June 11, 2002 10:00 AM PDT

Danger flirts with handheld market

Toward the end of May, Andy Rubin and Joe Britt, two of the three founders behind start-up Danger, had come face to face with their latest problem. A magnet.


Newsmakers
Handhelds: Danger ahead?
Danger's Andy Rubin and Joe Britt
hope to turn the wireless market on its ear.


At Danger's Palo Alto, Calif., headquarters, Chief Executive Rubin and Chief Technology Officer Britt were looking over the latest batch of cases for the company's Hiptop, a portable device for making cell phone calls, surfing the Web and sending e-mails that will cost around $200, less than competing products.

But as Rubin slid his Hiptop device snugly into its black leather case and flipped down the cover, the magnetic snap meant to secure the cover also changed the device's power setting. Oops.

Like other companies trying to popularize devices that combine phone, e-mail and organizer--businesses such as Palm, Handspring and Research In Motion--Danger has faced its share of blips and setbacks. The frustrating part for these businesses is that not all the problems are as easy to fix as the magnetic snap mix-up. Some, in fact, lie beyond reach.

"Much of what will determine the success of Danger and its device is outside of their control," said William Crawford, an analyst with Wall Street brokerage U.S. Bancorp Piper Jaffray.

Danger's fate, like that of its rivals, is tied to the reception it gets from its customers, wireless network carriers, who are receiving competing pitches from all these players.

Danger has taken a different approach than its competitors, though, which could give it a leg up. Instead of selling a device under its own name, Danger is working closely with wireless carriers to develop fleets of inexpensive devices and services based on Danger's technology but sold under the carrier's name.

The company expects to deliver the Hiptop in late July, Rubin said in a recent interview. Danger has twice pushed back the ship date for the device. In early April, the Federal Communications Commission gave its approval to start selling the gadget in the United States, and Danger is in trials with VoiceStream and other carriers, making it likely that Rubin's ship date will stick.

But once the device starts shipping, Danger will have to turn to the network-related issues, not the least of which is the fact that the networks themselves have been slow to get up and running.

"We have seen many application and handset companies negatively impacted by network delays," said Crawford. "Handspring and Research In Motion being two examples. They can't ship a product until the network is ready."

These high-speed, next-generation wireless networks are key. They'll give specially designed devices such as the Hiptop fast access to a variety of data as well as to voice communications--data such as Web content, e-mail and documents including contact lists and the like.

Up to now, attempts at popularizing more complex non-voice applications for cellular data devices have largely failed. Networks have been too slow, making things like Web browsing and online gaming frustrating for consumers. So far the only non-voice application to take off with the public has been short messaging, the handheld version of the instant messaging done on desktops.

But wireless carriers have invested heavily in the next-generation networks, reasoning that if they can make Web surfing and other activities workable for consumers, customers will use up more minutes, subscribe to new services and run up heftier bills.

Carriers also expect the networks to be more effective than voice-only services when it comes to making subscribers loyal to a particular carrier. If customers switch cell phone carriers, all they have to change is their phone number. But switching next-generation wireless carriers could involve certain hassles with moving content, discouraging a switch.

Danger's Hiptop device is designed to grab information from GPRS/GSM networks (general packet radio service/global system for mobile communications), which are taking longer than expected to launch.

Hipper than thou?
But despite the question of network delays, and competing pitches from rivals, there are some things that might help set Danger apart.

The company "understands that the carrier is the gatekeeper and to get to the market they have to serve the needs of the carrier," said Piper Jaffray's Crawford.

Founders Rubin, Britt and Senior Vice President Matt Hershenson are applying experiences they picked up at various other companies that cater to carriers, such as WebTV.

"Cable and wireless carriers are of the same breed," CEO Rubin said. "They know their business of retaining their customers very, very well. Their job is to provide services to those customers."

WebTV, for example, provided a set-top box for Internet novices and did most of the elbow work behind the scenes.

Customers, he said, "didn't even have to worry about what phone number to dial to access their e-mail. We're applying that same theory here to the wireless space: Our device doesn't have to be configured; it works right out of the box."

Danger isn't manufacturing the Hiptop devices, and its name won't appear on the gadgets. Instead, wireless carriers and their manufacturing partners will be responsible for building, branding and selling the devices. Danger is providing carriers with a software foundation for services, such as America Online's instant messaging.

The draw for the carriers is that they can tweak the device to meet their needs. In order to get carriers to initially buy into what it is offering, the start-up had to develop everything from the OS running on the device to the back-end support running on the carriers' servers.

Carriers will probably also like the cost of the Hiptop. With Danger's device, much of a subscriber's data is stored and processed on the carrier's server. So the overall work is balanced between the device and the server. This means the gadget can use a fairly limited, and inexpensive, 24MHz Samsung chip, one way the company cuts the cost relative to its competitors.

Danger is going to let carriers set the Hiptop's price, but early estimates put it in the $200 price range--well below what other combination devices cost. Carriers typically pay hundreds of dollars to sign up new customers, often giving potential subscribers a break of about $150 on the cost of a device to encourage them to sign up. But with the Hiptop costing only $200, carriers won't have to subsidize the device very much, if at all.

Another thing that sets the company apart from competitors is its continued focus on the consumer market.

Though that market is seen as the biggest segment for wireless handheld-related companies, it's remained largely untapped, mainly because of challenges such as the high price of devices and finding the right mix of services to attract use.

As a result, some companies, such as Research In Motion, Good Technology and Palm, have started looking to the corporate market.

Danger is keeping its sights on the consumer market, though, with a strategy of combining easy-to-use services with applications that mimic those already in use on desktop PCs.

"With the Hiptop," CTO Britt said, "the instant messaging experience, the Web browsing experience and the e-mail experience are very similar to what you get on your desktop machine. The fundamental idea behind Hiptop is to present...the same content (from a desktop) on a device that you carry around with you."

Risky? Perhaps. But the options aren't necessarily much better.

"I've seen a lot of companies start in consumer and fail and say, 'OK refocus, it's enterprise because that's where the deep pockets are,'" Rubin said. "And those are the guys that really get burned in an economy like this--where enterprises aren't spending any money."

 

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