The Next Big Thing Forget Wi-Fi. The real wireless revolution is being driven by the cell phone--and is already creating rich opportunities for huge players and small startups alike.
By Michael V. Copeland, Om Malik, and Rafe Needleman

(Business 2.0) – In a home recording studio near San Francisco, Del The Funky Homosapien's chart-busting rap tune "Phoney Phranchise" comes pumping out of a silver Kyocera 3225 cell phone lying on a cramped desk. The little device is almost hidden by the computer gear, guitars, and mixing boards that surround it. Chris Dunn listens intently, then groans. "It just doesn't work," he says, snapping his gaze back to a laptop screen filled with audio mixing tracks. He fiddles with some of the digital sliders and plays the song again through the cell phone with the bass boosted an octave. Dunn sways to the groove, and a smile spreads across his face. "That totally works now," he says. ¶ With his sideburns and Cat in the Hat striped socks, Dunn, 31, looks like the rocker he is. He's in a band, but he also has a day job as audio production manager for Faith West Inc., converting songs, sounds, and phrases into ringtones that cell-phone users can download wirelessly over the Internet. "Phoney Phranchise" is one of some 950 ringtones offered by Faith West's Modtones service and its partner Verizon Wireless for about $1 apiece. In less than a year, the venture has attracted more than 1 million customers--making it just a bit player in a huge new global industry. In the roughly three years since downloadable ringtones became widely available, consumers have spent an astonishing $1.8 billion on them. That's one of the faster zero-to-$1.8 billion sprints in business history.

You say you want a revolution? The wireless revolution is here, right now. It's presenting untold new opportunities for fortune and glory. But forget the hype and hysteria over Wi-Fi and other small-scale schemes for building wireless local area networks. As Dunn and his ringtone cadre demonstrate, the great engine powering us into the new wireless age is, of all things, the good old cell phone.

Make no mistake, Wi-Fi is indeed a promising technology for wirelessly connecting to the Web, and it has a role to play in the revolution. But as Bob Metcalfe, the inventor of the Ethernet, observes, "There are 1 billion cell-phone users. That number means that the cellular people will have a lot more to say about what the wireless future looks like than anybody else."

Actually, Metcalfe is off a bit: There are 1.2 billion cell phones out there, one for every five people on the planet. By 2006 there will be 2 billion. Every year a third of all cell-phone users upgrade to newer models: phones with longer battery life, more processing power, and the latest features.

This relentless churn drives innovation--advanced cell phones now sport cameras and keyboards, play MP3s, browse the Web, stream videos, and handle e-mail. Equally important, as cell phones morph from voice-only devices into ever more complex and potent machines, they are creating whole new industries and vast entrepreneurial openings--Dunn's rocking ringtones being just one example. Each successive generation of devices makes possible new and more muscular applications, and spurs demand for more powerful chips and higher-capacity networks.

The cell-phone and data networks that now exist, imperfect though they are, have whetted the public's appetite for always-on anywhere connection to the Web. Who among us can't imagine a very near future when we'll get reports on dinner possibilities via video cell phones from spouses "embedded" at the grocery store? There's already a Nokia video cell phone for sale in the United States, and at least 20 more videophones are on the way. Consumer demand for new tech leveled off during the past three years, but one of the few signs of a rebound has appeared in the cell-phone market, where sales rose 18 percent in the first quarter, fueled by consumer appetite for new, fully loaded handhelds.

The network that's emerging as the axis of the wireless world will ultimately involve many technologies--existing cellular networks and new ones like the much-maligned but now-deploying third-generation (3G), Wi-Fi, ultrawideband, fixed wireless, and others yet to be invented. Which of them ultimately emerge as the biggest winners is almost beside the point right now. More important for people trying to make sense of the revolution and find their place in it is this: The wireless economy--the revenues generated by wireless services, gear, applications, and infrastructure--totaled roughly half a trillion dollars last year. That figure is expected to almost double by 2006.

This translates, quite simply, into an enormous opportunity--for the entrepreneur looking to start new businesses, for the middle manager trying to use wireless to hack at costs, for the microchip designer who can surmount some of the many technical hurdles on the road to ever-smoother perpetual connection. Companies from General Motors to UPS to Roto-Rooter are already adapting the new technologies in order to sell more and spend less.

