The Wi-Fi Bubble.(Column)

In the edgy world of high tech, hot spots sounded so good they just had to work. A customer would pop into a cafe, marina or even a park, flip open a laptop and cheerfully surf the Net, download music or check e- mail. No more wires, no more modems, no more fiddling with a dicey dial-up connection or waiting at an Internet cafe for someone to get off the sports channel in order to fire off a memo to a client.

That, at any rate, is the idea behind Wi-Fi, the much talked-about radio-linked LANs (local area networks), known to techies as "wireless fidelity." To get into the Wi-Fi game, all a budding entrepreneur had to do was get a bunch of coffee shops, restaurants or even bus stations to pay for the installation of a network. He'd maintain the operation for a fee, as well as a cut of the revenues, and customers who bought the service would then market themselves as cool Wi-Fi hot spots where local Webheads could come to hang out and surf. Users would be charged a monthly fee for Wi-Fi access. Hot-spot owners would bet that being digital would bring in business.

Sounds suspiciously like the mantra of the first Internet revolution-- build it and they will come? You bet. In an otherwise moribund tech sector, the Wi-Fi boom has whipped up passions not seen in years. Everyone, it seems these days, wants to be a hot-spot operator. Yet amid the furor, familiar warning signs are beginning to appear. One industry research firm, Gartner, charts what it calls a "hype cycle" for new technologies. Hot spots are coming off their peak, says analyst Jason Chapman, and are poised to plunge into a "trough of disillusion."

In June, Lars Godell at Forrester Research created a stir with a report declaring that business models for most public Wi-Fi providers don't hold up. "The gold rush is on as if the dot-com boom and bust never happened," he warns. Forrester calculates that in Europe, 53 million laptops and PDAs will be equipped for Wi-Fi by 2008--but that only 7.7 million people will bother to use the technology. Another industry group, Pyramid Research, predicts that while global Wi-Fi users will soar to 707 million by 2008, average revenue per user will drop from $30 per month to $3 as prices are forced down in order to draw customers. Almost no one has yet seen any measurable increase in business from merely offering Wi-Fi access.

The first hints of a shakeout, in fact, can already be seen. Nearly a year ago, one closely watched Wi-Fi start-up, MobileStar, ran out of money. The big cell-phone spinoff of Deutsche Telekom, T-Mobile, quickly snapped it up. But since then, several other pioneers have folded or merged, and many are struggling. It won't be as ugly as the dot-com crash, says John Yunker of Pyramid Research, but many of the hundreds of stand-alone companies in the field are likely to perish.

There are good reasons to like Wi-Fi: it's much faster than current mobile-phone connections, and the spectrum is free. To get into the business, all a budding Wi-Fi operator has to do is crawl behind a customer's coffee bar, connect a radio transmitter to a broadband telecom line, then arrange some software for handling credit cards. Presto, he's in business. Over the past two years, eager entrepreneurs have hooked up thousands of hot spots around the world, fueled by venture capitalists afraid of missing the next big thing and egged on by optimistic analysts making the rounds of technology conferences turned pep rallies. Resellers such as Boingo have cropped up to coordinate accounts so that consumers can roam the world. And this year, AT&T, Intel and others formed a company called Cometa Networks, which will build a giant network to lease to operators across the United States. It's already in trials with McDonald's.

Hot spots are now in that weird bubble --phase when exuberance coexists with red flags. Wi-Fi start-ups have been racing to lock in prime locations, sparking a fierce competition for the best spots. "It would be suicide to get in the game ...