Outlook ’04: WLANSs –

The cutthroat competition for phone customers that has spawned so many annoying television commercials may actually produce something positive: opportunity for wireless startups.

Competition is forcing wireless carriers to improve their coverage and service with technology being developed by young, venture-backed companies.

This year, venture capitalists will invest in companies that extend and improve cellular service (by boosting signal strength inside buildings, for example) and in companies that leverage Wi-Fi hotspots and broadband infrastructure to make cellular phone coverage ubiquitous.

Investing in wireless is nothing new, of course. It has been one of the hottest sectors for venture capitalists in recent years, with VCs investing in everything from Bluetooth chipmakers to developers of video games that can be played on cell phones (see story, page 8).

In 2002, 218 wireless companies raised $2.1 billion in new rounds of venture capital, according to Thomson Venture Economics (publisher of Venture Capital Journal). Last year, another 190 wireless companies pulled in more than $1.3 billion.

While the amount was less than the previous year, it is a clear sign that VCs continue to feel bullish about the space. Market analysts predict that investments in wireless technology will pass the $1 billion mark again this year.

While voice over IP (VoIP) is finally gaining traction, the new buzz is about using broadband infrastructure to extend cellular coverage.

Wireless LANs, most commonly known as Wi-Fi hotspots, can carry voice traffic and extend cellular coverage to any Wi-Fi-enabled airport, hotel or cafe. The same can be done with DSL broadband lines.

Bad Report Card

Consumers are very unhappy with their cell phone service right now. One-third of U.S. wireless subscribers give their carriers a grade of “D” or “F” for quality of service, according to the National Regulatory Research Institute at Ohio State University.

It is likely, then, that a significant number of those customers will seek out carriers offering better quality, something made easier since the Federal Communications Commission cleared the way for cell phone number portability.

Some analysts say they expect hundreds of thousands of users to take their phone numbers to new carriers. In the first four weeks after number portability went into effect, 2,400 people lodged complaints with the FCC against carriers that made the process more difficult than expected.

When Europe rolled out number portability, carriers saw a 20% to 50% increase in churn rates, according to ClientLogic Business Intelligence.

The good news for startups is that the carriers trying to woo new customers with higher-quality service are more likely to seek technology help from third parties to improve their networks than try to do it in house. Startups are nimbler and faster. They can concentrate on a single effort without any of the bureaucratic hurdles that plague big companies. They can also work with each of the handset makers and develop a single industry-wide technical standard.

Neato Kineto

Kineto Wireless, based in Milpitas, Calif., closed its second round of venture capital in September. With $24 million of funding behind it, and commitments from 3i, Sutter Hill Ventures, Mitsui & Co. Venture Partners, SeaPoint Venture Partners and Storm Ventures, the company has developed technology that uses WLANs like cellular bay stations, extending cellular coverage inside the home or into public spaces.

Kineto’s is an end-to-end system for wireless carriers: The company is putting the system through trials with three network operators in the United States and Europe and working with handset makers to make the system work. Kineto expects to have is first system in place and operation by the second quarter of this year.

Ibis Telecom, a one-year-old company based in San Diego, is seeking its first round of venture capital.

Three wireless industry veterans are behind the startup, including Stefan Scheinert, the founder and chief executive of Littlefeet Inc., a company that focused on providing strong, clear signals to cell phone users. Ibis’ system implements a piggyback wireless architecture that uses the subscriber’s broadband Internet connection to extend cellular coverage.

Kineto and Ibis are permutations of one wireless trend already gaining a foothold in the marketplace: using Wi-Fi hotspots to transmit voice traffic within a closed enterprise network.

This technology would allow a manager to roam through a factory, but still be reachable by phone. That VoWLAN market is small and immature, but it is poised for rapid growth over the next five years, according to research firm In-Stat/MDR, which predicts that end-user revenue will grow from $16.5 million in 2002 to $507 million in 2007. Avaya, NEC, Mitel and Nortel Networks have all embraced the technology, as have vendors like Cisco, SpectraLink, Symbol Technologies and Vocera Communications.

Still, VoWLAN systems developed for enterprise-level communications are not a technology that can be widely deployed. There is no VoWLAN phone on the market that costs less than $400, making the technology prohibitively expensive. Plus, 802.11 networks weren’t built to support voice services, making quality of service a real issue.

Security, authentication and authorization are some of the other issues that need to be resolved before the technology can be widely deployed. All that security and authentication needs to happen fast enough so that a call isn’t dropped as a user moves between access points.

Companies like Kineto or Ibis may succeed because they’ve tapped into a fiercely competitive market for wireless customers. They are not asking carriers to build new towers or add antennas to their transmission networks. They’re providing a low-cost way of extending wireless phone service into homes and offices over broadband systems.

To transmit a call over broadband infrastructure costs a carrier about one-quarter of what it costs to send that call over a cellular network. And, if carriers can promise high-quality indoor service, they may take market share away from telephone providers as consumers abandon their landlines entirely.

Plus, by creating an in-home cellular network, carriers can bundle wireless phone service with other broadband offerings like Internet or cable TV access.

Kineto and Ibis are not alone, though. There is still opportunity for others developing technology to make VoWLANs more secure and able to deliver high volumes of high-quality voice traffic.

It also points to a larger opportunity – using broadband and Wi-Fi infrastructure to create new applications and deliver services beyond what they were designed to do. Pronto Networks, a Pleasanton, Calif.-based startup that uses Wi-Fi hotspots to allow online gamers to compete against each other in real-time, plans to add telephony to its offerings. It is backed by Draper Fisher Jurvetson and Intel Capital.

While there is likely some hype in how quickly it will take for VoWLANs to gain traction, it is undeniable that the demand is there. Wireless carriers spend up to $5 billion each year to expand improve the quality of their cellular network, and this technology is one that has already caught the eye of cell phone carriers.