(FORTUNE Magazine) – It was a pristine morning last August in San Francisco, and the Starbucks on Mariposa Street near Franklin Square was abuzz. Smiling executives from the coffee giant and from wireless telco T-Mobile USA had gathered to unveil a dazzling new offering for Starbucks customers: in-store wireless Internet access, better known as Wi-Fi. Latte sippers could flip open their laptops and, in a few clicks, surf the web or send e-mail without having to futz with wires or endure plodding dial-up speeds. T-Mobile, the cellular subsidiary of Deutsche Telekom, planned to spend $100 million dragging high-speed Internet lines into 1,200 Starbucks and other high-traffic sites, and outfitting them with the devices needed to broadcast Internet throughout. Wi-Fi was going to be the next big thing, and T-Mobile wanted to be the leader.

But a funny thing happened in the test run. Every time someone tried to log on, a dialog box popped up offering two options: Did the surfer want to connect using T-Mobile or with some company called Surf & Sip?

In his office two miles away, the CEO of Surf & Sip, a 44-year-old entrepreneur named Rick Ehrlinspiel, sat smiling. Just the day before, he had installed a competing Wi-Fi station in the computer repair shop that shared a wall with Starbucks. With that $300 investment, Surf & Sip was stealing T-Mobile's thunder--and its customers. Ehrlinspiel recalls that a T-Mobile network manager called him and told him to shut his signal off. His reply? Sure--if you shut off yours. (A T-Mobile spokesman says he has no recollection of this exchange.)

It's hard to turn on the news, pick up a magazine, or stop in a McDonald's without hearing about the Wi-Fi revolution: the promise of low-cost, low-fuss wireless broadband access to the Internet. The technology promises to change the way we work and play on the web--meaning we could do either from the couch, the classroom, a poolside cabana, even the cabin of a 747. For a globetrotting executive it means sitting in an airport and e-mailing the management team while watching the World Series over streaming video. For the traveling salesman it means getting customized quotes approved by headquarters without ever leaving the client's office. For hospitals it means bedside registration and portable access to patient histories. When Intel in March held a kickoff party for its Centrino chipset, which enables laptops to connect seamlessly to wireless networks, CEO Craig Barrett declared that Wi-Fi "will change the way people use computers." The company brought in Malcolm Gladwell, author of The Tipping Point, to go even further, suggesting that Wi-Fi may have the same profound societal impact as the rise of radio in the 1920s.

Possibly. But as the scene at Starbucks shows, this revolution, like so many before it, will be an uncontrolled, chaotic affair sure to burn through capital and companies. Think of the boom-and-bust stories of the Northern Pacific railroad, RCA radio, and Global Crossing. This time the people in charge of building the revolution's infrastructure are doing so by setting up "hot spots"--any home, coffee shop, airport lounge, or street corner where users can gain access to a Wi-Fi network. At the end of 2002 there were about 4,000 hot spots in the U.S.; projections for the number over the next three years range from 30,000 to the hundreds of thousands. The optimism is easy to understand. The barriers to entry are low: A hot spot can be created with as little as a high-speed Internet line and an access point--a paperback-sized radio transceiver costing a few hundred dollars that can broadcast the Internet over 150 feet. And the rewards look rich: If Wi-Fi is going to be as big as people predict, everyone will demand the ability to log on from just about everywhere. At least one analyst is predicting that hot spots in the U.S. will generate almost $3 billion in revenues from 13 million users by 2007.

That has set off a land grab that makes the 19th-century "sooners" look like slackers. Small wireless ISPs like Surf & Sip, Deep Blue Wireless, and Wayport are racing to sign up retailers and restaurants before cellular giants like T-Mobile and Sprint PCS can offer the service. Wi-Fi aggregators like Boingo and iPass are providing consumers and corporations with access to established networks. And heavyweight Cometa Networks (backed by IBM, AT&T, and Intel) is spending millions to convince chains like McDonald's that it has staying power. The Wi-Fi market is in such a frenzy that it obscures a basic, daunting fact: While analysts are predicting big numbers, so far almost no one is paying for public access. Last year only 2% of Americans with a Wi-Fi-enabled laptop, or about 60,000 people, actually paid to use a hot spot, says Analysys, a telecom research firm in Cambridge, England.

