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Openwave woes bad omen for wireless

Tough times are predicted for Openwave Systems, the wireless Web software maker generally regarded as a bellwether for the wireless industry.

Tough times are predicted for Openwave Systems, the wireless Web software maker generally regarded as a bellwether for the wireless industry.

The Redwood City, Calif.-based company this week blamed the recent terrorist attacks for what will be its first losing quarter since 1999, when the company was formed through the merger of Software.com and Phone.com. Wall Street analysts expected a profit of 11 cents per share. Instead, the company warned it will post a loss of 1 cent to 4 cents per share.

The magnitude of Openwave's profit warning has put it in the penalty box on Wall Street as many analysts doubt the company's problems are solely related to the Sept. 11 attacks. But it may also hint at another loss of momentum for the wireless industry, because Openwave powers many of the cutting-edge features found on cell phones such as wireless Net access.

"Wireless carriers seem to have little urgency to purchase next-generation applications," Peter Friedland, a wireless analyst at WR Hambrecht, wrote in a research report.

ABN AMRO analyst Keith Bachman said he expects more bad news is on deck for Openwave. Why? The company is increasingly dependent on landing big deals to hit its financial targets.

That dependence could backfire as telecommunications companies delay offerings of wireless networks. "We believe that carriers will lengthen the sales cycle and purchase all software and equipment on a just-in-time basis," Bachman said.

Bachman maintains that Openwave could benefit as customers launch 2.5G networks, but that may take longer than expected. "We're anticipating 2.5G to take off in the second half of 2002," said Bachman, noting that most of the industry is hoping for the first half.

Messaging focus
Openwave also is expecting carriers to balk, for now, at buying some of the next-generation phone network software it is trying to sell. One of these applications is unified messaging. The software, called UM, creates one inbox for people to access e-mails, faxes or telephone voice mails from any device, regardless of whether it is from a device that is wireless or tethered.

Openwave is trying to sell the UM technology it created to most of the world's carriers. There are some, such as British Telecom, the United Kingdom's biggest mobile operator, and a small carrier in Cincinnati, that are selling the service to all of their customers. But the rest of the world's phone providers are being very cautious, CEO Donald Listwin told analysts this week.

Most carriers are planning to start with extremely limited offerings. Listwin said carriers are still leery about the service and are only expecting to offer UM piecemeal to customers, perhaps as few as 15,000 subscribers at a time. Verizon, the United States' largest carrier, has 28 million subscribers.

Wireless carriers usually sell a new way of using a cell phone to all of their customers at once. E-mail is one example, instant messaging another. Listwin said the difference with UM may have something to do with its technological sophistication. It uses the Internet, for instance, to take an e-mail sent from a personal computer to zoom it to a cell phone.

"Some proponents have less political and physical capital as in the past," Listwin told analysts. "The real view is this is truly a product end users want, but a caution that they don't want to put big, multimillion-dollar upfront deals in place."

Launching like molasses
The reluctance by carriers to buy UM is part of a bigger problem for Openwave, according to WR Hambrecht's Friedland. Carriers are slow to launch their next generations of faster telephone networks capable of speeding data like e-mails between wireless devices at broadband speeds, he says.

Meanwhile, analysts are skittish about price competition from rivals such as Nokia and Ericsson, which can bundle wireless Internet software with other products.

Openwave Chief Financial Officer Alan Black said this week that competitor price cuts have hurt the company's quarter. "The end-of-the-quarter pressure from pricing influenced our behavior," Black said. "There were a few deals where it was not in our best interest to complete them."

Openwave's way of making cash depends in part on the total number of wireless subscribers accessing the Net using phones. That makes Openwave's success a good barometer for the wireless industry.

The company's most valuable product is its micro-browser software for cell phones, which it provides free to cell phone makers to embed in their products. The browser is based on WAP (Wireless Application Protocol) but also operates on any of the five other standards wireless players use, according to the company. Executives estimate the browser is embedded in 70 million cell phones worldwide.

Openwave's WAP browser lets a cell phone customer reach wireless servers run by companies like Sprint PCS, Verizon Wireless or British Telecommunications. Customers are charged for Internet access and any other trappings of the Web such as e-mail services or synching services for handheld devices. The carriers then give Openwave a percentage of every dollar that a wireless Web customer pays the carriers.