What follows is a breakdown of where some of the new opportunities are, and what you can do now to seize them.

Instrument of Change Why cell phones are the real engine of the wireless revolution.

Cell-phone usage has surged relentlessly, and the number of subscribers to high-speed third-generation (3G) cellular services will double next year.

The market for Wi-Fi equipment, meanwhile, is growing briskly but remains small compared with cellular-device and related infrastructure sales.

2002 Wireless infrastructure revenues: $45 billion 2002 Wi-Fi equipment revenues: $1.6 billion

BUILDING THE WIRELESS BRAIN

OPPORTUNITY Designing the fastest, least power-hungry chips for every mobile device

MARKET SIZE $17.2 billion, 2002; $30.7 billion, 2006

INCUMBENTS Agere Systems, Infineon Technologies, Qualcomm, Texas Instruments

CHALLENGERS Intel, QuickSilver Technology, Tropian, XtremeSpectrum

INTEL, A CHALLENGER? IT'S A MEASURE of how thoroughly wireless has shaken up the old order that the world's biggest chipmaker is feverishly chasing the leaders. Roy Want is one of the guys running hardest.

Want, principal engineer at Intel Research in Santa Clara, Calif., is charged with figuring out ways to deploy Intel's XScale communications chips, released 18 months ago. They're less well known than the Centrino, a Wi-Fi chip that Intel is spending roughly $300 million to market. But the XScale, many inside Intel believe, could become the Pentium of the wireless world. XScale has already captured almost 40 percent of the PDA market, and Intel sees a real bonanza in cell phones. The more computerlike they become, the more the XScale can do for them. The chip's main advantage: Its speed and brawn make it easy to adapt complex apps written for the PC universe--such as RealNetworks's multimedia software (see "Sultan of Stream," page 70)--for phones.

Hitachi and Korean phonemaker Maxon are already using the XScale in advanced phones that run videogames, among other things. And as Want likes to demonstrate, the XScale can perform impressive technical magic.

On a recent day in his lab, Want fishes for a little acrylic box on a speckled table amid five laptops and a lava lamp. William Shatner peers down from a poster on the wall. The box, the size of a deck of cards, packs an XScale. Want presses a button on the side, and soon the opening scene from the campy sci-fi flick The Fifth Element wirelessly streams onto a nearby laptop screen.

Intel calls its pocket-size gizmo the "personal server," a wireless computer that stores and processes data. Want imagines the personal server acting as your cellular phone and providing access to your personal database of information whenever you need it. Intel is in discussions with partners to manufacture the device. Not that the chipmaker wants to go into the gadget business. But, in keeping with a long tradition of pushing devices to drive demand for its microprocessors, it's betting that the personal server will catch on--and will create new markets for the XScale.

For chipmakers like Agere Systems (Lucent's former chip business, based in Allentown, Pa.), wireless is the present and the future. The sector made up about 25 percent of Agere's $2.2 billion in 2002 sales. Its chips are used throughout the wireless food chain--from cell phones to Wi-Fi gear to network infrastructure. Robert LeFort, president of North American operations for German chipmaker Infineon, predicts that within three years, in part because of ever-faster but power-stingy chips, the cell phone will be reduced to a headset. The PDA will become as small and thin as a credit card. And the two will be linked via Bluetooth, a technology that wirelessly connects devices over short distances. Making chips that run that stuff, Lefort says, is a huge opportunity.

IN SEARCH OF THE PERFECT GIZMO

OPPORTUNITY Creating the dream gadget that combines mobility with ease of use for everything from computing to communication to entertainment.

MARKET SIZE $63.7 billion, 2002; $92 billion, 2006

INCUMBENTS Ericsson, Motorola, Nokia, Samsung, Siemens, Sony, Toshiba

CHALLENGERS Danger, IXI Mobile, Microsoft, Palm

Kyle Harris recently went to Ikea on a quick return-and-refund mission. Fortunately for the San Rafael, Calif., private chef and computer consultant, he was armed with a Sanyo 5300, one of a crop of new cell phones that take digital pictures. An Ikea store, for the uninitiated, is a sprawling maze of Swedish furniture, meatballs, and various home-related trappings that many a shopper finds nightmarish to navigate.

