When worlds collide

Mobile Internet companies experience growing pains Internet world, meet the wireless world. The two are colliding. While the wireless Web promises to become the next big economy, countless mobile Internet companies - ranging from those looking to aggregate or provide content on wireless phones to companies that create wireless Internet platforms - haven't figured out how to do business in the wireless world. But they know it's one of the hottest spaces around.

Richard Siber, a partner at Andersen Consulting and director of the firm's worldwide wireless practice, is like a Hollywood executive these days.A multitude of wireless Web start-ups are pitching him new scripts that are a combination of old movies.

"They can't describe what they do without describing other things that exist," he said. "It's exciting because there's new blood, a new thinking and a new energy, but the reality of the situation is that there are few companies out there that are novel."

Executives with the new blood seem to agree. "We're like a young Nokia and an old Motorola, but you need to add the Microsoft Windows CE platform and the backing of Symbian," one said.

"We're a kind of development team that does things behind a firewall that is thinking of a wireless platform," said another.

Wireless carriers are telling the same story.

Mark Kelley, vice president and chief technical officer of carrier Leap Wireless International, has met face-to-face with at least 50 companies in the last several months.

"The funny thing is, these guys are bright people, but when we start drilling down and asking questions like, `What do you do exactly?' They don't know," Kelley said. "And the CEO says,`We enable Internet content over the wireless infrastructure,' and we ask them how and what kind of content. And he asks, `What kind of content do you want to enable?'"

The problem is that doing business in the Internet world is not the same as doing business in the wireless world, where anyone could set up a Web site and begin marketing the service. In the wireless market, carriers own the customer, and their primary motivation is to differentiate themselves from the competition, reduce churn and make money.

"Most of the industry is running on the old Ma Bell full service provider business model," said Darryl Sterling, an associate with Mainspring, an Internet strategy consulting company."On the flip side is the Internet economy, where everyone provides value to the ecosystem. That's not how it works in wireless. Carriers control the network, air-time and customer, and it's hard for people to understand that this is the Internet business model. Companies that succeed will take the time to understand the wireless dynamics."

"The wireless ecosystem is not a friendly one," said Adam Lavine, co-founder and CEO of FunMail, a company looking to take its animated instant messaging service from the desktop to wireless devices. "People mistakenly assumed it was the same as the Internet frontier," he said. "Carriers want to make money, and you have to sing that tune and have a product or service that has a clear path that shows them how to make money."

Livermore, Calif.-based FunMail is testing its service with Japan's NTT DoCoMo's successful i-mode service and will target the U.S. market once packet networks are in place. The company's core technology converts text-based e-mail messages into animated messages based on FunMail-created cartoons. FunMail licenses the service and charges a per-user subscription fee that is shared with carriers. Operators that license the technology also can create proprietary versions of the service.

FunMail's product fits the criteria carriers are looking for, Siber said. Its product is unique, scalable and appeals to a broad customer base. Most important, FunMail has a way to make money.

"The big key is the revenue model," Siber said. "Revenue is important because we're moving away from just a flat-rate, per-minute model and moving to other revenue models. It's not just showing up to the party and saying to the carrier that you have a great service. Carriers are looking for ways to get stickiness and new revenue models that don't exist today."

"Oftentimes, we think their value is almost nothing," Kelley said of the companies with which he meets."Looking at the cost structure, we've spent millions to get this person to hold our phone, and the incremental dollar we would get from their service is nothing."

Perry Walter, senior vice president with Robinson-Humphrey Co., sees many companies approaching the wireless Internet too narrowly. For instance, one company may have an innovative short message service technology for GSM technology but will alienate itself to the U.S. subscribers who use CDMA or TDMA technology.

"There's a lot of dumb money going into this space," Walter said. "Financiers hear wireless, hear application, and they forget that the service is targeted to only one segment of the market."

Offering products and services that are attractive to broad audiences means wireless Web companies should focus on making services work over the multiple devices, platforms and technologies that will continue to exist in the wireless world - not just Palm, Wireless Application Protocol or GSM technology, Walter said. Scalable applications, easy navigation and user interfaces compatible with carriers' networks also are key, he said.

But even if a company has the basic technical requirements to compete, its survival will become a matter of differentiation. The wireless platform market, for instance, has attracted about 30 different companies offering the same products, said Mainspring's Sterling. Aether Systems is one company differentiating itself by targeting vertical and enterprise markets, he said.

Sterling sees another problem. Mobile Internet companies target the sexy segments of the industry, like content, but neglect some critical spaces that will determine the success of the wireless Web.

The ability to synchronize desktop applications with mobile applications will become a key factor in the mobile Internet, yet it remains virtually untouched, he said. Billing systems to rate different types of wireless traffic, voice vs. data, also will become critical, he said.

"These are horizontal technologies that should be in wireless and the Internet and need to exist before anything takes off. I don't see it yet," Sterling said.

The wireless Internet market is indeed experiencing growing pains, but the revenue promises are big. Many applications and services won't take off until carriers begin migrating next year to packet networks that will allow for higher data speeds and always-on connectivity. And the wireless industry is thoroughly studying how NTT DoCoMo attracted millions of i-mode customers. Companies in the mobile Internet space that differentiate themselves well will begin to pull ahead, and financing will dry up for those not proving that they have any customer revenue opportunities, analysts predict.

"I think we're definitely expecting that there will be some sort of shakeout in the next 12 to 24 months," said Crispin Vicars, vice president with Charles River Ventures. "It's the same classic sense you're seeing on the Internet side. It's going to be a real test to see if business models prove out."