Technology

Open Networks Could Spark a Gadget Boom


As wireless providers increasingly let outside devices run on their networks, a slew of new Web-enabled electronics could hit the market

Andrew York ordered his Kindle after getting stuck waiting at the Washington Dulles International Airport over Thanksgiving weekend with no books to read. The physics graduate student didn't want to buy another paperback that would collect dust at his already cramped apartment in College Park, Md. And paying for a Wi-Fi connection on top of the cost to download an electronic book to his laptop seemed like a waste of money.

Enter Kindle, a $400 electronic book reader from Amazon (AMZN) that includes a fee-free wireless connection via Sprint Nextel's (S) network. "[Reliable wireless connectivity] is probably the best feature of it," York says. "I already pay $15 a month for wireless Internet for my phone. Having it for free is amazing." He's not alone. The device sold out nationwide in 5 hours, and it's the best-selling electronic gadget on Amazon—even more popular than Apple's (AAPL) latest iPods.

Spurred in part by Amazon's success with Kindle, a slew of other tech companies, including Sony (SNE) and Qualcomm (QCOM), may be planning forays into the nonphone wireless-device market.

The catalyst: new openness by wireless carriers to having competitors' wares on their networks. Without a green light from mobile-phone service providers such as AT&T (T), Verizon Wireless, and Sprint, selling wireless devices is a nonstarter. Wi-Fi connections are all well and good, but they're typically available in only limited areas, such as cafés, hotels, and airports, typically for a fee. "We wanted Kindle to be hassle-free," says Ian Freed, a vice-president in charge of Kindle at Amazon. "Hassle-free means not having a wireless bill sent to you every month. We didn't want them thinking how to configure Wi-Fi. We wanted a customer to be able to be anywhere, decide you wanted a book—and to download it in under a minute."

Wide Field of Players

That's likely to be possible in more places than Sprint's network. On Nov. 27, Verizon Wireless said it will allow all sorts of devices to run over its network starting in late 2008. Later the company also confirmed it will open its network to all kinds of software, including Google's (BusinessWeek.com, 12/3/07).

AT&T and T-Mobile USA are likely to follow Verizon's lead and open their networks to all devices in the next six to 12 months, says Chris King, an analyst at Stifel Nicolaus. Search giant Google (GOOG) and several other companies, including Frontline Wireless, may bid in a January auction of airwaves, which they, too, could use to create open networks.

Consumers could use open networks not only for handsets and wireless-enabled laptops but also for MP3 players, gaming consoles, and global positioning systems.

The result would be faster growth in some areas of consumer electronics, says Todd Thibodeaux, an analyst at the Consumer Electronics Assn. He believes open networks could add two to three percentage points to growth in some product areas in the next decade. As a whole, the U.S. consumer-electronics market is expected to grow 6.1%, to $170 billion, in 2008. "All these announcements lend themselves to a whole different class of products," he says. "It could be a tipping point for broader adoption of devices showing video and playing music."

Beyond Phones and PCs

What might these new products look like? Sony's e-book reader may take on a wireless component, says Steve Haber, a senior vice-president at Sony Electronics. About a year ago, wireless and multimedia chipmaker Qualcomm formed a group focused on wireless devices other than phones and laptops. "We are already engaged with a lot of customers," says Sanjay Jha, Qualcomm's chief operating officer. He declined to elaborate.

Web-services providers like eBay (EBAY), News Corp.'s (NWS) MySpace, and Google's YouTube may have the best shot at introducing hardware tied to their services, since they have deep pockets, say analysts. Any company hoping to succeed with its own devices and services will need to provide such accompanying services as marketing, retail distribution, and customer support. Web-services companies could also potentially make their gadgets more attractive to carriers by offering to share revenues from related services.

Meantime, cell-phone makers will probably come under added pressure to devise feature-rich devices. "The pace of innovation should increase," says Richard Doherty, a director at consultant Envisioneering Group. For instance, manufacturers could introduce handsets that work on multiple carriers' networks, from Verizon Wireless to AT&T to Clearwire's (CLWR) Wi-Max broadband service. Such dexterous devices could debut as early as the January Consumer Electronics Show in Las Vegas, Doherty says.

But there's a potential downside: When selling some devices directly to consumers, cell-phone makers will have to charge higher prices. Currently, carriers typically subsidize $50 to more than $200 of a device's cost in a bid to get users to sign wireless contracts. "This type of move erodes, over time, the subsidy structure for devices," says Pieter Knook, a senior vice-president for mobile communications at Microsoft (MSFT).

More Package Deals?

As a result, if consumers have to pay more for cell phones, they may hold on to these devices longer and buy new mobiles less frequently, says Knook. That said, carriers may start charging less for monthly service to users of gadgets they don't subsidize.

More Americans may subscribe to family plans with a monthly subscription allowing, say, three gadgets to connect to a wireless network. Already, 5% to 10% of U.S. wireless customers are power users, often brandishing a BlackBerry (RIMM) for work e-mail and an iPhone for music and fun. Others may enjoy wireless connectivity for free, à la Kindle. Some hints of carriers' new pricing models could appear in early 2008.

What and how carriers charge for access to open networks will determine just how big this consumer-electronics boom will be. "People are always interested in connectivity, but that connectivity has to be easy, and it has to be cheap," says Chris Crotty, a senior analyst at consultant iSuppli.


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