Enormous growth lies ahead in wireless, but not necessarily where the public attention is focused today. Mobile entertainment, 3G, ARPU, and even Europe look questionable for growth in the next few years. The more likely stars are Asia or the US, and the quintet of technologies Wi-Fi, Bluetooth, GPRS and RF (radio frequency), business applications, and object-machine wireless. With GPS transmitters shrinking to the size of a matchbook, GPS could start turning up in many smaller, high-value assets.

Handset numbers: a geographic issue Nokia notes an International Telecommunications Union report forecasting 1.7 billion mobile phone users by 2005, up from 1 billion this year, while Asia becomes the biggest market by mid-decade. “We believe there is large potential in emerging markets such as India and Russia,” says a Nokia spokesperson. Adding more than 5 million new customers a month, China has shot past the US as the largest mobile subscriber market, according to research firm BDA. However, even with penetration at under 15 percent, ARPU levels in China have “fallen dramatically.”

The great error Do not expect growth in ARPU to come from entertainment, at least not in the next few years. 3G was the wrong track to go down in 2000 and may be remembered as one of the greatest business errors of all time. For much less money, mobile service operators (MSOs) could have opened the revenue floodgates by upgrading and leveraging their billing infrastructure. This would have unleashed a DoCoMo – or Minitel-like torrent of content and service providers using prosaic, good-enough 2G. The examples, Japan and France, were duly noted, admired, and ignored.

Finnish teenagers and Filipino overseas workers kept the wolf from the MSOs’ door, as they taught the world to use text messaging. Now the MSOs are making reverse billing work, just in time to serve as their inflatable life vest. “It took a long time for the mobile operators to get ready. Now that reverse billing is UK-wide, services will flourish,” says Damon Lambert, head of commercial strategy for Wireless Commerce, a Finnish-turned-British company that bills itself as the No. 1 SMS aggregator.

The accidental product never stops growing Britons today send more than 40 million text messages a day. Why not 80 million? Will SMS, the only profitable area for some MSOs, hit a saturation point? Yes, but SMS might well keep up steady growth, because it achieved a strong behavioral and cultural change, one which has yet to claim the US. Notes Lambert, “The MTV generation became Gen-SMS, and now it’s permeating business habits.” And American adults are just noticing that teenagers have started “texting” and downloading ringtones and getting “free stuff” with RocketCash.

One answer: the Internet of things MSOs have one way to climb out of the deep hole they jumped into: encourage data traffic to and from objects and machines. Here’s why: not even .001 percent of valuable objects/assets are linked by wireless today, but they should be. Eventually, almost everything of value in the supply chain will communicate, creating huge amounts of data traffic as these objects report on their current state. The motivation: eliminate shrinkage and out-of-stock conditions, improve service, and take the slack out of manufacturing. This object-to-network data traffic, and not human usage, can restore the MSOs to health while delivering huge benefits to industry. As Forrester Research notes in a recent report led by Lars Godell, only 385 million Europeans are in conversation, while trillions of objects and machines could be.

Monitor people, too More data traffic will come from the monitoring and locating of bipeds, especially young ones (finding them) and old ones (monitoring their vital signs). Eventually it will be cheaper for health maintenance organizations to continually observe adults for signs that we’re about to break than to fix our components after they fail. If it meant a $1,000 reduction in medical and life insurance premiums, the average American might happily be monitored via a clip-on or implanted device.

A patchwork of connectivity All this locating and monitoring leaves space for your favorite technology. RF, which is incredibly cheap or still too costly, depending on your bias, dominates the close range and on low-cost products and in smart cards, as it continues to replace barcodes. As for Bluetooth, “It’s disappointed thus far, but most of its obstacles will be weeded out within a year,” says Johnny Johansson, CEO of chip maker Spirea in Sweden (Tornado 100 winner). “But there are 50 million Bluetooth units deployed in the world today,” he notes. Bluetooth is important on “body networks” and inside buildings, particularly factories, where sensors need to communicate as they move around. Transmission control protocol (TCP) and Internet protocol (IP) are needed, and cable replacement equates with safety. While 802.11b (and its cousin 802.11g) will matter because of their longer range, GSM (and TDMA in the US) are at play for sensors and reporting over national distances, and GPS is vital for assets that get lost outdoors, such as containers, trucks, trains, and cars.

This scenario calls for “network agility” because, as Spirea puts it: “Future wireless broadband access will consist of patchworks of networks using many interoperable standards including Bluetooth and Wireless LAN, as well as licensed WAN standards such as GPRS and UMTS. Everything has to connect seamlessly to whatever technology is locally available.” It will be more efficient, cheaper, and faster to make chipsets that can handle the patchwork, rather than build out overlapping ubiquitous networks. Also, small companies can make the chipsets without waiting for the slow, expensive buildout that depends on a handful of large companies.

