NEW YORK (Business 2.0) -
When a new technology becomes a commodity, margins fall and profits drop, driving all but the biggest producers out of business.
Take Wi-Fi networking. Many wireless industry-watchers believe that the combination of open standards and open platforms on which Wi-Fi technologies are built has lowered the barriers to entry.
As a result, only the biggest Wi-Fi chipmakers like Broadcom (Research) and Intel (Research) and the top Wi-Fi device makers such as D-Link and Linksys have the scale to stay afloat.
Five years ago, when Wi-Fi technology was new, a router sold for $250 and tons of companies were itching to get into the market. Today routers sell for as little as $50 and margins have dropped to an all-time low.
Conventional wisdom dictates that few opportunities remain in a marketplace once a technology has been commodified. Take a closer look at what's going on with the latest wireless gear, however, and a very different and potentially lucrative picture begins to emerge.
Looking at the opportunities
Wi-Fi is making its way into a wide range of devices, including stereo systems, laptops, cell phones, and PDAs. Cities across the country, from Philadelphia to San Francisco, have built networks using the latest 802.11 gear. The technology can be found in more than half of American households.
Now the ubiquitous networking platform is attracting a new breed of startup. Rather than focusing on the nuts and bolts of wireless networking, these companies are building high-margin peripherals and software on top of the infrastructure that's already in place.
Take Olive, a San Francisco-based startup launched earlier this year. Olive makes a stereo component that works like a jukebox, connects to the Internet using Wi-Fi, and can communicate with other Wi-Fi devices in the home. Called Symphony, Olive's hybrid receiver sells for $899, which enables the company to make a handsome profit.
Along the same lines, Silicon Valley-based Video54 has developed an antenna design and software to boost the range of existing wireless routers. Video54 doesn't sell the antennas itself; it licenses the technology to established equipment vendors such as NetGear.
Another example is Sereniti, a New Jersey-based startup that uses its software to manage home networks, especially those that use Wi-Fi. If you're looking to build a product on top of the burgeoning Wi-Fi (or any) platform, don't focus on hardware. The real opportunity is in software and services.
Sign up to receive the Tech Investor column by e-mail.
Plus, see more tech commentary and get the latest tech news.