Before we get to that, it's important to understand why Silicon Valley is desperate for Wi-Fi to work. The answer is that this might be the technology that gets people buying again. The tech slump is now entering its fourth year, and corporations have shown little interest in buying new PCs, servers, or other hardware. But the promise of Wi-Fi has CIOs--and a few CEOs--cautiously experimenting. Makes sense: Nearly 21 million U.S. workers are on the move on any given day, according to the Yankee Group; Wi-Fi allows those mobile workers to stay where they are most needed--on the road, dropping off packages, handholding clients, or drumming up new business. Joel Reed, senior director of product marketing at enterprise software maker J.D. Edwards in Denver, says two-thirds of his clients are interested in wireless versions of his company's sales-force automation software. Soon, the thinking goes, interest has to turn into sales. "Wi-Fi's the only bright spot in the market," says Scott Miller, director of wireless research at Current Analysis in Sterling, Va.

On Sand Hill Road, the cash spigots are (cautiously) flowing: Private equity investments in Wi-Fi companies have totaled $1.5 billion worldwide over the past three years, according to San Francisco investment bank Rutberg & Co. Last year Wi-Fi accounted for 15.2% of all money sunk into the wireless industry, up from 5% in 2000. Wireless Internet-equipment makers and service providers are hungry for that cash; Paul Longhenry at venture capital firm 3i in Menlo Park, Calif., has heard almost 200 Wi-Fi-related business plans in the past two years. Intel COO Paul Otellini says the company will ship one million Centrino chipsets in the second quarter, making Wi-Fi one of the chipmaker's bright spots. And while attendance at technology trade shows like Comdex has dwindled, the most recent DEMOmobile show, held in September in La Jolla, Calif., bettered 2001's attendance. When surveyed on which technology could revitalize the high-tech industry quickly, the conference goers almost all wrote in "Wi-Fi."

But for now, at least, the success of the revolution hinges on people like Rick Ehrlinspiel, who are spreading Wi-Fi across America, one hot spot at a time.

"You can't 'own' a location," Ehrlinspiel explains as he walks into Dress Woman, a clothing store in San Francisco's bustling Marina district. It's a beautiful March day, and he's on one of his dozen weekly cold calls. His real target isn't the fashion bargain hunter; it's the coffee shop next door, a popular hangout called the Grove. Rival Deep Blue Wireless has already enrolled this spot for its service. Ehrlinspiel wants to hijack the customers, just as he did at Starbucks. He approaches a Dress Woman staffer and launches into his spiel: "Remember when no one had a cellphone? Well, Wi-Fi is just like that. Everyone's going to use it soon." Dress Woman would earn 50% of any subscriber fees. The saleswoman isn't enticed, and she's still confused about what Wi-Fi is. Ehrlinspiel leaves empty-handed. But he's persistent--a few weeks later he signs up the dry cleaner across the street.

Is this any way to build an industry? The hot-spot rollout is so new that no one quite knows what making a buck is going to involve--only that there might be bucks to be made. Take T-Mobile, which owns and manages its network and directly bills subscribers, who pay $40 a month or 10 cents a minute for access. T-Mobile has so far eschewed roaming agreements with network aggregators like Boingo, whose software allows subscribers of, say, Deep Blue to gain access at any of Boingo's 1,200-plus hot-spot locations without having to pay twice. T-Mobile's way of doing business is expensive, especially since it shoulders much of the up-front cost and installs pricey, superfast T-1 pipes rather than DSL in its 2,100 Starbucks locations. Then it shares subscriber revenues with Starbucks, though neither company will offer details. Some say the T-1s are overkill for the amount of traffic the average latte sipper needs. (Starbucks would not disclose usage but said that user sessions are up 329% since last August.) But then, Wi-Fi rivals revel in badmouthing one another's business plans. Sean O'Mahony, CEO of FatPort, a Canadian hot-spot provider, estimates that T-Mobile needs 20 to 25 subscribers per Starbucks per month just to break even. FatPort, which says it runs a leaner operation, needs fewer than four. T-Mobile USA chairman John Stanton disputes O'Mahony's figures but won't give specifics. It's clear that turning a profit is not his top priority right now. He's trying to quickly establish the largest footprint of high-profile locations.