Warchalking: get Your 802.11x right here! You have got to love those Wi-Fi renegades, drawing strange symbols on buildings to announce WLAN hotspots. Wireless LANs are the most potent grassroots technology to come along in years and will explode as prices come down. The business model? Come on, who cares about math when spotting hotspots is so fun for on-the-go entrepreneurs and executives. The real business model is that without Wi-Fi, an airport, hotel, or coffeehouse will be like a bicycle without a seat: usable, but painfully and unhappily. Can hotels and Starbucks give it away free? “No,” says Bruno Giussani, the Italian author of ROAM, a leading book on the mobile Internet. “Wireless LAN costs too much to install and operate.”

John Zeisler, of Nokia Venture Partners, disagrees. “WLAN’s are growing at more than 35 percent annually because they require virtually no infrastructure to set up, support, and use, and they can be used independent of spectrum licenses, carriers, and telcos,” he says. The bottom line: without significant retraining, new applications, or other costly upgrades, provide real benefits to mobile workers. One analyst calls it “a technology that nobody is dissatisfied with.” Access in public hotspots and businesses will continue to grow significantly, but for the telcos, it means merely “a few billion euros worldwide over the next five years,” which is peanuts when compared to their other lines of business. Giussano notes dryly that many hotspots involve theft of bandwidth. “That’s why they’re free to users,” he says.

Wi-Fi is passing through a stage where ham radio got permanently stuck: “Hey, I have a signal. I can talk to you. Wow!” It is hyped by the US press, say Europeans, because the Yanks favor David-versus-Goliath stories. Yet the incompatibility between 802.11a and 802.11b, as well as security holes “big enough to drive a truck through” are technology problems that remind us WLAN simply replaces cables. Ken Dulaney, vice president of mobile computing at Gartner, dismisses the security issues. “The standard 40-bit encryption has been hacked,” Giussano admits, “but you can have a secure wireless LAN. Just turn on the hardware vendor’s proprietary security. Almost nobody does!” Giussani marks 802.11x chipset producers as the Wi-FI winners, and like most wireless insiders, dismisses the competition with Bluetooth. “They serve different markets now, and the distinction between WLAN and Bluetooth will blur over time,” he says.

Entertainment will take years Despite the remarkable energy behind “mobile fun,” the current chaos may take a few years to sort out. Entertainment sent to wireless devices, whether it is music, still images, or video, could well become a sort of utility service, where consumers pay a flat monthly fee to have all services piped to their handheld. Due to wishful thinking, MSOs got hooked on the mistaken belief that consumers willingly and knowingly will spend more than 50, 75, or 100 euros per month for fun emanating from their handy. As a result, the telecom industry will get smaller before it gets bigger. “But if [customers] receive value, they’ll spend for it,” comes the deluded refrain, which is doubtful at best. Although consumers can be temporarily suckered into spending beyond their comfort level, they will find ways to regain ground, such as family calling plans or just giving up their landlines. Consumers have thresholds, and MSOs chose a losing battle in trying to raise ARPU above these thresholds long term.

Current mobile entertainment revenue is anything from steady. The ringtone-selling business is going into fast decline and will likely be dead as a profit center by October. Polyphonic ringtones may give it a brief second life, but the fad has run its course; much money was spent by VCs and telcos for little return. Photograph swapping may be the consumer app that has some traction, especially as families buy the same model of camera-phone in groups, and monthly fees are charged for photo downloads by those enterprising pioneers, the soft pornographers.

Wireless in business, already White-collar businesses in Europe and the US are just testing out, in small pilots, wireless data services as a part of their business processes. They are spending modestly and getting fairly modest benefits. Wireless email, pioneered by RIM and its Blackberry, is often the first office function to go mobile and has clear benefits. But warehousing has been a stronghold for wireless for almost two decades, according to Gartner Group, with transport, shipping, and receiving almost as entrenched. More recently, field service and customer service, with queue-busting at airlines and restaurants among others, have gone wireless. Filing business time sheets and expense reports via wireless from a PDA turns out to save a bit of money. The public sector is becoming a major user for emergency services as well as for routine service to the deaf via SMS. Direct marketing must embrace wireless, especially in the US where the sector is badly hurt by postage hikes and anthrax fears. Agencies that creatively apply mobile technology to complement traditional marketing have shown they can make money.

SMS delivery platforms have already become a commodity, differentiated mainly by how many MSOs and devices they link to. Their vendors need to ally with partners who put these platforms to uses that deliver tangible benefits to businesses.

The next three years In Europe, where mobile penetration has peaked, device sales may depend upon the specialization of business versus consumer devices (phone + Blackberry type for business, phone + music for consumer), and on other evolutions toward multi-usage. The mobile phone will become wallet or a payment instrument, Walkman, and house + car key. In two years, we may see Nokia and Ericsson selling wireless non-urgent health monitoring GPRS/GSM devices and after-market GPS tracking devices for children, pets, and cars. Regardless of who makes them, you are likely to be using them.

As chipset makers help solve the problem of patchwork networks, as the Internet of Things comes to be, America adopts texting, businesses find profitable uses for wireless, and entertainment services are packaged and delivered, the future of this industry could make the past five years look like mere gestation. The mobile operators and handset makers can ride the wave by leveraging their billing structure and market influence, or they can try to solve the problems and control the solutions themselves. Their employees and shareholders have to hope they don’t choose the latter course.