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Reality checks dampen wireless optimism

In the last few weeks, the wireless market has seen earnings warnings, customer shortfalls, plummeting stock prices and delayed initial public stock offerings. What's happened?

The honeymoon is over for the wireless market, and the aftermath is getting ugly.

In the last few weeks, the market has been hit with earnings warnings, customer shortfalls, plummeting stock prices and delayed initial public stock offerings. These problems have plagued a part of the technology industry that many market observers had hoped would pick up and succeed where the flagging Internet sector had failed.

What's happened? Companies are still signing up customers by the hundreds of thousands per quarter. Yet beyond some of these solid numbers, the reality of market competition seems to have set in--undermining what had been universally buoyant predictions for the growth of mobile phone and mobile data use, analysts say.

"You've got a lot of service providers all targeting the same customer base," said Eddie Hold, a wireless analyst with research firm Current Analysis. "They're all suddenly discovering that their expectations were a little too optimistic."

That reality is rippling through the industry, prompting lowered expectations in service providers, handset manufacturers, and so on, down the line. Further anxieties have been prompted by the potentially monumental amount of money service providers will soon have to spend on government-auctioned spectrum to use for high-speed "third generation" wireless data services.

As a result, the outlook for the wireless industry remains cloudy into the near future, many analysts say.

Picking up the pieces
At the top of the industry are the giant telecommunications service providers and handset manufacturers, which work closely together and are staggering in tandem.

Stock in European wireless giants Nokia and Ericsson slipped Wednesday as investors anticipated the companies' earnings. Ericsson, which will announce financial results Friday, slid nearly 6 percent by market close. Nokia, which will report earnings later this month, saw its stock more than 2 percent by market close. Investors appear to be edgy about the growth prospects for wireless after a series of worrisome announcements and postponed IPOs.

Verizon Wireless, the largest of the wireless carriers in the United States, said Monday that it had decided to put its IPO on hold as a result of the "recent volatility of capital markets." That will likely translate into more delays for BellSouth and SBC Communications' Cingular Wireless, which had been expected to go public early next year, analysts say.

Giving those companies pause has been the market's reception for AT&T Wireless, which met tepid enthusiasm when it went public in April and has fallen more than 30 percent since that time.

The network operators are frustrated that they're being lumped in with a malaise affecting much of the rest of the technology sector, even though they are legitimately beacons of growth among their telecommunications brethren.

"Unlike the dot-coms, we have subscribers," said Ken Woo, an AT&T Wireless spokesman. "But the bottom line is we've got to show execution. We've only had a couple of quarters to do that as a public company."

AT&T Wireless is, in part, "being dragged down by the parent," Woo added.

It's these companies that are most directly being forced to reevaluate their ability to grow, analysts say.

The trouble is that they're all targeting the same type of customer--largely the tech-savvy, mobile businessperson dubbed the "mobile see story: Wireless auctions could tank telecom stocks professional" by legions of customer-hungry marketing departments. That strategy has served the companies well and is still leading to growth that far outstrips the remainder of the telecommunications industry. But it's a limited market, some say.

If the companies want to get back on track with continued growth, it's time to expand the market, analysts say. In Europe and Japan, where cell phone use far outstrips the equivalent rates in the United States, companies have far more successfully marketed their services to teens and older subscribers, largely through offering pre-paid plans.

"This is not the death knell. This doesn't even have to mean growth has to slow down," Hold said. "It means that wireless providers just have to broaden their horizons as to who they're targeting."

Expanding their marketing efforts could also help cell phone manufacturers, which are experiencing their own downturns in projections and stock prices, analysts say.

Data on hold
Alongside the woes of the carriers and handset manufacturers are the worries of the wireless data market, which still resides in next-big-thing land.

The hype that marked the sector early in the year has in large part evaporated. Trade shows still see hundreds of wireless application service providers, portals, games and messaging companies. This week's annual Cellular Telephone Industry Association (CTIA) technology conference even had to turn away participants.

But the interest of the financial markets has largely turned to infrastructure providers, on the theory that this will be a better place to find long-term, stable revenues.

"We're a lot more interested in fast, affordable pipes right now," said Chris Noble, a general partner at venture capital firm Bay Partners, speaking on a CTIA show panel Tuesday in Santa Clara, Calif. "We don't know whether the applications and services will be features or businesses on their own. But we do believe the networks are going to happen, and that's where you'll make some money."

The trouble with actual data services is that the biggest potential is still in the future, when high-speed networks will allow something more than today's slow, cumbersome software applications. At this point, there is still minimal use of the wireless data services in the United States, despite considerable attention on the development and marketing fronts.

Nevertheless, the sector still has its boosters.

"We're just now beginning to hear a thunderous demand for wireless services," said Josh Daniels, a general partner at CMGI's @Ventures group. "We like to invest just ahead of a mass market, and we think that's occurring over the next 12 to 18 months."

Whether or not that's true, the rocky period of adjustment to mark the realignment of expectations won't harm the industry's long-term growth, some say.

"There's an anticipatory phase that always exists in any industry before reality. And just before reality comes, (investors) then penalize these companies for not making it happen sooner," said CTIA chief executive Tom Wheeler. "I don't worry at all about the industry."