Harris returned his merchandise and decided to check out the kitchen section--and this is where his camera phone saved his wife, Anne, a trip to Swedish purgatory. "We're redoing our kitchen, so I just walked around taking pictures of equipment, cabinets, and countertops," Harris says. "I was e-mailing them to her, so she knew exactly the size, shape, and color. She didn't have to be there."

In 1983, when the first commercial cell phone came to market, you needed a briefcase to lug the thing around. Today's phones are objets d'art, smaller than a pack of cigarettes, offered in a rainbow of colors, and chock-full of features. The new Samsung i500, scheduled to hit stores this summer, is being hailed by some techno-geeks as the Einstein of smartphones: Powered by the Palm operating system, it enables superfast handling of e-mail and MP3 songs. You can even download and watch the trailer for, say, The Matrix Reloaded. At $599, analysts expect it to be a hot seller among cell-phone fanatics. It will compete with another new arrival, the just-released $649 Sony Ericsson P800 Worldphone, which has a PDA, a camera, and an MP3 player.

The established cell-phone makers dominate the device market, but as phones become ever more powerful, they catalyze myriad niche opportunities--for all comers, small and large. Danger, a startup in Palo Alto, has targeted teen techies with a gadget called the Hiptop that packs wireless e-mail, instant messaging, a camera, and a phone. IXI Mobile of Redwood City, Calif., is developing a slew of specialized devices, including recording pens, e-mail-enabled watches, and digital cameras, that connect to your cell phone and each other via Bluetooth. Japanese carrier KDDI plans to launch a wireless health-monitoring system later this year. The device wirelessly relays a constant stream of information from a patient--a diabetic, for instance--to a monitoring station, and sends alerts to a doctor at the first sign of trouble. The niches are all but limitless: Nokia is selling a device that is a combined cell phone and videogame player--essentially, a Game Boy with a dial tone.

Perhaps the most powerful wireless devices on the immediate horizon are those high-tech clipboards toted around by the legion in brown, United Parcel Service drivers. Long a pioneer in adopting technology, UPS is ramping up to deliver its next-generation clipboard, called the DIAD IV (see "UPS's Wireless Wonder," opposite). It has a touch-sensitive color screen that not only collects customer signatures but gives drivers directions to their next stop. The clipboard will house six separate communication systems, including GPS, cellular, and Wi-Fi. UPS, which is spending $120 million to build new wireless networks at its worldwide distribution centers, expects a 35 percent productivity gain from its latest wireless efforts.

What's next? Within a year or so, high-end devices will begin to combine the portability of phones with the power of laptop computers. They'll be able to handle word-processing, voice-recognition, and photo-editing software, and they'll come with ample storage and long-life batteries. And with the expected arrival of speed-burning 4G cellular networking technology by the end of the decade, these superphones will allow the streaming of DVD-quality video and connect to the Internet at speeds of 14 megabits per second--almost 20 times faster than today's DSL services.

UPS's Wireless Wonder Big Brown's drivers are already among the most unwired workers around. Here's a look at the DIAD IV, the next-generation UPS electronic clipboard.

1. A touch-sensitive COLOR SCREEN wirelessly transmits customer signatures and gives drivers directions to the next stop.

2. A CELLULAR MODEM transmits up-to-the-minute package information.

3. WI-FI RADIO is used primarily in the depot for jobs like downloading a roster of the day's packages and stops.

4. BLUETOOTH RADIO connects with newer UPS peripherals such as the "ring scanner" that loaders in the depot wear on their fingers.

5. An INFRARED PORT works with older peripherals like printers.

6. A GPS RECEIVER logs in exact locations of package pickups and deliveries and tracks drivers' whereabouts.

7. An ACOUSTIC MODEM with a microphone and a speaker allows a driver--if other systems fail--to use any pay phone to dial up the UPS network and hold the tablet to the phone so it can talk to the system.

THE BATTLE OVER BUILDING BLOCKS

OPPORTUNITY Becoming the Cisco of new networks by building wireless switches, routers, and base stations.

