Gilgamash, here's the story to which you refer...
Smith Micro could ride Wi-Fi wave
Commentary: Linking wireless networks carries big risks
By Mike Tarsala, CBS.MarketWatch.com
Last Update: 12:06 AM ET April 30, 2003
ALISO VIEJO, Calif. (CBS.MW) -- Smith Micro, a tiny software maker that first made its mark in the 56k-modem wars in the mid-90s, could re-emerge as one of the early mercenaries in the fight to boost sales of Wi-Fi network equipment.
Smith Micro's been as visible as tourists in Toronto lately. Sales were a little north of $6 million last year, and although it has drastically pared losses, the company is still losing money. On an average day, about 7,700 Smith Micro shares trade on Nasdaq. The stock (SMSI: news, chart) has slid from an all-time high of about $32 in March 2000, to less than $1 today.
But with the latest version of its flagship data connectivity software, Smith Micro's executives say the company stands a good chance of ramping sales this year. The company's upgraded main product is one of the first that lets mobile workers switch between cell-phone-based data networks and Wi-Fi networks on the fly. It seems likely to make Smith Micro a sought-after partner of major telecom companies.
"We're in a leadership role in providing this kind of software to carriers," said William Smith, Smith Micro's chief executive. "Verizon (VZ: news, chart) and Cingular Wireless buy products through us exclusively -- and they are No. 1 and No. 2 in the wireless business in North America."
Although sales in Smith Micro's fourth-quarter fell about 1 percent from the previous year to $1.87 million, the company, which trades at a little more than 1 times sales, says it still expects to turn a profit for the year, while increasing sales by at least 20 percent.
Bright spot
Wi-Fi is one of the only technologies that excites analysts these days, because it has the potential to be the kind of grassroots technology movement from which the Internet grew. It gives customers a low-cost way to wirelessly roam with a laptop computer or a hand-held. As long as you're a few hundred feet of a transmitter, you can hook up to a Wi-Fi Internet connection at broadband speed. The transmitters are already in more than half of Starbucks (SBUX: news, chart) coffeehouses, and they're spreading fast to airport terminals, apartment buildings and corporate offices.
As a result, industry leaders including Intel (INTC: news, chart), with its Centrino chip, Cisco (CSCO: news, chart) with its $500 million purchase of Wi-Fi equipment maker Linksys, and Microsoft (MSFT: news, chart) with increased operating system support all are all placing bets on Wi-Fi.
"Wi-Fi is the hottest thing right now, in all of telecom," said Greg Gorbatenko, analyst with Loop Capital Markets in Chicago. "The market is there. Investors believe in it, and they'll vote with their dollars that this is a good idea."
But there are glaring problems that keep Wi-Fi from being a runaway hit: Transmitters are still hard to find in some areas; if you stray beyond the range of the transmitter, you lose your connection; and major telecom carriers aren't spending to put advanced services on Wi-Fi, since many already spent billions on building 2.5 and 3G wireless networks that use cell-phone technology.
That's where Smith Micro comes in. The company's technology can keep your laptop connection going on a cell phone network, then automatically ask if you want to switch to a faster, cheaper Wi-Fi connection when you encounter a transmitter. When you roam away from the Wi-Fi, you can automatically switch back to the cell phone network -- all without losing your work.
Out of range
Network-switching from cell-phone to Wi-Fi networks is something that excites telecom carriers, says Carl Zetie, analyst at Forrester Research. Instead of competing against Wi-Fi, it's a way for the carriers to generate demand from the new technology, by making sure you keep your connection going when you're not near a Wi-Fi transmitter. It helps make their big investments in 2.5 and 3G wireless in the bubble years more viable.
"The range in which a Wi-Fi network can operate is limited, and you're always going to need the cell phone-based wireless WAN," Smith says. "Both serve a purpose."
Among the telecom companies, T-Mobile (DT: news, chart) has taken the lead in offering access to Wi-Fi networks. Through a partnership with a company called Boingo, it offers software to jump from one Wi-Fi hotspot to another. But so far, the company doesn't allow roaming between its Wi-Fi and cell-phone data networks. It's not likely to happen until at least the beginning of next year, says Phillip Redman, Boston-based analyst with Gartner Inc.
With help from Smith Micro, Verizon Wireless might beat T-Mobile to the punch. A source familiar with the situation says that Verizon Wireless, which has more than 30 million cell phone subscribers, plans to announce a data service for businesses and consumers in May that would switch between cell phone and Wi-Fi networks. The service should be up and running by year's end.
And according to the source, Verizon Wireless has been in exclusive talks with Smith Micro to provide the key part of front-end software that would make the service possible. The sources say that any deal with Verizon Wireless could potentially represent millions in business over several years for the tiny software maker, with all of 40 employees.
Verizon Wireless already announced in mid-May at an industry conference that it planned a new wireless offering that could tap into Wi-Fi hotspots, but the company didn't' announce anything definitive.
There are very significant risks to any investment in Smith Micro. The company's stock is so thinly traded that it'd be hard to sell off if business started to tank. The company needs to raise its stock price to more than $1 by the fall, or face likely Nasdaq delisting. Smith Micro said last week that shareholders gave the OK to a reverse stock split, but that would serve to further restrict the number of shares in the market, exacerbating the liquidity problem.
Another risk is that Smith Micro continues to bleed cash, and it only has about $3 million of it left. As a result, there's a large short position in the company's shares. On the plus side, however, is that the company has no long-term debt.
Smith Micro faces an endless string of obscure competitors. There are dozens of privately held start-up companies that could develop similar technologies to its main product.
And while Wi-Fi is exciting, analysts warn that the market is really unproven at this point. No company is really making money on it. It remains to be seen how much companies can charge for advanced wireless services, and just as important, how they'll bill for it.
While it's too early to start a love affair with Wi-Fi, it is one of the few bright spots from a technology standpoint in recent years. And Smith Micro is a pint-sized software maker that could be at the right place at the right time.
Mike Tarsala is a San Francisco-based reporter for CBS.MarketWatch.com.
AI
