive
adoption of Wireless Internet services as has clearly been seen in Japan, with
over 10 million users in less than one year.
New technologies will create a "battle for the consumer" with carriers,
portals and enterprises trying to acquire the right to bill the consumer
directly. Carriers will try to keep from becoming a "dumb pipe" by controlling
the look and feel of the wireless access device. New carriers, portals,
application service providers and enterprises will use the new technologies to
wrest control of the handset from the carriers.
The enterprise market is heating up with application service providers (ASPs)
competing with in-house server software to provide relevant, personalized
content to the corporate customer. Corporations are demanding ways to extend
Internet/Intranet capabilities to mobile employees and customers.
New Forms of Communication Will Emerge, Changing the Way We Interact - Push
technologies will enable new customer interaction with wireless messaging,
instant coupons, payment capabilities, etc. Retailers can reach out to
customers well equipped with wireless e-wallets.
Areas for Investment
There is quite a bit of confusion on the Street regarding the Wireless
Internet and where the major areas for investment lie. The pieces of the
wireless pie necessary for the Wireless Internet, and therefore, wireless
e-commerce are coming together. We believe that five areas will help to frame
the discussion for our investors, with the long awaited goal of a ubiquitous
everywhere Internet within sight. As we get closer to achieving this goal,
look to those companies that can help put all the pieces together.
Part 2 of 3
low-speed networks currently that will give way over the next several years to
higher-speed packet based networks. 2 and 3rd generation technologies will
be deployed globally, providing ubiquitous Internet access across a
multiplicity of devices. All infrastructure vendors, from small capitalization
to large capitalization will benefit from these network upgrades. While we
will not be discussing these companies in this report, we wish to point
investors to CIBC World Markets other analysts that cover this area in detail,
Dale Pfau and Earl Lum.
Devices - One area that we will be discussing in greater detail in this report
involves Wireless Internet access devices. These include personal digital
assistants (PDAs), cellular phones, smartphones, wireless modems and other
devices that will be used to "enter" the Wireless Web. We believe that the
number of subscribers using data capable "smartphones" will increase from just
under 4 million in 1998 to nearly 890 million in 2005. We also believe that
the number of PDA users subscribing to wireless services will increase from
only 16,000 in 1998 to nearly 37 million by 2005. Roughly translated, these
are two extremely large markets for service providers as seen in Exhibits 2
and 3 below.
Exhibit 2 - Total Addressable Market - Smartphone Services ($ Millions)
Source: CIBC World Markets
The numbers above do not include the available market for voice-centric phone,
but merely represent the opportunity for data-centric Wireless Internet
smartphones. One of the issues that we will be describing in more detail is
the ongoing battle between the cellular handset manufacturers and the PDA
manufacturers. As wireless becomes more pervasive, many are predicting the
merging of the two categories into one, or the cannibalization of one by the
other. We believe that both types of devices are likely to grow as prices
decline, and as the market historically shows that demand drives diversity
more often than a "one size fits all" approach.
Exhibit 3 - Total Addressable Market PDA Device Services (In Millions)
Source: CIBC World Markets
Service Providers - Wireless carriers will be prime beneficiaries of the
Wireless Internet as wireless data may prove to stem the declining average
revenue per user trend that has resulted from stiff competition and flat-rate
pricing. New revenue streams will enter the carrier market with the addition
of affiliate fees and advertising based annuities. New business models are
emerging to take advantage of the emerging medium, with wireless Internet
service providers, wireless portals and application service providers reaching
out for entirely new market segments. We believe that services derived from
the Wireless Internet will show tremendous growth over the next several years,
sparked by higher-speed networks, greater functionality in wireless devices
and an explosive increase in applications. Our estimates for Wireless Internet
access services presuppose that approximately 22% of smartphone users and 50%
of PDA users will use the services.
Exhibit 4 - Total Addressable Market - Wireless Internet Access Services
(In Millions)
Source: CIBC World Markets
Software - The market for software is vast, including everything from billing
solutions to enterprise presentation software, from Wireless Access Protocol
(WAP) server software to Public Key Infrastructure (PKI) software for
security. The acronyms flying around the Wireless Internet market are enough
to drive a saint to drink, so we have gone into a bit of detail in the hopes
of clearing the air a bit. Sizing the market for software gets a bit tricky
given its expansiveness, and we will narrow in a few of the more important
sectors in this report. We believe the most important areas to focus on can be
found in Exhibit 5 below.
Exhibit 5 - Wireless Internet Software Focus
Source: CIBC World Markets
Mobile E-Commerce - Mobile E-Commerce, or Me-Commerce, should prove to be one
of the fastest growing and most exciting marketplaces to ever develop. A true,
ubiquitous Wireless Web will reinvent communications. Teenagers in Japan and
Europe have already begun to develop new forms of communication with Short
Messaging Service (SMS) and e-mail through the NTT DoCoMo iMode service. The
goal of enterprises, wireless portals, carriers and application service
providers is to deliver new applications and services that will
transubstantiate wireless users from communicators to purchasers of goods and
services. Wireless coupons will be sent using location services to entice
customers to enter stores. Stock limits will alert investors that a price has
been reached and offer the user the chance to buy or sell securities. Amazon
has already enabled wireless users to purchase books and items from anywhere
with a few "clicks" on a cellular telephone. As we can only begin to describe
the possibilities and directions the market may take in this report, suffice
it to say that we believe Me-Commerce is prime to cross the "chasm" into the
"tornado", and should become, through the hands of over one billion wireless
users, one of the greatest legal sources of revenue ever created.
Exhibit 6 - Me-Commerce Total Addressable Market Estimates (In Millions)
Source: CIBC World Markets
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more to follow...Part 2 of 3Part 3 of 3
With these figures and ideas in mind, we can now turn to the ingredients of
the Wireless Internet in more detail, focusing on the equipment in the
beginning and moving toward the services in the end. We look forward to
exploring the emerging market as it develops, and hope this serves as a useful
primer to help investors join the discussion.
Special thanks to
This Executive Summary highlights what we will be discussing in our
forthcoming report, UNSTRUNG - The Birth of the Wireless Internet For more
information, please contact your CIBC representative. |
