Making good on its promise to spend $150 million on building up smaller Wi-Fi (define) technology companies, Intel (Quote, Company Info) Wednesday said it was investing in two startups.

The Santa Clara, Calif.-based chipmaker said it’s Intel Communications Fund division is plunking down an unspecified amount of cash to help Salt Lake City-based STSN and Bellevue, Wash.-based Telesym develop their products.

Intel has said it plans on making about 30 or so of these investments in smaller companies that have survived after their series A or B funding rounds. The money would come from Intel’s previously established $500 million Communications Fund.

Wi-Fi (also known as IEEE standard 802.11b) is an emerging and increasingly popular technology that provides high-speed wireless Internet access in many locations around the world, including airports, cafes, corporate offices, universities, factories and homes.

The Fund now has completed three investments in Wi-Fi companies since October when Intel announced plans to invest in companies pursuing Wi-Fi technology. The first investment was in Cometa Networks, a joint project announced with IBM (Quote, Company Info) and AT&T (Quote, Company Info) back on Dec. 5.

Intel said it intends to use the technology from STSN and Telesym to complement its next generation mobile technology, codenamed Banias, which will be introduced in the first half of 2003.

“Mobile computer users will have real-time wireless Internet access from STSN-enabled hotel rooms and will be able do innovative things like turn their laptops into wireless speaker phones with TeleSym’s software,” said Intel Communications Fund director John Hull.

STSN provides wired and wireless high-speed data communications to hotels and conference centers around the world. STSN’s products allow for high-speed data communications connections in more than 120,000 guestrooms and 4,000 hotel meeting rooms worldwide. Intel Capital first invested in STSN in 1999.

TeleSym develops “SymPhone System” a voice communication software over wireless networks. The company’s software can be used on mobile PCs and personal digital assistants.

Part of the driving force in developing Wi-Fi is the emergence of the commercial hotspots, like those offered by Starbucks (Quote, Company Info).

High-tech marketing research firm In-Stat/MDR predicts the marketplace will expand from 2,000 locations in 2001 to 42,000 sites worldwide by 2006.

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December 12, 2002 The Wi-Fi Boom By ADAM BAER

ON a brisk autumn day in Portland, Ore., Paul van Veen was soaking up some sun as he logged on to the Internet – from a spot in bustling Pioneer Courthouse Square. Mr. van Veen was looking for a job, and he was surfing the Web over a free wireless connection.

These days, Pioneer Courthouse Square is but one of some 140 public spots across Portland with free Internet access using a high-speed wireless technology known as Wi-Fi. The network of such Wi-Fi “hot spots” throughout the city was developed by Personal Telco, a grass-roots, nonprofit group devoted to blanketing the city with free access points.

Portland and Personal Telco are just part of a growing national trend. There are community groups promoting public Wi-Fi access in nearly every large American city, from NYCwireless, which “unwired” Bryant Park and Tompkins Square Park in Manhattan, to KC Wireless in the Kansas City area. They have been joined by independent cafes and restaurants, apartment houses and community centers across the country that view free, easy access to the Internet as a draw for customers.

At the same time, subscription services and pay-as-you-go Wi-Fi hot spots are springing up in cafes, bookstores, hotels and airports, put in by companies like T-Mobile and smaller, start-up competitors like Boingo Wireless and Wayport. Last week, Cometa Networks, a new company backed by Intel, AT&T and I.B.M., said it planned to put a network of thousands of wireless access points across a huge swath of the nation by 2004. The result is a growing array of options for Wi-Fi users and the emergence of a mobile wireless culture that spans business travelers, teachers and students, people relaxing in coffee shops and even moviegoers waiting for the show.

All that is needed for laptop users to wander with Wi-Fi (the name is short for “wireless fidelity”) is a piece of hardware called a Wi-Fi card – perhaps a $100 investment – and where the access is not free, a one-time or longer-term service provider. Anecdotal evidence suggests that most users are male, under 40 and comfortable with technology.

The technology is, however, becoming more accessible. People who use paid hot spots like those offered by Wise Zone, Wayport and T-Mobile simply open their browsers to log on. Users of free city networks like NYCwireless are asked to agree to the network’s “acceptable use” policy, and if they do, they are on the Internet for six free hours until they have to sign on again.

Wi-Fi is also changing the way that people – at least some young, technologically adept people – go about their work. In Philadelphia, Yvonne Jones, a 33-year-old freelance copywriter, moved her base of operations to a Starbucks about a month ago and said she quickly became “a thousand times” more productive than she was when working at home. “It’s not your house, and you are there for a specific purpose, so the ‘distractions’ aren’t that distracting,” she said.

