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Wi-Fi Means Business


Engineers on runways in Seattle and Frankfurt are tinkering with antennas and satellite links. This isn't the usual avionics, though. Instead, Boeing Co. (BA) is preparing a brand new business: flying cybercaf?s. By early next year, more than 100 Boeing jets are scheduled to be equipped with speedy wireless technology known as Wi-Fi. For $25 or so per flight, laptop-luggers will be able to log on to the Net while soaring above the clouds -- shopping on eBay Inc. (EBAY), restocking their companies' inventories, perhaps even making voice calls over the Web. Boeing is so gung-ho on the new technology that over the next decade it hopes to outfit nearly 4,000 planes with Wi-Fi service. Says Scott E. Carson, president of the company's Connexion by Boeing unit: "Wi-Fi is on an explosive growth path."

After four years as a plaything for techno-geeks and home hobbyists, Wi-Fi is beginning to beam its way into Corporate America. Its superfast connections to the Web cost only a quarter as much as the gaggle of wires companies use today. And they're proving irresistible to businesses willing to venture onto the wireless edge. From General Motors (GM) to United Parcel Service (UPS) to CareGroup, companies are using Wi-Fi for mission-critical jobs in factories, trucks, stores, and even hospitals. "We firmly believe that this is the tipping point," says Intel Corp. CEO Craig R. Barrett.

What is Wi-Fi? It's a radio signal that beams Internet connections out 300 feet. Attach it to a broadband modem and any nearby computers equipped with Wi-Fi receptors can log on to the Net, whether they're in the cubicle across the hall, the apartment next door, or the hammock out back. To date, Wi-Fi has grown on the scruffy fringes of the networked world. It shares an unregulated radio spectrum with a motley crew of contraptions, including cordless phones and baby monitors.

Yet Wi-Fi networks, known as hot spots, have popped up faster than fleas on a circus dog. Thousands of do-it-yourselfers worldwide have rigged antennas to create their own hot spots. They've joined together to form networks so that the public can zap e-mails and surf blogs for free, no matter where they are. From street corners in Sydney to mountaintops outside Seattle, some 5,000 free hot spots have emerged. This is Wi-Fi Nation. More than 18 million people worldwide have logged on, and the numbers are growing daily.

The challenge facing the tech industry is to transform this unruly phenomenon into a global business. This means turning Wi-Fi Nation into Wi-Fi Inc. That involves transforming a riot of hit-or-miss hot spots into coherent, dependable networks. It means coming up with billing systems, roaming agreements, and technical standards -- jobs the phone companies are busy tackling. The goal, says Anand Chandrasekher, vice-president and general manager of the mobile-platforms group at Intel, is to "take Wi-Fi from a wireless rogue activity to an industrial-strength solution that corporations can bet on."

If successful, Wi-Fi has the power to fit the Internet with wings. A constellation of dependable Wi-Fi hot spots could extend dramatically the range and expanse of the Web, changing its very nature. The path ahead, analysts say, is sure to have its share of bumps. But it could lead to cascades of up-to-the-minute information zipping around offices, homes, even remote disaster sites. MeshNetworks Inc. in Maitland, Fla., is working on Wi-Fi systems that would allow emergency-response teams to create networks among themselves by simply turning on their laptops or handhelds -- even if cellular or wired networks have been knocked out.

Corporations aren't waiting for fine-tuned industrial versions of Wi-Fi to hit the market. The potential productivity gains are so compelling that many are investing in custom-built systems. United Parcel Service Inc. is equipping its worldwide distribution centers with wireless networks at a cost of $120 million. The company says that as loaders and packers scan packages, the information zips instantly to the the UPS network, leading to a 35% productivity gain. IBM is devising Wi-Fi-powered systems to monitor the minute-by-minute operations of distant machines, from potato fryers at restaurants to air conditioners in computer labs.

