High-Flying Phones

By Charles P. Wallace/London

For a painfully long time, people have been asking David Potter, chairman of British computer maker Psion, "When are you going to die?" It's nothing personal, only that Potter's company--the maker of sleek hand-held computers, with annual sales of just $235 million--is sitting astride a market now being targeted by Bill Gates and giant Microsoft Corp., plus a dozen of the world's leading computer-hardware manufacturers. The battle became so intense earlier this year that Potter was forced to issue a warning about reduced profits, and Psion's stock price took a beating.

Seized upon as a David-vs.-Goliath tale by Britain's press, Potter's duel with Gates may well have a surprise ending. A South African-born physicist with a flair for brilliant chess moves, Potter last month finished stitching together an ingenious alliance with three of the world's telecommunications heavyweights: Sweden's Ericsson, Finland's Nokia and Motorola of the U.S. The three firms account for 70% of global sales of mobile telephones and have the kind of financial muscle to make even Bill Gates sit up and take notice.

The joint venture, called Symbian, will license Psion's software as the underlying brains behind a new generation of smart devices, ranging from mobile phones that receive e-mail, surf the Internet and even pay for transactions, to laptop computers that can go online automatically without anyone's having to open the carrying case. Yet the battle between Symbian and the Microsoft camp is not just about who will make next year's cool gadgets. It promises to determine who will control the next era of personal communications.

Oh, what a lovely war it will be! Market researcher Dataquest estimates that global sales of mobile phones, already astounding most analysts, will soar from 100 million handsets annually in 1997 to 360 million a year by 2002. Of that number, 15% to 20% are expected to be so-called smart phones that can handle data as well as voice traffic, a market that will rival today's volume of PC sales. "I foresee an absolutely huge future for the pretty amazing new stuff that's going to be added to the mobile phone," says Martin Heath, a telecommunications specialist for consultants KPMG in London. "There will be tremendous battles for who controls the value of this chain. Symbian has the advantage, but it's 10 yds. in a marathon, not 10 yards in the 100-yd. dash."

Whatever the distance ahead, the smart-phone era has already dawned. In Europe later this year, Nokia will begin selling its 9110 Communicator, a second-generation device about the size of a large mobile phone with a flip-top computer screen, capable of composing faxes, sending and reading e-mail and accessing the Internet. Alcatel, the French phone giant, is already marketing a phone called the One Touch Com, which has taken all the functions of a palm-size organizer, such as address book and scheduler, and installed them in a mobile handset small enough to slip in a shirt pocket.

A striking feature of the mobile-phone story so far is that it is a rare triumph for European business. The information superhighway is littered with companies battered by the Microsoft juggernaut, from software pioneer Digital Research to Apple Computer, which has been reduced to single-digit market share and is struggling to survive. Similarly, European computer makers, from Britain's Amiga to France's Bull and Italy's Olivetti, have been crushed by American competition. The one bright spot that European companies can point to is the market for mobile phones, where manufacturers, led by Ericsson and Nokia, have taken a commanding lead in the transition from first-generation analog phones to cutting-edge digital devices in tiny packages.

What goes for companies also applies to people. While Americans lead Europeans by a wide margin in the use of personal computers at home and in the office, Europeans are becoming far more addicted than Americans to the mobile phone. One reason is Europe's more cooperative approach to the technical issues: in 1991 manufacturers, network operators and regulators all agreed on a single digital standard called GSM (for Global System for Mobile Communications). The European standard quickly spread to as far away as Hong Kong and Australia, while mobile-phone companies in the U.S. chose a variety of incompatible standards that made it hard to use a single phone when traveling from New York City to Los Angeles, much less from Boston to Bombay. That, Nokia CEO Jorma Ollila told TIME, gave the Europeans a huge competitive edge in the global marketplace. "With tremendously costly investments and the uncertainty of technology, the fact that you have the volume benefit of a standard applied in more than 100 countries gave a kick to the whole industry, lowered risk for key players and reduced the cost to the consumer."