Frank Bonomo, who is between apartments and living with his parents on Long Island after losing his job at a dot-com, spends nearly every workday at a Starbucks in Greenwich Village. Mr. Bonomo, 24, is building a freelance practice as a Web producer, managing online advertising and message boards for design firms. He uses an account with T-Mobile to stay in touch with his clients by e-mail and instant messaging. “I commute here from the Island so I can be close to the offices of my three to four regular clients,” he said.

Mr. van Veen, who is looking for work as a wireless systems engineering manager, said he was using the public Wi-Fi hot spot in Portland to research a “hot job lead” because the connection was so much faster than his home connection. “At home, you generally use a standard phone line,” he said. “This downloads at 200 kilobytes a second, which is just lightning quick.”

Actually, under ideal conditions, Wi-Fi offers even greater speeds – 11 megabits per second, exceeding those typically achieved by high-speed home connections through cable modems or digital subscriber lines. Connection speeds slow, however, as a user gets farther from the source of the signal, which has a range of about 300 feet.

Ryan Palmer, a Portland-based consultant who studies human-computer interactions, said public wireless access had allowed him to be more efficient and enjoy himself at the same time. Mr. Palmer, 27, was on a business trip to Austin and wanted to sample the authentic Texas barbecue that he kept hearing about, but he also had some work to finish. He was able to do both at Green Mesquite BBQ, a restaurant with a recently installed free Wi-Fi access point.

“It’s nice to surf the Web and enjoy some good food,” he said, adding that the Internet connection at his hotel was so slow it was “painful.” He said: “I feel empowered. I’m not a stranger in a strange land anymore.”

It took Mr. Palmer 15 minutes of fiddling with the settings on his laptop to get a connection at the restaurant. “I had to play around a little bit,” he said. “I’m still not confident that someone could walk in off the street and do it.”

Not everyone can. Jodi Avant, 41, who is studying for teacher certification at the University of Texas at Austin, uses wireless frequently on campus, where it is widely available. As part of her program, she had to buy an Apple iBook with a wireless card to do schoolwork and communicate with teachers and other students.

She tried and failed to log on to the free Wi-Fi hot spot at a Schlotzsky’s Deli near the campus. “I brought it here, set it up and played around with it for half an hour,” she said. But she did not know what settings she needed and there was no help available in the restaurant.

Ms. Avant, who lives near Schlotzsky’s, visits the restaurant with her children every Saturday. They stay about an hour and use the wireless Internet terminals provided by the restaurant. She checks her e-mail while her 7- and 11-year-old sons play games and her 8-year-old daughter visits sites like www.funjail.com. Ms. Avant said she planned to keep trying to get through to the Schlotzsky’s network on her own computer. “It’s a lot better than my dial-up at home,” she said. “The only downside is I can’t print anything.”

People who use public Wi-Fi networks have another option: they can use the same setup to connect to wireless networks at home, at the office and at school. Running a Wi-Fi network in an office is only slightly more involved. Janine Kurnoff, who runs a Portland company that trains sales and marketing professionals, has maintained her Wi-Fi network for a year and a half. “There’s a little bit of setup involved, but less than an hour of work,” she said. “You don’t have to configure anything. The computer sees your network and picks it up.”

Forest Ridge School of the Sacred Heart, a girls’ school in Bellevue, Wash., was part of Microsoft’s Pioneer School program on incorporating technology into the curriculum in 1996. Now each student’s tuition buys a Wi-Fi-ready laptop.

“There’s a lot of instant messaging going on,” said Diane Burgess, 39, the school’s information technology manager. Ms. Burgess said classes were no longer disrupted by cellphones, parents message their children to arrange pickup times, and students regularly share files for collaborative projects. “Wi-Fi lets them do group work from anywhere on campus,” Ms. Burgess said. “It’s a really freeing experience.”

Beyond the hardware and software difficulties that users like Ms. Avant have encountered at public Wi-Fi spots, there are traffic considerations: connection speeds can slow if the number of users on a network picks up. And some home Wi-Fi users have reported that the systems, which operate on the 2.4-gigahertz frequency, are subject to interference from cordless telephones and microwave ovens. Ms. Burgess said that water, which absorbs the wireless signal’s energy much like food in a microwave oven, can interfere with a home network and that glasses, clothes and other clutter can obstruct the signal. “It actually helps me keep my home cleaner,” she said. “My kids keep their rooms absolutely streamlined now.”

