Special Report October 9, 2006, 4:26PM EST

Radio Shipment-Tracking: A Revolution Delayed

Radio frequency identification, or RFID, has been slow to reshape retailing, but it's finding unexpected uses in health care and beyond

by Rachael King

Pete Abell used to be bullish on radio frequency identification, a technology for tracking shipments known by its acronym RFID. Back in September, 2002, he penned a research report saying RFID would have an "imminent effect" on retailers and manufacturers, helping them better follow products from the factory all the way to store shelves. RFID would help manage inventory, reduce costs, and by 2006 it would be economically viable for its users, according to the report, published by consulting firm AMR Research.

Abell wasn't alone in rallying around RFID. Consulting firm IDTechEx predicted that by this year, more than one billion RFID tags would be used on cases and pallets in the so-called supply chain, the complex network of suppliers, storage facilities, transporters, distributors, and retailers that bring a product from the factory to the store.

Neither Abell nor IDTechEx is quite so bullish anymore. "It's a real whimper, rather than a shout," says IDTechEx chairman Peter Harrop, referring to use of RFID technology in the supply chain. IDTechEx has already slashed its forecast to 500 million tags and is about to ratchet the figure down again, this time to 350 million.

DIDN'T WORK ON METAL.

"What we have seen is that the business case has not materialized in line with what was expected," says Abell, now program director of radio frequency sensor network research at Manufacturing Insights, a subsidiary of consulting firm IDC.

What went wrong? For starters, the optimistic forecasts failed to account for technical glitches that made early RFID devices hard to read. The tags checked out fine when affixed to cardboard. But when they got wet or were affixed to metal or liquid products—not so much.

Another obstacle: the supply chain can be a complex Hydra of manufacturers, retailers, shippers, and others. To work well and be cost effective, the technology would have to be adopted by most if not all the companies in a given network. Many suppliers are waiting for the costs to drop and the technology to mature in order to build an RFID business case.

MOTOROLA'S COUP.

There are also concerns about privacy, tag security (see BusinessWeek.com, 3/16/06, "What's Lurking in That RFID Tag?"), and increasingly, vendor stability in a rapidly consolidating market. "A lot of companies are being acquired or looking at other markets," says Abell. RFID sales are not resulting in "sustainable income for the various participants." Alien Technology, a maker of RFID tags and readers, scrapped a planned initial share sale in early August citing "market conditions."

Then, on Sept. 19, Symbol Technologies (SBL), which makes RFID readers and tags, was snapped up by Motorola (MOT) for $3.9 billion (see BusinessWeek.com, 9/20/06, "Motorola Bellies Up to the Bar Code").

"It's a great revenue opportunity," Motorola Chief Executive Ed Zander said in an interview at the time. He plans to tap that opportunity by marrying RFID with Motorola's expertise in wireless technology.

STAR WARS APPLICATION.

And even though demand hasn't met expectations, other companies aren't giving up on RFID either. A handful of large retailers such as Wal-Mart (WMT), Target (TGT), Best Buy (1 2 3 4 Next Page