Hey you 3Com people, here is another relevant Barrons article :
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."
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.
Copyright ¸ 2000 Dow Jones & Company, Inc. All Rights Reserved. |
