Wi-Fi Tightens Its Belt

By Ed Sutherland

August 04, 2003

Prognosticators say the Wi-Fi industry will be worth billions. But the bubble will also burst (at least on any short term profits for chips, hotspots, and more). Will this leave us with a more solid foundation in WLANs?

With predictions of the Wi-Fi industry being worth billions in a few years, why are observers warning of lean times in the near future? It seems success may spoil the dreams of near-term revenue bonanzas.

From the chips powering Wi-Fi enabled laptop computers to the commercial hotspots, revenue expectations are falling dramatically. Call it an industry shakeout or consolidation, but long-time chipmakers are on the auction block as wireless companies re-jigger revenue expected to plummet from the current $30 a month per user to $3 a month in five years.

John Yunker, analyst for Pyramid Research, highlights a dilemma where dramatic growth of worldwide Wi-Fi use is coupled with dropping prices. The research firm predicts 707 million Wi-Fi users by 2008.

"However, the rapid growth in Wi-Fi users will be coupled with equally rapid price erosion," says Yunker. The analyst believes the average revenue per user (ARPU) will drop from $30 per month to $3 per month in 2008.

Costing little to deploy in comparison to wireline or cellular communication systems, Wi-Fi has become a commodity. Yunker expects most WISPs and Wi-Fi hotspot aggregators will die as the low revenue makes it impossible to support them as standalone Wi-Fi attempts. As seen with Boingo, Wayport, and iPass, many hotspot aggregators and service providers will team up with carriers to assist with roaming and billing issues.

In another sign of the doubled-edged sword of Wi-Fi's success, researchers at Frost & Sullivan blame the growing number of free hotspots dotting the U.S. for the dwindling revenue of commercial WLAN operators, such as T-Mobile, Boingo and others.

"The proliferation of free hotspots -- over 600 across North America in 2002 -- makes the customer price conscious, therefore making it more difficult for providers to expand Wi-Fi services," according to the report entitled "U.S. Wi-Fi Hotspot Services Market."

While the Frost report sees Wi-Fi acceptance growing and the number of hotspots increasing, community and civic wireless networks threaten to "render Wi-Fi hotspots redundant as their coverage increases." Analyst Wai Sing Lee sees each additional community hotzone as impeding the growth of the commercial Wi-Fi hotspot market.

Although the hotspot industry is expected to grow from the current $18 million to more than $1.4 billion by 2009, Frost & Sullivan recommends hotspot operators carefully select potential venues.

"The balance of power favors service providers that can control locations, since it allows them to dictate the terms of business," says Lee.

In his report on the maturation of the Wi-Fi industry, Pyramid's Yunker says the recent sale of the Wi-Fi arm of chipmaker Intersil to GlobespanVirata "is a clear sign that this is a low-margin game that only the major players (i.e. Intel and Cisco) can survive within."

Russ Craig, analyst with the Aberdeen Group, concurs. Craig pegs the plummeting price of 802.11b chips as one reason for the recent sale of Intersil's Wi-Fi business. In early 2002 an 802.11b chipset sold for $18. By summer of the same year, chipsets had dropped to $16.

"Prices have declined at 28 percent per quarter to the present $4 level," says Craig in a report on WLAN chip competition.

Craig believes as more competitors from Taiwan enter the Wi-Fi chip market, chipmakers can expect the same downward spiral for newer 802.11a and 802.11g products.

"An identical price decline is expected for those technologies, as well. This does not threaten the entire 802.11x market in the near term, however," according to the report.

The Wi-Fi bubble may not burst, as some pundits predict, but the industry is heading for a period of consolidation allowing it's meteoric rise, only to continue with a more solid foundation.

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