Barrons lead story appears to try to cool the Palm offering.
What a poor research job. It talks all about 3G and high speed access and mentions all the key handset makers and service providers but narry a mention of the key to the future QCOM. To the uninitiated, they will likely use this as a reason to sell QCOM. To those in the know this appears to be a ringing endorsement of QCOMs future dominance.
From new issue of Barrons.
interactive.wsj.com
February 28, 200 cover story:
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."
And while Palm was unable to comment because of the
quiet period surrounding its IPO, its prospectus says: "The
emergence of technologies enabling wireless access to the
Internet ... [is] transforming the handheld device industry."
But perhaps the realistic player in the bunch is Psion. For
now, CEO David Levin says his plan is to establish a
beachhead in the U.S., and become a name to be reckoned
with in this business. Beyond that, he figures that Psion
will move from hardware to service. The data and
software now stored in handhelds, he says, will not be
stored in the wireless phones of the future but rather on the
Internet and accessed by users. "Service," he says, "is the
future."
He is not alone. Says Barry Schuler, president of America
Online's interactive services: "We think that wireless will
be quite simply huge in the U.S. What all this adds up to is
the beginnings of another chapter of this whole business."
Put another way, a huge battle is brewing. And the winners
are much more likely to be the wireless phone makers and
service providers than the folks who make the gadgets that
are so prevalent today. |