Other tech titans are rushing in, too. Intel (INTC) is spending $300 million to market its Centrino computer chips, which come equipped for Wi-Fi. In March, Cisco Systems Inc. (CSCO) agreed to spend $500 million for Linksys, a Wi-Fi equipment maker. For the first time, that will put Cisco into head-to-head competition with Microsoft Corp. (MSFT), which plowed into Wi-Fi network gear last year. And Cometa Networks, the new joint venture made up of Intel, IBM (IBM), and AT&T (T), is building a nationwide network of 20,000 hot spots over the next three years. Phone companies, including Verizon Communications Inc. (VZ) and T-Mobile USA Inc., are following suit. "You'd have to have your head in the sand to not see the news about hot-spot deployments," says Edward M. Cholerton, SBC Communications Inc.'s (SBC) vice-president for Internet product management.

The giants are joined by legions of small fry. Last year alone, in the depths of the tech downturn, U.S. venture-capital firms pumped $2.8 billion into 296 wireless startups, says researcher Thomson Venture Economics. And as more companies pile in, prices for Wi-Fi equipment are plummeting. Installing an industrial-strength hot spot costs only $2,000 now, one-fifth what it cost two years ago. Home-gear prices are also in free fall. More than 50 companies are in the chip market alone, estimates Gartner Inc. As the tech powerhouses storm into the market, a painful wave of consolidation is all but assured.

Even for the mighty, this gold rush crosses hazardous terrain. Off-the-shelf versions of Wi-Fi are often unreliable and rough to install. This undermines confidence in the technology. And key initiatives are untested. Will corporate and consumer users dish out $30 to $50 a month for access to a nationwide grid of Wi-Fi hot spots? Will the number of subscriptions justify big network investments? "Can anyone make money in the home-networking or wireless world?" asks David Schmertz, a vice-president at Efficient Networks Inc., a broadband subsidiary of Siemens (SI). "We're looking at that question hourly."

The riches won't flow until Wi-Fi security reaches industrial grade. Corporations are hankering for the power and flexibility of Wi-Fi networks, but many are postponing rollouts in strategic areas until they're convinced that hackers, spies, and competitors can't intercept wireless data. General Motors Corp. has deployed Wi-Fi in 90 manufacturing plants but is holding off on Wi-Fi at headquarters until next year. Why? Execs worry that until new encryption is in place, guests at a Marriott Hotel (MAR) across the street could log on to GM's network and make off with vital memos and budgets. Industry analysts say a slew of airtight Wi-Fi security systems will be out next year. But delays or news of security breaches could pummel confidence in the technology.

A wild card is the possible overlap between Wi-Fi and the multibillion-dollar project for a high-speed cellular system known as Third Generation. Like Wi-Fi, 3G promises a wireless Internet. It's coming onstream in Europe and Asia and will be spreading in North America in the next two years. As a phone system, 3G provides far broader coverage than Wi-Fi's constellation of hot spots. But Wi-Fi's hot spots are targeted precisely in the hotels, airports, and commercial centers where mobile Net surfers are most likely to be swarming. This upsets revenue projections for phone companies. Still, they're plowing ahead with Wi-Fi deployments on three continents, hoping they can bill customers for a menu of wireless services, including both Wi-Fi and 3G.

Wi-Fi represents a disruptive force. Yet if history is an indicator, it will ultimately pay rich dividends. The upstart technology appears to follow a pattern that has become common in the Internet age. New technologies surge from the grass roots, pushing companies to race madly, trying first to cope with the new sensations and later to transform them into businesses. This happened with the Net itself, and with Linux, the free software operating system. Now, the Internet has not only defined an age, it has spawned a host of successful companies. Some 40% of publicly traded Net companies are profitable today. Linux, developed within a populist movement similar in spirit to Wi-Fi, holds 13.7% of the $50.9 billion market for server software and is breathing down Microsoft's neck.

Wi-Fi promises similar fireworks. And the beleaguered tech industry is counting on it for a welcome shot of growth. In the short term, the direct payoff is likely to be moderate. Wi-Fi spending on hardware and subscriptions is expected to reach $3.4 billion this year and is growing at a 30% clip. Network buildouts over the next two years will chip in $8.2 billion more. That's welcome in a downturn but not enough to sway a $1 trillion global tech economy. And Wi-Fi subscriptions aren't likely to catch on until national networks are up and running, perhaps two years from now.