Security is also a concern for open networks. Mark Malewski of NexTech Wireless, a Chicago-based nonprofit group that is trying to organize grass-roots Wi-Fi networks, said there were steps the hot spot operators could take to help. “We have an authentication server that tracks usage,” he said. “Without that, a lot of people could plug in an access point and share it with those who could conduct fraudulent activity.”

Security concerns will become more important as public Wi-Fi networks spread and more people use them. Statistics on use of the technology are elusive, but according to Gartner, a consulting company in Stamford, Conn., the number of Wi-Fi cards sold in North America this year is on track to jump 75 percent over 2001, with another 57 percent gain over this year expected in 2003. William Clark, research director at Gartner, said that the number of frequent Wi-Fi users was expected to grow to 1.9 million next year from 700,000 in 2002, with the number of public hot spots in North America likely to nearly triple by the end of next year from about 3,300 now.

In fact, this growth is responsible for casual Wi-Fi use beyond the high-tech vanguard. Sherry Bough, 56, and her husband, Bob, 59, live at the Austin Lone Star RV Resort, a gated park with a heated pool, a playground and a Wi-Fi network, for six months a year to be near their children. The Boughs used to order a phone line whenever they stayed in one place for more than a month so that they could use their dial-up Internet connection to track their investments, check e-mail and search the Web. Now they use the park’s Wi-Fi network.

“It’s amazing how fast it downloads,” Mrs. Bough said of the network, which was installed earlier this fall and offers fee-based service by the day, week or month. Still, she said, it took her a couple of hours to connect the first time. “It was a little bit confusing,” she said. “To me, that’s where they’re failing right now.” To use the wireless network, the Boughs had to buy a U.S.B. card for their computer and they updated to Windows 98; Mrs. Bough said they also needed to install more memory.

James Westberry, 55, is another part-time resident at Austin Lone Star. He works in Austin, the state capital, when the Legislature is in session, advising lobbyists for small telephone companies like the Eastex Telephone Cooperative, where he works. He goes home to Tyler, Tex., on the weekends.

“I have to have high-speed Internet wherever I’m at,” he said. “Otherwise I’d be at a hotel or have an apartment.” He uses it to download bills, attend committee meetings online and to check e-mail.

Public Wi-Fi has also begun to change the way people play. Jack Swayze, a 27-year-old technical-support worker in Vienna, Va., gathers with laptop-equipped friends at Wise Zone hot spots around Washington to team up for live-action shooting games like Unreal Tournament 2003 and Medal of Honor, which they play against other Web “posses.” “The connection is as reliable and fast as my connection at home,” he said.

At the Alamo Drafthouse North, a movie theater in Austin, wireless access is available in the four screening halls. Tim League, the theater’s 32-year-old owner, installed the Wi-Fi access in concert with Austin Wireless, which set up the system after he agreed to offer it to viewers free.

Mr. League uses the network to offer Internet-based activities to entertain viewers before movies. He is testing interactive trivia programs and audience polling contests and expects to have one running soon. “I’ve always thought it strange that the slides you see before movies still exist,” he said. “That the practice hadn’t changed in 30 years just seemed silly.” He shows animated videos that are downloaded from the Web using a Wi-Fi-equipped computer in his projection room. “Viewers also use the Web to research movie facts or catch up on their work or e-mail, though we ask them to close their laptops when the show begins,” he said.

Entertainment is the main motivation behind Shane Nixon’s experiments with public Wi-Fi. Mr. Nixon, 34, was trying to log on to a Wayport hot spot at the Austin airport last week while he waited for a flight to Bowling Green, Ky., where he lives.

A construction and maintenance coordinator who travels three weeks a month, Mr. Nixon had been using dial-up connections while on the road to chat with his wife by instant messaging and to play card games with her on sites like www .mysticisland.net. He had just installed a wireless network at home so that he, his wife and two sons could go online at once, and he was trying to connect wirelessly on the road for the first time. When he could not log on, he used his cellphone to call Wayport’s technical-support number, but his cellphone battery died. Despite the technical problems he encountered, Mr. Nixon said he would probably stick with Wi-Fi. “I’m gone all the time, so that’s a way to keep in touch and do something together,” he said.

Mr. Nixon noted another virtue of high-speed chatting. “You can talk all night long,” he said, “and you don’t have a large phone bill.”