Two other marketing innovations have helped boost demand in Europe. Phone companies there quickly realized that people would leave their cellular phones switched on longer if the cost of the phone call was paid by the caller, not the receiver of a mobile call--the opposite of the payment system still common in the U.S. Economists also began to realize that the U.S. business model--subsidizing the cost of the phone handset in order to lure customers to sign up for the service--is less appealing to consumers than an approach by which the customer pays full price for the phone but gets cheaper talk time. No matter the differences in approach, Europeans love their mobile phones. A telecommunications milestone was reached last month when Finland, home of Nokia, reported that more than half its population of 5.1 million had a mobile phone, the highest penetration in the world. "The mobile phone has become a personal device to help customers manage their daily lives," says Jari Jaakkola, senior vice president for Finnish mobile operator Sonera, who predicts that 100% market penetration, meaning more mobiles than people, will be achieved within five years.

Once the preserve of business users, mobile phones have become an everyday consumer appliance--even a fashion accessory. Alcatel claims to have taken 10% of the world phone market with a cheap handset available in rainbow colors that appeal to women. The marriage of prepaid calling cards and cheap mobile phones has made markets in Italy, Ireland and Portugal grow nearly 38% a year because there is no subscription fee or phone bill at the end of the month. In Israel some 200,000 units of a phone known as the Mango, which can call only one number, have been sold: principally to parents, who give them to their children so the children can regularly phone home--especially those serving in the army. Sven-Christer Nilsson, president of Ericsson, recently observed that it took about 120 years from Alexander Graham Bell's invention of the conventional telephone to wire up 1 billion customers worldwide. Current estimates by mobile operators suggest the same number of mobile subscribers could be online by the year 2005. Little wonder that traditional computer companies are scrambling to enter the mobile business. Bill Gates, whose aim has been to put a PC on every desk, told a symposium in February that "Microsoft's vision for PCs five years from now is a wireless device you can carry around."

Unlike Psion, which produced the first digital organizer in the 1980s, Microsoft's entry into the world of palmtop computing began only three years ago, when the company rolled out Windows CE, a relative of the company's ubiquitous operating system now found on more than 90% of personal computers. Microsoft then signed up 10 manufacturers, including Hewlett-Packard, Sharp and Philips, to make hand-held computers to its specifications. Following the huge success of the Palm Pilot, the tiny organizer that uses a plastic pen instead of a keyboard, Microsoft enlisted another eight manufacturers to make a competing version of a similar unit. "Everybody is in market-development mode at the moment,'' says Dilip Mistry, Windows CE manager for Microsoft's British subsidiary. "I don't think anybody is making money in this yet. It's all about investing to see what happens going forward."

With his business under threat from Microsoft, Potter has cleverly realized that the mobile-phone companies would be as nervous about Bill Gates as he was. The history of the PC business showed that hardware companies were caught up in a cycle of steadily declining prices, while Microsoft and chipmaker Intel captured the lion's share of the profits. "I think there is a great deal of concern in many industries that the added value in their industries doesn't get taken away by Microsoft," Potter says.

That led Potter to approach Nokia, Ericsson and later Motorola--which has agreed in principle to join Symbian--with an offer to use Psion's operating system EPOC as the basis for smart phones. He offered a remarkable deal, taking only 31% of Symbian and selling the remainder to the three phone giants for $50 million. "Companies like Nokia and Ericsson are concerned about ending up like the manufacturers of personal computers, becoming box shifters for Microsoft," says Martin Butler, a British computer consultant. "Potter could become the Bill Gates of the portable-device marketplace. It's there waiting for him."

When the giants agreed to an alliance, Psion became the Cinderella of the mobile-phone world. Analysts figured that if it won 15% of the mobile-phone market projected for 2003, Psion's share of Symbian alone could be worth $430 million a year. The deal also meant that Psion's computers might find more customers. Psion's depressed shares soared as a result, from $3.36 to $12 on the London Stock Exchange. "For a while it looked like Psion was finished, but by getting together with the dominant players in the telecom industry and partnering with them, they have given themselves a lifeline," says Patrick Yau, an analyst with Nomura Securities in London.