Instead, it's as an amplifier of other technologies that Wi-Fi packs its punch. It turns nearly every machine, from laptops to cash registers, into network devices. And it fuels demand for always-on broadband connections. This, in turn, paves the way for the next generation of Internet services. Analyst Christopher Fine of Goldman, Sachs & Co. compares the power of Wi-Fi to the networking of computers in the early 1990s or the telephone exchanges that spread in the 1920s.

Intel and computer makers are betting on it to spur laptop sales, which even without Wi-Fi carry profit margins 50% higher than those on desktops. Microsoft is pushing its Windows XP operating system, which is specially adapted to handle Wi-Fi. "You could say that Wi-Fi is the killer app that gets people to upgrade to Windows XP," says Pieter Knook, the company's vice-president for network service providers. On Apr. 15, Intel announced that strong laptop sales, powered by Wi-Fi-ready Centrino chips, helped boost first-quarter profits.

The consumer-electronics industry is counting on Wi-Fi, too, to link a host of appliances in the home. Already, gadget-meisters are sending MP3 songs and videos from their computers to TVs and stereos via Wi-Fi. This could become a breeze over the next two years as the new generation of Wi-Fi rolls out, lifting connection speeds to 54 megabits -- or nearly an hour of MP3 music -- per second. Motorola (MOT), Nokia (NOK), and Ericsson (ERICY) are working on Wi-Fi phones that would let people move from Wi-Fi to cellular networks without even noticing. These should be ready in 18 months. In time, Wi-Fi could even feed data into smart networks in the home or factory to automatically monitor climate controls or industrial supply chains. "There's no upper limit to how you can use this technology," says Dean Douglas, vice-president for telecommunications at IBM Global Services. "In that, it's like the Web."

In its infancy, long before Wi-Fi took shape, the radio technology belonged to businesses. The year was 1985. The Federal Communications Commission had opened up slivers of the radio spectrum for experimentation. Researchers at a vanguard of companies, including NCR (NCR), Symbol Technologies (SBL), and Apple Computer (AAPL), started building wireless networks. Their goal was to link everything from cash registers to auto assembly lines. But momentum slowed in the late '80s as the companies developed systems that didn't work together.

An NCR Corp. scientist named Vic Hayes stepped into the mess in 1990. Hayes led the movement toward a standard. It was a long and combative process, but in 1997, it led to the release of 802.11b, now known as Wi-Fi, or Wireless Fidelity. Two years later, Apple kick-started the market by adding Wi-Fi to its iBook portables for the then-stunningly low price of $99.

The race was on. In cities worldwide, tech geeks began setting up wireless networks. Led by pioneers such as Rob Flickenger in San Francisco and Anthony Townsend in New York, these techies jerry-built Linux-based hot spots and cheap alternatives to expensive gear. Famously, they improvised antennas using empty Pringles cans. And in the 21st century equivalent of barn-raisings, they united to link neighbors to the growing community networks. Says Townsend, who co-founded NYCwireless in 2000 with Terry Schmidt: "Our model of Wi-Fi is if you charge people to use it, it's not useful." Now the pair runs a business that builds community networks.

While Wi-Fi Nation was taking shape in the streets, a smattering of businesses were adapting the new networks to their own needs. At CareGroup Inc. hospitals in Massachusetts, engineers installed wireless systems to connect more than 2,000 doctors and nurses to the corporate system. This way, whether they were in emergency rooms or intensive-care units, they could access patient records, add observations to the database, and check on medicines. "It's cost-effective, and the doctors love it," says Chief Information Officer John D. Halamka, who estimates that the system helps reduce costly medical errors by 50%.