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Published Oct 7, 2002 NET07

Envisioned by cellular pioneer Craig McCaw, backed by Bill Gates — and financed in part by their bottomless wealth — the idea of delivering high-speed Internet via a constellation of satellites seemed almost a sure thing.

But after 12 years of management changes, network design revisions and, most recently, telecommunications industry turmoil, the vision of an Internet-in-the-sky has come crashing down to Earth.

Teledesic’s board has halted work by a contractor building two satellites, effectively putting the ambitious idea into deep hibernation.

“Obviously by suspending work on the contract, the board of Teledesic is saying, as we see it today, it’s not feasible to do this,” spokesman Todd Wolfenbarger said.

The recently announced decision means layoffs for 25 people. Another 10 or 12 employees will stay on, evaluating “possible alternative approaches,” a company press release said.

Teledesic, started in 1990, was envisioned as a network of space-based satellites that could deliver high-speed Internet to businesses and consumers anywhere in the world. The network would relay voice and data over a portion of the radio spectrum, with Teledesic hoping to offer full service by 2005.

It was the latest brainchild of one of Seattle’s favorite sons. McCaw almost single-handedly had spun together the new industry of cellular telecommunications. His company, McCaw Cellular, impressed telecom executives, Wall Street investors and customers alike and was bought by AT&T Wireless in 1994.

And Teledesic, although it never had more than 200 employees, certainly had its star power.

The company, based in Bellevue, Wash., had McCaw for a founder, Microsoft Chairman Gates as a backer, a $100 million commitment from Boeing Co. and $200 million from Saudi Prince Alwaleed Bin Talal. With some of the richest men in the world behind it, the company wasn’t hurting for money.

But despite the promise, the vision and the war chest, Teledesic had its issues.

Management changes

The company went through several management changes, including rotations through chief executives and co-chief executives.

“It’s hard to have consistency and hard to develop your road maps and service with different types of visions that are being replaced every so often,” said Sean Badding, vice president of the Carmel Group telecommunications research firm.

The designs and scope of the project changed as well through the years.

Ultimately, even men with very deep pockets have their limits.

“Really, for the people who have already invested money in this thing, it really doesn’t make sense,” Wolfenbarger said. “The risk is not outweighing what they think the reward is.”

Teledesic still owns rights to a portion of high-frequency spectrum.

But under agreements with the Federal Communications Commission, the company would have had to meet a series of deadlines with the ultimate goal of offering service by 2004, which it could not do under the current financial climate, Wolfenbarger said.

With no big customer lined up ready to commit, the board opted to put the project on ice.

“[McCaw] was supposedly a genius who could see the future and see around corners,” said O. Casey Corr, who wrote a biography of McCaw. “This proves that he’s mortal.”

Other companies, including McLean, Va.-based StarBand and Hughes, already offer Internet connections through a satellite network, though their service is far less ambitious than what Teledesic had planned.

StarBand recently filed for bankruptcy, joining other troubled satellite ventures, including Iridium. Backed by Motorola Corp., it built a satellite network offering voice and data service but, crippled by debt, ended up cutting off service two years ago. A new venture, Iridium Satellite, took over the bankrupt company’s assets.

Too much, too soon?

Teledesic, with its grander vision of high-speed connectivity, might have been ahead of its time, Badding said. “At this time, there are more questions than answers about the viability and the economics for these types of services.”

McCaw isn’t out of the satellite business altogether, either.

He still is a major investor in London-based ICO, which similarly hopes to offer satellite-based wireless communications in the future. At one point, McCaw sought to merge the company with Teledesic and issue new stock in the combined company. But he abandoned that effort early last year due to the sagging market.

Badding said he remains hopeful that McCaw one day will revive Teledesic.

“Teledesic still has tremendous amounts of potential in the future,” he said. “In the next seven to eight years, it clearly is going to be a different story.”

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B.C. you later Net entrepreneurs are heading to U.S. Steve Ernst Staff Writer

Speeding tickets are no longer a worry for Dimitri Sirota.

Until a few months ago, the 29-year-old entrepreneur was driving 300 miles twice a week. He would zip down to Seattle to raise money and line up partnerships, then travel back to Vancouver, B.C., to run his telecommunications infrastructure start-up, eTunnels Inc.

Finally, like a growing number of his countrymen, Sirota moved his 8-month-old company to Seattle in hopes of attracting more venture capital and establishing a foothold in the much larger U.S. market.

“It’s very, very hard for an Internet company to make it in Canada,” he said. “And it’s not just because of the taxes. The Canadian business environment just doesn’t offer the opportunities that are here. People are more conservative and are far more risk-averse up there.”