MARKET SIZE $44.9 billion, 2002; $70 billion, 2006

INCUMBENTS Ericsson, Lucent, Motorola, Nokia, Nortel

CHALLENGERS ArrayComm, Flarion Technologies, Starent Networks, WaterCove Networks

Last December, Marc Goldburg sat in a cafe in Sydney, Australia, picking at sushi and preparing to fire up his Dell laptop. Soon the screen blinked on and filled with the Google homepage. Goldburg, the chief technology officer of San Jose-based ArrayComm, let out an involuntary whoop: "Oh shit, it works!"

Goldburg had reason to be stoked. He was using a new cellular network built on gear--mainly base stations and modems--designed by ArrayComm CEO Marty Cooper (the guy who, as a Motorola engineer in the 1970s, invented the cell phone). That equipment allows users to hook up to the Web wirelessly at about 1 megabit per second--as fast as a DSL connection. Personal Broadband Australia, a startup carrier based in Sydney, will soon begin offering service based on ArrayComm's equipment to about 1 million people in Australia.

Goldburg was using a laptop, and so will the initial customers of the new network when it goes commercial later this year. But the next step will be to plant ArrayComm technology into specialized handheld devices, enabling them to make the same ultrafast Web connection for voice and data. ArrayComm's equipment makes a cellular network's use of spectrum more efficient--and faster, in fact, than 3G cellular networks.

That makes ArrayComm an up-and-comer in one of wireless's most lucrative contests: the race to build the key components of high-speed networks. Those networks are based on an acronymic jumble of competing standards, each creating its own demand for specialized gear. But 3G and its successor cellular networks seem likely to emerge as the overarching technology that links together networks based on many different standards--including the much-discussed Wi-Fi. Wi-Fi "hotspots" have a range of 300 feet, and it'll be years before any constellation of hotspots gives Wi-Fi the global reach that cellular networks already have. Though telecoms overspent heroically on 3G spectrum and the networks are years late in rolling out, they're now up and running in Japan, Korea, and parts of Europe and the United States.

What does all this mean for opportunities in wireless gear? For one thing, it means that demand for new cellular networking equipment will remain voracious. Last year, carriers spent $45 billion on cellular gear, much of it 3G-related. Wi-Fi equipment sales, by contrast, totaled $1.6 billion last year. ArrayComm has shown that radical new technology can create openings for equipment startups. Forest Baskett, a venture capitalist focused on wireless at New Enterprise Associates of Menlo Park, Calif., sees rich possibilities in creating hardware for specialized networks that, for instance, monitor fleets of cars or natural gas pipelines in remote locations. And there is huge demand coming for the gear vital to ever-faster cellular networks. Ericsson, Motorola, and other big players had a lock on 91 percent of the wireless infrastructure market in 2002. A nimble new player that can loosen the giants' grip could create the kind of out-of-nowhere success story that Cisco did years ago in wired networking--which explains why Cisco itself has begun to target the wireless equipment market.

SERVICE WITH SPEED

OPPORTUNITY Taking on big carriers by providing cheap, fast service and plugging gaps in wireless coverage.

MARKET SIZE $338.1 billion, 2002; $487.7 billion, 2006

INCUMBENTS AT&T Wireless, NTT DoCoMo, Sprint PCS, T-Mobile, Verizon Wireless, Vodafone

CHALLENGERS Crown Castle, Monet Mobile Networks, Personal Broadband Australia

Peggy Isakson doesn't even know what 3G stands for. All the Fargo, N.D., real estate agent cares about is that she has high-speed Internet access when she's showing houses. "I need to answer my e-mail right away or I could lose the client to another agent," she says. Thanks to Monet Mobile Networks's always-on connection, she can upload photos of properties and look up tax and county records even when she's on tours with prospective buyers. "It's my competitive edge," she says.