Early on, entrepreneurs saw opportunity in the burgeoning Wi-Fi community. Sky Dayton, founder of Internet service Earthlink Inc., believed that if anyone could unite the ragtag collection of hot spots and network communities into a secure nationwide network, there was a fortune to be made. In 2001, he founded Boingo Wireless Inc. The idea was to certify networks everywhere as Boingo providers. Then, when subscribers paying up to $50 a month turned on their laptops and saw a Boingo connection, they'd log in. Boingo, based in Santa Monica, Calif., and local providers would split the take.

It was a good idea. So good that lots of others came up with it, too. In the past two years, scores of networks have been launched, causing the number of commercial hot spots to mushroom to 16,000. Starbucks Corp. (SBUX) piled in, teaming with T-Mobile to offer consumers Wi-Fi surfing at more than 2,100 coffee shops for $40 a month. Fast-food giant McDonald's Corp. (MCD) has deployed Wi-Fi at 10 restaurants in New York and plans to add hundreds more hot spots by yearend. The idea there is less to make money on Wi-Fi services, which go for $3 per hour, than to attract new customers and boost sales. McDonald's is offering a free hour of Wi-Fi with each Extra Value Meal.

To date, though, few commercial hot spots have thrived -- and analysts have plenty of doubts about the new ventures at Boeing and McDonald's. Why? No carrier can offer seamless nationwide coverage, security is still touch-and-go, and many potential users feel it costs too much. "We don't subscribe to any of these services," says Tripp McCune, senior vice-president and director of information technology at ad agency Deutsch Inc. "The coverage isn't widespread enough for our people to use."

The job now is to build Wi-Fi into a solid pillar of the networked world. And Intel is out to lead the charge. Last year, CEO Barrett put $150 million into a Wi-Fi-oriented venture fund. He assigned 800 engineers to work on Wi-Fi, and in December he joined IBM and AT&T to launch Cometa. Unlike Boingo, Cometa will build its own hot spots. By next March, it plans to have 5,000 up and running.

The next job is to establish Wi-Fi as a global mainstay, and Intel is responding, naturally, with a chip. The Centrino family of chips, released in March with a $300 million media campaign, embeds a Wi-Fi receptor into the innards of a laptop computer. The effect should be dramatic. By this summer, every Dell Computer Corp. (DELL) laptop and 70% of Hewlett-Packard Co.'s (HPQ) consumer offerings will be Wi-Fi-ready. For most users, this should ease the transition into the new technology. The current process is so complicated that it often irks novices. Intel and Microsoft are hoping that with the new systems, Wi-Fi installation will eventually become as easy as activating a modem: click "yes" six or seven times and then "finish."

Wi-Fi isn't likely to become a rock-solid standard until hot spots are dependable. That's pushing more than 100 Intel engineers on a worldwide mission. They're labeling hot spots the world over as "Centrino-certified." The idea is to unify the Wi-Fi world around Intel's brand, giving Centrino the Wi-Fi equivalent of the Good Housekeeping Seal of Approval.

Across the industry, engineers are coming up with security systems to satisfy the most demanding customers. Cranite Systems Inc. in San Jose, Calif., sold security for the $960,000 Wi-Fi installation at the U.S. Army's West Point Academy. Colonel Donald J. Welch, an associate dean for information and educational technology, says the military put the system through rigorous antihacking tests. "We don't want to be a launching pad [for hackers] to the Defense Dept.'s network," he says.

He has reason to be hypervigilant. Every step of the way, the technology manages to remind the Wi-Fi industry of the tough road ahead. At Intel's glitzy launch of its Centrino chips in March at the Hammerstein Ballroom in New York, CEO Barrett was on hand. The room shook to the sounds of Goin' Mobile by the Who. The crowd watched a live video hookup as an executive demonstrated how to use a Wi-Fi-equipped laptop to make a phone call. All he got, though, was dead air.

As technology companies scramble to transform Wi-Fi into a business, they'll come up against a lot more dead air. But it will all be worth it if Wi-Fi lives up to its promise to unleash the Internet. By Heather Green, with Steve Rosenbush in New York, Roger O. Crockett in Chicago, and Stanley Holmes in Seattle


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