An increasing number of Canadian entrepreneurs are being lured to the Seattle area by the city’s large pools of venture capital, this country’s more accommodating tax and securities regulations, and the proximity of other established e-commerce and technology companies. While start-ups in Canada don’t pay for employee medical benefits and can receive liberal tax credits for research and development, those advantages don’t seem to offset other factors luring firms to the United States.

Sirota is following a trail most recently blazed by Canadian expatriate Glenn Ballman, chief executive officer of Onvia.com Inc. Ballman moved his company’s headquarters to Seattle in 1998 and went on to raise $71 million in venture financing for the small-business e-commerce site before taking it public last month.

And he isn’t alone. This week Canadian Terry Drayton will take public the company he founded, HomeGrocer.com Inc. Drayton started the company in Vancouver before heading south in search of capital.

The publicly traded company NetNanny Software International Inc., an Internet filtering and security firm, last month moved its headquarters from Vancouver to Bellevue, in hopes of raising more private equity and to be closer to its biggest market.

George Hunter, executive director of the British Columbia Technology Industries Association in Vancouver, is familiar with the syndrome. “The story I hear most often is Canadian companies can achieve better valuations by moving to the States,” he said. “Many of them link up with U.S. venture firms early on and set up their business development and marketing headquarters in the U.S., but keep research operations in Canada.”

Canadian venture investors also tend to be more conservative than their American counterparts, said Gordon Ross, CEO of NetNanny and a third-generation Vancouverite.

“Getting investments in Canada can be a long, long process,” Ross said. “And with technology companies, you really can’t wait. Venture capitalists down here really understand that, they understand the risks and the nature of the business.”

Last year overall venture capital investment in the United States was 18 times greater than in Canada, according to a study conducted by the Boston Consulting Group, a Boston-based research firm. An estimated $1.2 billion in venture capital flowed into the Pacific Northwest last year, while all of Canada collected about $2 billion in private financing.

One thing Canada lacks is a large pool of institutional investors, the report concluded. “The environment is less dynamic in Canada because the venture capital market is dominated by passive and semi-public investors,” the report stated.

Canadian law prevents pension funds and other government-sponsored investment funds — which constitute more than 60 percent of the venture capital investors in Canada — from taking a large ownership stake in companies. Those venture capital investors tend not to take an active role in companies primarily because labor-sponsored funds receive an upfront tax credit for their investment, lessening their drive for high returns, the report concluded.

Ross, who started NetNanny 10 years ago, plans to keep the company’s software research and development operation in Vancouver to take advantage of tax credits and government grants.

The company also recently closed on $6 million in private equity from a group of European investors.

“It’s a totally different dynamic here,” said Buzz Leonard, chief operating officer of NetNanny. “Investors here really understand the business models of dot-coms and software companies and they know how to help them. In Vancouver, particularly, it’s still very much a resource-based economy and investors just don’t move as quickly.”

In addition to a lack of early-stage investment capital, Canadian start-ups are also following Interstate 5 south to escape tax and securities regulations that can inhibit a company from going public.

Last year 165 U.S. technology companies went public on the Nasdaq exchange, while only four Canadian companies held IPOs on Canada’s major exchange, the Toronto Stock Exchange, according to the Boston Consulting Group’s report. Venture capitalists trying to cash in on Canadian investments can face several challenges, observers said.

In many cases, capital gains tax rates in Canada are double those in the United States, eating into investors’ winnings.

Also, under Canadian securities laws, investors who acquire shares of a company before its IPO must hold those shares for 12 months after the IPO date. Underwriters in the U.S. typically require pre-IPO investors to hold their shares for at least 180 days.

American VCs can also face higher tax rates when investing in Canadian companies. Most venture capital firms in the states are formed as limited liability companies or partnerships and under Canadian law those operations are subject to higher capital gain tax rates. Canadian firms trying to raise money across the border also face a similar problem.

In addition, stock options for Canadian workers are typically taxed when the options are exercised, as opposed to when the shares are sold. That gives workers even more incentive to join what Canadians are calling “the brain drain” by moving south of the border.

ETunnels CEO Sirota got what he was looking for: he is now using a $4 million infusion of venture capital, garnered from a mixture of Silicon Valley and Canadian venture firms, to set up shop in Seattle.

“It’s also just a much bigger market,” Sirota said. “It just makes more sense to start a company here or San Francisco or Boston or Austin than in Canada.”