That task is not cheap. T-Mobile last month won the right to deploy Wi-Fi in Kinko's 1,050 copy centers in the U.S. After being wooed by all the leading players, Kinko's chose T-Mobile over Cometa, Wayport, Boingo, and Sprint PCS. "We're the hot date," crows Kinko's CEO Gary Kusin. And the hot date always calls the shots. Kusin says he insisted that T-Mobile assume all the costs of deployment and monthly operation, terms similar to those arranged with Starbucks. More important, T-Mobile has to sign a reciprocal roaming agreement with one other major provider. Explains Stanton: "It was important for us to get that site, so we were willing to do some things."

T-Mobile's headlong drive into Wi-Fi is making it tougher for its biggest competitor, Cometa, to gets its sales in motion. Under the direction of CEO Gary Weis, the former head of AT&T's global services division, Cometa is trying to build a wireless infrastructure--5,000 hot spots in the U.S. by March 2004 and 20,000 by 2005--and then sell Wi-Fi access wholesale to cellular or cable providers, ISPs, or Baby Bells. They in turn can resell to end users--especially large corporate customers. But to build the network, Cometa has to hammer out deals not only with service providers but also with the retail venues that will house its hot spots, like McDonald's, which plans to have Wi-Fi in several hundred restaurants by the end of this year. Unlike T-Mobile, Cometa says it won't split a dime with venue owners until its own costs are recouped. "If they shove 100% of the costs on us and take all the benefits, then we don't have a business," says Cometa chairman Ted Schell in a not-so-veiled swipe at T-Mobile.

So far the T-Mobile vs. Cometa struggle has left plenty of room for two dozen or so little guys--Ehrlinspiel, O'Mahony, and their ilk, many of whom have carved niches by keeping costs low and exploiting the absence of a dominant national Wi-Fi provider. "There is little difference between the regional provider and the big guys," says Yankee Group analyst Sarah Kim.

Just getting a hot spot isn't good enough: There's the matter of actually collecting revenue on it. Prices for Wi-Fi service are all over the map. Monthly all-you-can-eat subscriptions range from $70 for AT&T Wireless's GoPort (a partnership with Wayport) to $50 for Boingo to $30 for T-Mobile (with a year's contract). Some hotels charge $10 per day; Wyndham offers Wi-Fi free to its Wyndham ByRequest members. That's the sort of pricing trend users seem to be looking for. A recent study of Internet and cellular users from ForceNine Consulting, a telecom-consulting firm in Washington, D.C., found that only 2% of those surveyed would "definitely or probably" pay $2 per hour or $10 per day for Wi-Fi. At $1 an hour, 18% said they were in.

Caught in the middle are potential corporate customers like Kevin Sweeney, director of Internet engineering at insurance giant Aetna. He's eager to find a public Wi-Fi solution for his company's sales and marketing staff, but he doesn't know which provider to partner with. He mentions a meeting he has later in the day with "Bongo"--he means Boingo, which doesn't say much for Boingo's brand awareness. He hopes to have a deal in place by the end of the year, but in the interim he's using a wireless data service from Sprint that's not as fast as Wi-Fi, but "at least we're getting something." Meanwhile, Joel Reed at J.D. Edwards says that although most of his customers are interested in wireless-enabled sales force automation software, only one client is currently using it. The reason? Lack of coverage.

Yet coverage itself isn't a panacea. For a laptop user, setting up a secure Wi-Fi session in a sea of networks can be a pain. And good luck asking the kid behind the counter at Starbucks for help. Anne Saunders, VP of Starbucks Interactive, says that the company has trained 40,000 of its baristas on Wi-Fi, but when pressed to explain what exactly they've been trained to do, she says that they know the service is available, and they know where to point users for help. Gee, thanks. A former hot-spot provider once got a frantic call from a cafe owner whose service was down. The problem? An employee had unplugged the access point to use a vacuum cleaner. Though most service providers offer help lines, corporate users like J.D. Edwards don't take chances. Its IT department has detailed information on log-in procedures for all the leading hot spots. "We want executives to be working, not setting up accounts," says IT network services director Marty Shelborn. Even so, Shelborn admits that some executives find using a hot spot so daunting that they simply don't bother.

Public hot spots could also use some good old-fashioned marketing. Aside from Intel, whose $300 million--plus Centrino campaign is only two months old, very little has been done to push the service. That's expected, since most Wi-Fi startups want to conserve cash. Even big players like T-Mobile have been quiet. "We haven't added a lot of customers because we haven't pushed it," says Stanton, who promises a huge ad campaign this summer. Hotels, however, have done a decent job of promoting their broadband capabilities, and business travelers have responded by flocking to those that offer it. Wyndham's ByRequest club, for example, has expanded from 330,000 to 1.4 million members since last June. But most hot-spot locations simply slap a sticker on the door, and that's it.

