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Forecasts for wireless, Net security, ASPs

Dot-com survivors shouldn't have been surprised by the advice given at the recent Wharton Technology Conference that said it's time to work harder at creating products that please consumers.

At one point during his keynote address at the 2002 Wharton Technology Conference last month, Bruce Claflin, CEO of network equipment maker 3Com, offered some advice to his audience: Remember, he said, that while technology categories improve at predictable rates, product categories don't. "Think about Moore's law from the 1980s: The power of a microprocessor will increase by 50 percent every 18 months. It's still true."

Similar reliable laws exist for bandwidth, storage and software. But product categories are unpredictable, he said, because a product has to pass a critical threshold of combinations of technologies that makes it useful.

Claflin gave the example of the largely forgotten Newton, Apple's version of an electronic handheld organizer. "Apple knew there was a latent demand, but the technology hadn't quite matured past that invisible threshold of usability and value. The battery technology was a little too short, the handwriting technology a little too ragged, the price a little too high, and the product bombed. Fast-forward three years to Palm, a very similar device, which passes the threshold and makes billions."

"Mistrust your product people...It's no fun. But you are likely to fail unless you understand whether that bundle of technologies really meets consumers' needs."
--3Com CEO Bruce Claflin
What can firms do to avoid this kind of error? "Mistrust your product people," advised Claflin, explaining that they tend to become advocates for new devices. He suggested that CEOs look at the original consumer research themselves, for example, personally viewing videotaped focus groups. "It's no fun. But you are likely to fail unless you understand whether that bundle of technologies really meets consumers' needs."

Known for introducing IBM's ThinkPad line of mobile computers in 1992, Claflin talked about the ecstasy and subsequent agony of the high-tech bubble. He and other conference speakers noted a general awareness among technology leaders that?-trendy though the latest electronic toys might be--these new technologies have to translate into cold cash and must be made secure from both domestic and foreign threats.

Wireless data services
Will data and other add-on services be the next growth area for the wireless industry? A panel of experts from the telecommunications industry tried to peer into the future. They also indulged in half-serious grumbling when the moderator asked the audience to turn off cell phones and pagers during the discussion. "For some of us, that's money," said one.

Most panelists were upbeat about the prospects for wireless data. "You've seen the change in usage patterns: Everybody carries a phone," said Mark Krantz, vice president for marketing strategy at Sprint PCS. "It's no longer something stuck in the car for emergencies. The same will be true as we raise the utility of new wireless devices: People will adopt" the new technologies.

Tim Pash, a messaging and mobility solutions specialist for Microsoft, said that his company is currently implementing wireless technologies such as e-mail accounts, databases and networked computers. "Our product sets are morphing to adapt to this new medium. We also have a killer development platform to create new mobile-friendly applications."

Bill Stone, executive director of advanced technology strategy for Verizon Wireless, also expressed high hopes for wireless's present and future. "You could walk to our (Philadelphia) store right now, buy our new Sierra wireless air card and have the same experience mobile that you have today via dialog." But Stone also named obstacles to progress, including high network infrastructure costs, the need for ubiquity in order to sign up enough subscribers and justify investment, along with performance improvements still in the works, such as a huge jump in transmission speeds.

An even more cautious note was sounded by Jeff Erb, co-founder and COO of Xportical, a Philadelphia-based wireless and technology developer and vice president of the D4 Creative Group ad agency. In Japan, he said, consumers are used to using their cell phones for content. That's not yet true in the U.S. Erb believes that before Americans will widely adopt wireless data, they need to be regularly using their cell phones to receive information by the voice route. His company is exploring these avenues.

What kind of wireless data device, or devices, do U.S. customers really want? Most panelists predicted that people will prefer two or three devices with customization options, rather than one do-it-all device (referred to as the Swiss army knife approach.) "Devices have limitations such as battery life and the form factor," said Pash. "We foresee mobile as a complement to the Internet, not a substitute."

"Don't make devices overly complex so that you need eight hours of customer service time to get them up to speed."
--InPhonic CFO Don Charlton
Wireless data devices, the panelists said, should have everyday usefulness as well as be lightweight, attractive and emotionally appealing. Some emphasized the need to offer high-quality service and faster data rates while achieving the right price point. Don Charlton, CFO of InPhonic, a wireless infrastructure provider, emphasized that, above all, people want their service to work. "Don't make devices overly complex so that you need eight hours of customer service time to get them up to speed."

