WI-FI": HARVESTING THE OPPORTUNITIES FROM THE HYPE

Cabot Adams LLC released its latest industry report on trends in telecommunications. "Wi-Fi" or 802.11 based wireless communications technology is currently froth with challenges and opportunities. There continues to be significant investor interest in this space. We report on two hot areas, WLAN semiconductors and wireless security that are most likely to attract capital in the near to middle term.

New York, NY – Ravi Bhagavan, Executive Advisor of Communications and Internet Services at Cabot Adams LLC, provides comments on opportunities in the wireless space that investors and entrepreneurs should we aware of.

By the term Wi-Fi", we mean IEEE 802.11 standards based wireless networking or WLAN. Without getting into semantic details, Wi-Fi in general includes 802.11b based technology that dominates today with 95% of market share, as well as 802.11a and 802.11g standards that are emerging as forceful competition. 802.11b uses DSSS coding and operates in the 2.4 Ghz frequency spectrum in only 3 non-overlapping channels, while 802.11g and 802.11a use the far more efficient OFDM technique to achieve up to 54 Mbps speeds in the 2.4 GHz and 5 GHz frequencies respectively.

Research firms such as IDC and Gartner suggest that the current Wi-Fi / WLAN market is $1.7-$2.0 billion, and is expected to grow at a CAGR of 20%-30% to $5 billion by 2006. In a similar gushing vein, TeleAnalytics projects over 300,000 Wi-Fi hotspots" worldwide by 2006, with almost $30 billion in service revenues, with a implied CAGR of almost 300% from 2002. Sounds like Internet deja vu all over again!

Lets cut through the hype. Wi-Fi has significant challenges in the medium term. Prices of consumer Wi-Fi products are still too high to make a significant impact on the mass market. Even if you could afford the various gizmos required to set up a WLAN, configuration remains a challenge. Range versus capacity tradeoffs continues to be a problem, aggravated by interference in the egalitarian 2.4 GHz spectrum channels. Security with the current WEP standards affords no comfort. For service providers, traffic backhaul costs from hotspots can be a killer problem, not to mention that current Wi-Fi systems are not scalable beyond localized networks. The lack of compelling applications like voice and video has delayed mainstream adoption as well.

But with challenges come opportunities. Venture capital firms have recognized this and have made significant investments in wireless networking, over $300 million per quarter in 2002.

We see two broad areas of interest over the next 6 to 18 months: (i) Wi-Fi semiconductor chipsets, and (ii) WLAN security.

We believe that Wi-Fi chipset manufacturers adopting the ‘a and ‘g standards will be key enables of the Wi-Fi market. The current line of Wi-Fi silicon does not effectively integrate functionality with components and applications, and the vendor market remains highly fragmented. Some of the key chipset enhancements that is expected to have significant impact and provide vendor differentiation are the following: (i) single integrated chip combining radio (RF) components and baseband (modulation / demodulation) elements built on standard CMOS processes, (ii) low power consumption and high reliability, (iii) multimode (a/b/g) and backward compatibility, (iv) integrated data, voice and video functionality for the consumer market, with QoS management. Integration will eventually lead to cost reductions and better performance, driving the wireless gear and services markets.

Wireless networks in general and Wi-Fi in specific are a breeding ground for security compromises primarily because the technology is incipient and the focus has been in developing and implementing networking standards. There are many free programs available for download on the Internet that easily hack into 802.11 networks using the prevalent 40-bit WEP-based encryption systems. In February 2002, a research paper was published out of the University of Maryland that demonstrated the weakness of the incumbent 802.1x standard for port-based authentication. The IEEE is currently developing a new standard, 802.1i that is expected to be released by end of 2004.

Enterprises mistakenly assume that deploying a VPN on their WLAN will make it bulletproof. While it is difficult to break the VPN itself, it is easy for intruders to commandeer user stations/clients, which typically have insecure configurations. Some vendors have introduced 128-bit key systems that are more difficult to compromise, but the key is still static and can eventually be cracked with access to a sufficiently large number of data packets.

There are tremendous opportunities for vendors to differentiate with security products that provide robust functionality to both monitor as well as safeguard WLANs from malicious attacks. The value proposition to gear makers is in embedding advanced encryption and authentication into the very fabric of Wi-Fi systems as opposed to allowing IT managers to build security around Wi-Fi with off-the-shelf products. These security systems should, at the minimum, be able to discover and fix vulnerabilities in real time, eliminate threats, secure the network and provide WLAN management functionality for monitoring, troubleshooting and control. We believe that resolution of security issues will be critical in establishing Wi-Fi as a credible broadband technology in the long run.

Cabot Adams LLC is a multi-industry capital advisory and venture funding firm based in New York. More information can be found at www.cabotadams.com. Ravi Bhagavan is Executive Advisor for Communications and Internet Services. He can be contacted at rbhagavan@cabotadams.com.

The information in this report is obtained from sources which Cabot Adams LLC believes to be reliable. All opinions expressed herein reflect Cabot Adams LLC's judgment and are subject to change without notice. No person should act on the basis of this report without considering and if necessary taking appropriate professional advice upon their own particular circumstances. No liability can be accepted for any loss arising from the use of this report. This report is for information only and should not be construed as an offer or solicitation for the purchase or sale of any security. Cabot Adams LLC and its employees cannot be held responsible for errors or any consequences arising from the use of this report.