For that she can thank George Tronsrue. A 47-year-old telecom-industry veteran who got his start at MCI, Tronsrue founded Monet in Kirkland, Wash., in 1999. He acquired wireless spectrum in sparsely populated outposts such as Sioux Falls, S.D., Fargo, N.D., and Duluth, Minn. Whatever for? Well, the spectrum was cheap, and as they say in telecom, any spectrum is good spectrum. Better still, none of the big players were interested in getting into those markets with wireless broadband--or DSL or cable. With the field to himself, Tronsrue started a data-only 3G cellular service that now has roughly 10,000 subscribers who pay $40 a month for high-speed broadband. The lesson, Tronsrue says, is to find something big players aren't doing and do it better than they ever could. "Data wasn't what the big guys were concentrating on, and there was room for us to innovate," he says.

The wireless giants are concentrating on data now--in fact, they've staked much of their future on it. Wireless carriers have been under well-chronicled financial stress. Revenues from voice communications have flattened in the past two years. On average, wireless customers spend $45 a month on services, almost exclusively voice; to restore carriers' financial health, analysts say, that amount needs to be about $100. The carriers are betting on data for much of the additional revenue. Verizon Wireless and Sprint are rolling out national data-service plans that charge about $80 a month for high-speed Web access. Who would pay that, just for data? The carriers believe there are plenty of harried corporate road warriors desperate for a superfast, always-on Web pipeline for vital work information, from e-mail to spreadsheets. If Isakson is any indication, they may be right.

THE QUEST FOR KILLER APPS AND SWEET CONTENT

OPPORTUNITY Writing the software and content that mobile users crave.

MARKET SIZE $5.6 billion, 2002; $18.6 billion, 2006

INCUMBENTS IBM, Microsoft, Oracle, RealNetworks, Symbian

CHALLENGERS ViAir, Jamdat Mobile, Faith West, Moviso, Zingy

To date, the most important wireless software applications remain e-mail and access to calendars. IBM is big in that game, though the market is fragmented, and less well known players like Seattle-based ViAir have been able to make inroads. The true blockbuster corporate apps--the wireless equivalent of Microsoft Office, for example--are still to come, and they'll create huge windfalls for whoever can dream them up.

In the meantime, scores of companies are coming up with their own twists on wireless to better run their businesses. State Farm gives each of its insurance estimators two wireless laptops and a digital camera, a major reason some customers can now get their checks within hours. In Chicago, Roto-Rooter is using Motorola's i58sr phone to assign work orders based on its plumbers' real-time locations, thanks to software that takes advantage of the phones' built-in GPS. Steve Poppe, Roto-Rooter's chief information officer, expects wireless applications to boost productivity by a third. General Motors is equipping pickup trucks and vans for fleet sales with cellular data and tracking software from Gearworks and Nextel. Gearworks will host the customers' applications, and Nextel will provide the network. GM estimates the market for these wirelessly enabled trucks at about 4 million units.

There's also vast opportunity in creating wireless content--particularly the kind that captures the whimsy and pure fun of being able to connect to the wonderland of the Web anytime, anywhere. A cell-phone screensaver featuring Hello Kitty, a cartoon character created by Japan's Sanrio, has been downloaded more than 1 billion times; analysts estimate that Sanrio has made more than $200 million on it in the past two years. Jamdat, based in Los Angeles, is the biggest player in a wireless videogame industry whose revenues totaled $59 million last year. Analysts say wireless games will be a $2.8 billion market by 2006.

In the end, some experts predict that the search for the one killer app will instead yield many lesser hits that together drive the wireless revolution onward. Ringtones seem destined to be one of them. Nearly 80 million ringtones are downloaded each month in Japan, 60 million in Europe, and about 1.5 million in the United States. Japan's Xing, the king of ringtones, had revenues of $100 million in 2002 and is growing at 60 percent a year.

Back in his home studio, Faith West's Chris Dunn works on ways to close in on ringtone rivals. He dials up a competitor's ringtone, Queen's "We Are the Champions." The '70s anthem totters out like Muzak. "It's musically correct," Dunn sneers. "But it's Queen--it should rock." Holding his phone in the air as if it were a lighter at a stadium concert, Dunn punches in another number, and out comes his version of the song. It does rock--well, as much as a cell phone can--and Dunn is pumped. "It's totally weird to be part of an industry that is growing so fast in a bad economy," he says. "Weird, but this is awesome work."