At one point, Erb was asked about the potential of wireless for advertising. He said his company is developing marketing opportunities via voice as opposed to SMS (the text-relayed mobile service widely used in Europe.) Customers can subscribe to receive financial and entertainment-related information. "If you can deliver information while marketing digital services and up-selling other products, you have a huge opportunity to communicate directly with your customer, as opposed to an e-mail or direct mail which may not get read."

Erb also sees possibilities in the fact that the largest segment of the U.S. population with cell phones is teenagers. He cited the huge success of an offering one company had: People could call in and hear Britney Spears' voice, then make other selections. "They get 100,000 calls a week." Michael Davies, chairman of Mercator Partners, a strategy consulting firm, reported a similar teenager-cell phone connection in the U.K.: Cigarette and candy sales are dropping as British youth spend money on ring tones and covers for their mobile phones.

Why are U.S. companies still struggling to hook the American consumer on wireless data services when it's such a smash hit in Japan and Europe? According to Erb, this country's different infrastructure, usage habits, and pricing structure present roadblocks. "So much more can be done in Japan because of that country's high-speed bandwidth," he added.

But according to Davies, "selling wireless services is not about bandwidth." He pointed out that European wireless Internet links are actually not very fast. The innovative carriers in Europe, he said, are profiting not from "selling pipes" but from ensuring that wireless is an intimate part of people's lives--"things like making a phone do a funny ring."

Davies told of attending a conference at which his phone rang with a default tone. His European client looked at him in horror and ordered his assistant to get Davies a ring tone voucher. "That's the essence of the way other countries think about this."

Krantz reminded the audience that when looking at the staggering adoption figures for Japan and Europe, they should remember that many people in these countries either didn't have the Internet at all--or were paying very high rates for it--when wireless came along. "All of a sudden there was a way to get the Internet in a mobile environment, with a color screen, at a fraction of the price.

"What this tells us," Krantz added, "is that people's preference is for mobile. We just have to get the model and value proposition right. In Japan, 25 million to 30 million users, boom. We in the U.S. just have a steeper hill to climb."

Internet security threats loom
Security issues have catapulted to the forefront since September 11, and businesses are re-evaluating the vulnerability of their systems. But are cyber threats overhyped in the media? Many panelists emphasized that managers should not allow visions of cyber terrorism to blind them to equally serious security concerns. For example, although the FBI estimates that U.S. businesses lose millions every year to system break-ins, two-thirds of these are not done via the Internet.

Howard Schmidt, vice chair of the White House's Critical Infrastructure Protection Board, emphasized that CEOs need to protect their IT systems in general. Many IT systems unrelated to the Web require a high degree of security, such as air traffic, 911, and power generation. "In one of my former positions, we found out about a teenager trying to hack his way into a city's traffic light controls so he could watch car accidents happen. That was through a maintenance port, mind you, not the Internet."

"It's the person inside the bank or power grid systems who would know how to take out our critical infrastructure. Insiders are among our most dangerous elements."
--Jeff Jonas, president of Systems Research and Development
But one major security issue special to the Internet is identity, agreed the panelists. In the real world, we show documents like passports and credit cards. While these documents aren't perfect, said Ian Curry, vice president of product management and strategy for Entrust, an Internet security services provider, they "enable you to present yourself to someone who has never met you, and they can trust that you are who the document says you are." But on the Net, noted Curry, transactions have more in common with his favorite New Yorker cartoon. "Two dogs are using a computer, and one says to the other, ?What's great about the Net is no one can tell you're a dog.' If you don't know who you are doing business with you can't do business effectively."

One possible remedy is digital certificates, or digital IDs. These electronic counterparts to a driver's license or passport can be presented electronically to prove identity online. John Weinschenk, a vice president at VeriSign, a provider of digital trust services, explained that digital certificates can be used to get credit information and discover whether an online company is who it claims to be. While only 10 percent of an astonishing 40 million Net domain names currently have these certificates, most panelists felt that digital IDs would become increasingly common for both businesses and individuals. Curry predicted that we will eventually possess different electronic certificates for different business purposes, akin to carrying multiple cards in our wallets.

An audience member asked if managers should focus more on "closing the doors off" and protecting their infrastructure, or on facilitating commerce. "It depends entirely on whether your business is subject to being targeted," answered Jeff Jonas, president of Systems Research and Development, an enterprise software solutions developer. "If you have a lot of brand equity, like the Coca-Cola Bottling Company, you need sophisticated facilities management and high security. If you only have two outlets, it's not the same at all." Jonas is the inventor of NORA (Non-Obvious Relationship Awareness), a sophisticated technique for detecting suspicious relationships between people across very large data sets.