So far, only Philips Electronics has actually licensed Psion's software for use in a smart phone, but the software has a compelling advantage: Symbian is charging just $5 a phone, while Microsoft charges computer makers $25 for each device that uses Windows CE, according to analysts. Jan Ahrenbring, an Ericsson vice president, adds that Microsoft's operating system "really wasn't applicable for mobile," but Microsoft maintains that the software is modular and can be customized to suit customers needs. South Korean manufacturer Samsung has produced the prototype of a Windows CE phone that it plans to market next year.

In addition to Symbian, the telecommunications industry has formed two other alliances to improve the usability of wireless devices. One of them, called the WAP Forum (for Wireless Application Protocol), is designing special browsers to bring Internet data to mobile phones, while a group named Bluetooth is trying to set a universal standard for radio communications between smart devices like palm computers and mobile phones. Interestingly, Microsoft has not joined either group.

For a look at how these devices may eventually be used, Finland offers some interesting insights. At the Helsinki airport, a Coke vending machine has a mobile number instead of a coin slot--dial up the machine and a Coke drops out, with the charge appearing on your phone bill. There's also a Helsinki car wash you can operate without leaving your car: dial 1 for wax and 2 for no wax.

Similar practices are spreading across Europe. In Germany, Deutsche Telekom's D1 service allows motorists to call in with a destination, then drive on, as a computer-generated voice calls back every 15 minutes with traffic information. In Italy, operator Omnitel lets users call a special number while standing in front of designated piazzas; the computer figures out where you are and plays back a recorded discourse on the art and history of the location in one of five languages.

But those are still sideshows. One of the biggest areas of growth for mobile is expected to come in the form of data communications. It is already possible in most European countries to subscribe to services that will send soccer scores and stock prices to your mobile using short messaging, much as a pager does. Soon an advertiser like McDonald's will be able to send a data message to every mobile phone at a football stadium urging their owners to eat a Big Mac at halftime. Or a pedestrian walking past a car showroom might receive a message inviting him inside for a special deal.

While the Internet is likely to have a huge appeal, surfing the Web on the phone is still impractical because the screens are tiny. So designers have come up with a micro-browser that lets the user surf for information by pressing a number on the dialing pad instead of fumbling with a computer mouse. While typing e-mail on phones is a hassle even with the latest technology, voice-recognition software will enable users to dictate directly to their cell phone.

Although data transmission on mobile phones is currently limited to a relatively slow 9.6 kbps, the European telecom industry should receive a huge boost next year with the arrival of an enhanced GSM system: General Packet Radio Service, or GPRS, will boost transmission speeds to 150 kbps--faster than a high-speed ISDN (Integrated Services Digital Network) computer line. Consolidating their lead in the global race in mobile telephony, most European operators will begin to add the feature next year.

The real sprint for technological superiority could take place when operators begin switching over to a third generation of mobile phones around the year 2003. Once again, the Europeans and Japanese have agreed on a technical standard called Wideband Code Division Multiple Access as the successor to GSM, but differences with American manufacturer Qualcomm mean that the U.S. will probably adopt a different standard from Europe's and Asia's.

By then, the battle between Microsoft and Symbian may have been resolved by the marketplace. Hand-held-computer makers could offer machines with Symbian's software in hopes of making them more appealing to consumers with mobile phones. Or the mobile-phone industry could beat a retreat and adopt Windows CE to ensure that their devices link up easily with existing desktop PCs. Either way, it's likely that the nations of Europe will be communicating with a single standard-- even if they are not yet talking with a unified voice.

--With reporting by Peggy Salz-Trautman/Bonn and Eric Silver/Jerusalem

With reporting by Peggy Salz-Trautman/Bonn and Eric Silver/Jerusalem