SAN FRANCISCO (CNN/Money) -
When historians look back at this era 15 to 20 years from now, they'll likely agree that few technology concepts were responsible for more investor losses in the late 1990s and in early 2000 than the notion of convergence.
You know, the idea of combining two or three stand-alone products into one device. On paper the concept seems so foolproof, so logical, yet it turned out to be so...doomed.
And yet companies continue to churn out all-in-one devices, failing to heed the warning signs of past failures. Granted, some success stories exist. But for every BlackBerry, there's a handful of failures.
Some notable examples of dashed convergence dreams include PCs with TV tuner cards stuffed inside, touted as PC/TVs, and fax/printer/scanner/copier devices that cut corners with each function.
Nokia (NOK: Research, Estimates) is the latest company to try its luck in the convergence game, but it seems to have missed its history lesson. On Oct. 7 the company will debut its N-Gage -- a portable game device, MP3 player, and cell phone.
On Wednesday of last week, Nokia announced that it was purchasing Sega.com to get its hands on the site's mobile-technology underpinnings and a catalog of game titles that it will use to entice gamers. The Street liked the acquisition (terms of which were not disclosed), sending Nokia's shares up 6 percent, with trading volume at a 30-day high.
Looks like the Street drank the convergence Kool-Aid, and that's troubling. Here's why: Playing games on a cell phone is a nifty pastime, and there's no question that Nintendo's (NTDOY: Research, Estimates) Game Boy portable gaming device is a bona fide success, but from what I've heard, the N-Gage makes too many key sacrifices to succeed.
"It's a device that tries to do too much and doesn't do one thing well," says Schelley Olhava, an analyst with IDC. "If I wanted a portable gaming device, I'd stick with Game Boy. The N-Gage is a kludgy product."
"We're creating an entirely new space with the N-Gage," responds a Nokia representative. "This is the first time that it's on an all-in-one device."
Nokia's cell phones are riding a rising tide of consumer upgrades, with a recent IDC study showing that consumers trade in their old phones every 18 to 24 months. Nokia was the leader in the cell-phone market in the second quarter of 2003, with a 35 percent market share.
Given the company's lofty standing, it makes sense for it to augment that lead by branching out into new markets, and with its cash position, it can afford to do so. But according to several people I spoke with who had tried the unit, it makes a lousy cell phone -- which is surprising since it comes from the cell-phone market leader.
First, the device is huge, comparable in size to an older-model Nintendo joystick. Second, you can't put the device flush against your face to talk, but must hold it almost perpendicular to your head. Third, and perhaps most damaging, the N-Gage is expected to cost consumers $299 -- that's $200 more than a Game Boy Advance, and far more than most heavily subsidized cell phones cost these days.
Finally, expecting people to play networked games over the current cell-phone network (where max speeds in the United States hit 30 to 40 kilobits per second) is simply ludicrous.
"Gamers have very high gaming standards," says Alex Slawsby, an analyst with IDC. "N-Gage's success depends on how far the gamers are willing to lower their expectations." Doesn't sound too promising, does it?
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It's hard to fault Nokia for trying to combine games and cell phones. In fact, its long-term strategy with the devices is pretty sound: When cellular networks in the United States speed up, and as price points decline, data networks will be big revenue generators. And games are a great way to get people streaming gobs of data on a regular basis.
But such scenarios are at least two years off, so I'm deeply troubled by the Street's reaction to Nokia's Sega.com acquisition announcement. Despite the tremendous rise in tech stocks in the last nine months, there hasn't been any real, across-the-board substantive reason for the trend.
It's worrisome to see the Street so handsomely reward an announcement whose fruition is so far off and hardly guaranteed. If the Street's level of due diligence on such announcements is this low, I'm fearful of where this market rise is heading. I've seen this movie before, and I know how it ends.
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