In addition to worrying about threats from the outside, businesses should watch what their own employees are doing, advised the panelists. As Jonas put it: "It's the person inside the bank or power grid systems who would know how to take out our critical infrastructure. Insiders are among our most dangerous elements."

The vice president of security research for Gartner G2, Richard Hunter, quoted the Defense Security Service, a government agency that tracks attempts to steal military-sensitive information from the United States. In 2001, he said, Internet attempts at this type of theft accounted for less than 4 percent of the total thefts. Surprisingly, the most common method used was to call someone in the company and ask for the information. Other common methods included attempting to hire the company for a specific task, be hired by it, or buy it.

Software as a service?
In place of shrink-wraps and CDs, software is being distributed as a service over the Web and paid for on a per-use or subscription basis. Will the trend toward Web services and application service providers (ASPs) dramatically change the way software is developed and used?

Paul Bryan, a manager in Microsoft's eBusiness Strategy Group, told the audience that "Microsoft has a lot underway in this area, including our dot.net architecture, which is a method of using and developing Web services. It's all about greater efficiency for business."

"We had our data on the Net by 1994. It creates incredible opportunity and efficiency," said David Franey, vice president of the global online recruiting network MonsterTRAK. "Students used to have to go out and sign up for job interviews. Now they can do it anytime from home. Plus, people can see online what comparable positions are getting paid."

Added Bill Karpovich, vice president of product marketing for USinternetworking, an Internet managed application provider: "No longer does an application have to be running underneath your desk. So it opens up opportunities, whether you are posting your career interests at 3 a.m. or are a large enterprise that needs an HR or financials application." Karpovich also said that the current profusion of standards associated with Web services is, paradoxically, causing more companies to use these services because they need help navigating the different interfaces.

Cases of companies achieving substantial savings through Web services were offered by Jane Mingey, a services director in the life sciences for J. D. Edwards, a company that provides enterprise and supply chain computing solutions. For example, she said, General Motors has used its Web services architecture to move closer to a build-to-order business model, and expects to reduce by half its $25 billion inventory investment.

"It's very different when your customers are paying you every month: They beat you up every single day."
--David Knight, vice president of application services, Portera
One benefit that today's ASPs typically cannot provide much of, though, is customization. "The key to providing ASP service is to find applications that" companies themselves don't customize, Karpovich said. "A (client) company wants to get the economies of scale and skill the service provider has." Among applications that currently get outsourced to his company, he cited the commonly used Microsoft Exchange and standardized accounting systems. "But we'll be able to do more as Web services evolve."

"Our competitors in college recruiting were providing custom solutions and went out of business," Franey added. "We embraced the Net right away, which allowed us to provide a standard application and achieve success."

How to integrate a company's applications with their existing installed solutions is a concern of many managers, according to the panelists. "There needs to be a set of technologies that lets people integrate, extend and enhance their various applications," said David Knight, vice president of application services for Portera, a global Web services provider. "XML (Extensible Markup Language, a license-free application, similar to HTML, used for structuring data) is a building block for doing that, and our application today is completely wrapped in XML interfaces. We've had customers integrate it with their back-end financials, and more."

Control issues loom large for some companies, too. "The biggest challenge that remains today for ASPs is that it's hard for some CIOs to let go of their servers," Karpovich said, "especially because a lot of these systems are fundamental to day-to-day operations." Asked about security fears, he called it a "perceived inhibitor," but asserted that his company has gone four years with no security breaches. He compares this to research showing that 90 percent of enterprises have had a significant breach in the last six months. In a statement that harked back to the Internet security panelists' caution about insiders, Knight added that "a company's highest threat is internal anyway. In some ways you're better off having a third party handle this for you."

Will ASPs and outsourcing continue to gain ground? Some panelists highlighted the recent slump in the economy as driving companies even more in the direction of outsourcing. They attributed this to a trend toward concentrating on your core business. Karpovich cited recent Gartner data projecting that 75 percent of IT budgets will be spent on outsourcing by 2005 compared with 15 percent of IT budgets today.

Like most of the panelists, Knight believes that "software as service" is the future of software, adding that he learned this the hard way. "Traditional vendors of software demand a huge amount of money up front with no guarantee that it will meet your business needs. It's very different when your customers are paying you every month: They beat you up every single day. Our application is much better than it would have been if we were simply a software vendor because we have been held accountable."

 
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All materials copyright © 2002 of the Wharton School of the University of Pennsylvania.