No surprise there. Venue owners such as McDonald's have to concentrate on selling burgers and fries, not Wi-Fi. "We're not doing this to make money," says Mats Lederhausen, president of McDonald's business development group. But Cometa is. And that could be a problem. If hot-spot venues don't have skin in the game, what incentive do they have to promote Wi-Fi? "I see a tenuous link between the venues and the operators who depend on them to succeed," says John Yunker, an analyst at communications consultancy Pyramid Research in Cambridge, Mass. To help get the word out, the Wi-Fi Alliance, an industry organization, is promoting Wi-Fi Zones throughout the nation that meet service standards.

Of all the issues facing Wi-Fi, perhaps the most vexing is roaming--the ability to sign up for one hot-spot provider and get access to all of them. Right now the industry is "like medieval England. Nobody is willing to cooperate with anyone else," says Stan Schatt, an analyst at tech researcher Giga. "And the loser is the end user."

J.D. Edwards's Shelborn says she's getting frustrated and is pressuring iPass--the remote-connectivity service the company subscribes to--and T-Mobile to strike a deal. If this all sounds familiar, it is. Back when cellphones were the size of Shaq's sneakers, it took years for cellular carriers to work out the intricacies of roaming. "In Wi-Fi it's even worse," says Yankee Group's Kim. Part of the problem is the sheer number of players. No one wants to partner with a provider that might close up shop in six months. (Hot-spot pioneer MobileStar's demise in October 2001 was a crushing blow to aggregator HereUare, which lost hundreds of locations overnight.)

Eventually, say most observers, the telecom titans will come to dominate the Wi-Fi scene. T-Mobile is already heavily invested, and some, including Verizon Wireless and AT&T Wireless, are now hedging the massive bets they made on advanced digital cellular networks with hot-spot partnerships. "The big boys are finally coming to the party," says O'Mahony. Others don't see what all the fuss is about. A spokesman for Cingular Wireless, a joint venture of SBC and BellSouth, says the company is "evaluating" Wi-Fi business models. But privately one Cingular exec says the firm is not sinking a penny into Wi-Fi until it proves its worth.

Then again, maybe the question of winners and losers is the wrong one to be asking. That's the way Les Vadasz sees it. Vadasz--who is retiring in June--oversees Intel Capital, the chip giant's venture capital arm. So far Intel's Wi-Fi investments have mainly been in middlemen that avoid the heavy costs of hot-spot deployment and instead handle back-end services like security, billing, and network management. Which Wi-Fi provider is best positioned? "I don't know, and frankly, in a way I don't care, as long as viable business models exist," he replies. "The biggest disaster would be if no model emerges. One thing I've learned in 40 years is, don't decide the future too soon."

He has a point. As Thomas Jefferson said, the generation that commences a revolution rarely completes it. Perhaps to truly understand hot spots, you have to break the mindset that they are just about laptop Internet access for the general public. That's only the beginning. The real value of these networks, not surprisingly, will emerge when airlines and restaurants and hotels piggyback on them and add their own applications for laptops, handhelds, and whatever funky devices come down the pipe. Starbucks, for example, has 600 district managers accessing Wi-Fi in its stores, meaning that they are spending more time in the field and less time at headquarters. McDonald's restaurants in Boise and Orlando have had stealth Wi-Fi deployments for two years--not for customers but for roving operations consultants who keep the home office informed about what's going on in the sticks.

It's that kind of imaginative thinking that has become the hallmark of Wi-Fi salespeople. Ehrlinspiel has just descended on the Tower Car Wash on Mission Street in San Francisco. Just a stone's throw from Highway 101, Tower includes a car wash, convenience store, and gas station. Ehrlinspiel explains how his system works, and manager Steve Matijevich nods as he fingers a Marlboro. Maybe he could add wireless order entry so employees don't have to walk over to the cashier to deliver paperwork. Maybe customers would come to his shop just for the chance to surf while their car was detailed. "Do we have the right kind of customer for it?" Matijevich asks, partly to Ehrlinspiel but mostly to himself. "Well," he continues, answering his own question, "the only way to answer that is to put it in and see if it works." It's a leap of faith. But then, that's how revolutions are started.

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