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Phone.com allays some wireless worries

The mobile Internet software leader's success may help bring the wireless industry out of its doldrums, but the company's growth is unlikely to spur a reevaluation of the roller-coaster market, analysts say.

Mobile Internet software leader Phone.com's success may help bring the wallowing wireless industry out of its doldrums, but the company's growth is unlikely to spur a reevaluation of the roller-coaster market, according to analysts.

Phone.com beat analyst expectations by about 30 percent yesterday, on quick worldwide adoption of its software products for mobile phones by telecommunications carriers. Together with strong earnings from handset giant Nokia this morning, Phone.com's report serves as a reminder that the wireless world's leaders are still showing substantial growth despite an ongoing atmosphere of diminished returns in the market.

Analysts caution against drawing too many global conclusions about the wireless market, however, particularly from Phone.com's earnings.

"This shows that carriers are rapidly rolling out (Phone.com mobile Internet) services," said Peter Friedland, a WR Hambrecht analyst who raised his expectations for Phone.com's future earnings today. "This doesn't show that subscribers (to carriers that use Phone.com) are actually rapidly growing."

Phone.com is the leading producer of software that turns mobile phones into small Net-browsing tools. The company sells its browser and gateway server software to the carriers, which are then responsible for turning on and marketing the Net access services to consumers.

The wireless sector is in a state of flux, with many companies trying to live up to what now appear to be the unrealistic expectations of the last year. A series of setbacks--ranging from delayed public stock offerings from the likes of Verizon Wireless to lower-than-expected handset sales from Motorola and slowing subscriber growth--have resulted in a free-fall for many wireless stocks.

If Nokia's results today soothed some fears that handset sales were dropping across the board, Phone.com's earnings provide some valuable insight into what's happening inside the wireless Internet market--an emerging niche that has been long on hype but short on viable businesses, according to some.

The company said that about 25 additional carriers turned on Phone.com software services this quarter. Wireless data services that use Phone.com technology saw their number of actual subscribers rise by 2.8 million over the quarter to a worldwide total of 6.9 million.

Phone.com said it would likely hit profitability by the end of next March, instead of in September as earlier predicted.

These numbers are critical signs of what is happening on the ground in the young mobile data market. Most of the largest wireless phone firms have turned on their wireless Net services, but it's not yet clear that consumers--at least in the United States--are responding with anything resembling strong enthusiasm.

Phone.com gets license revenues only when a carrier turns on its service--hence the steep climb in earnings this quarter. The actual subscriber figures came in at the low side of expectations, analysts said.

The next few quarters will be a truer test of the market demand, as carriers expand marketing for Christmas and holiday sales, prices for Net access fall, and network upgrades overseas begin to make Net access over phones faster, analysts noted.

"We believe that reduction in service prices...will accelerate deployment, demand and use of wireless Internet services in the mass market, and is likely to be a catalyst in the uptake in subscriber growth, as well as new services and applications," U.S. Bancorp Piper Jaffray analyst Edward Jackson said in a report today.

The stellar financial figures point to Phone.com's strong continued presence at the top of the wireless software market. The company says it's willing to brace itself through periods of rising and falling market perceptions.

"We remain absolutely convinced that this will be adopted faster than PCs," said Alan Black, Phone.com's chief financial officer. "But we remain realistic that this is an early stage."