A net gain? No thank you

As mobile sales fall, makers are adding online services to voice and text. Tony Smith asks if we want all these add-ons?

Have no doubt: the mobile-phone fad is over. For proof, look to the high-street retail chain Dixons. Earlier this month, it admitted that its sales over Christmas were in effect down by 0.6 per cent, despite strong demand for consumer electronics kit.

The reason? A 50 per cent year-on-year fall in sales of mobile phones, following a 25 per cent decline in the first half of the retailer's fiscal year. Last Wednesday, Carphone Warehouse warned of profits being 10 per cent down because of "weak demand" for mobiles over Christmas. With more than half the population owning a mobile that makes calls and sends text messages, why buy a new model?

Both companies hope the trend won't last, and are betting on new technology that puts the internet in the palm of your hand to bring mobile users back into their stores. They aren't alone. PDA pioneers such as Palm and Handspring are hoping that devices that merge the PDA's personal organiser features with wireless Web-searching and e-mail will revive fortunes. After revealing a $19.8m (£14m) quarterly loss last week, Donna Dubinsky, the chief executive of Handspring, said: "We are transitioning out of the organiser business and into the communicator business."

Other companies, such as Britain's Pogo and last year's darling of Wall Street, Research in Motion, are hoping to build businesses out of the wireless internet, targeting consumers and corporates. Ditto the network operators. Cellnet, now part of the MM02 consortium, wants to triple its revenue from mobile data traffic over the next two years to 30 per cent of its overall total. Orange and Vodafone are no different. Market watchers such as IDC and Gartner reckon the value of the business worldwide will reach $44-47bn by 2005, so you can see why. Each hopes to cash in on demand for mobile net services to fund the evolution of their networks from today's second and second-and-a-bit-generation technology to tomorrow's "broadband in the sky".

But businesses and consumers will take some convincing, and the industry appears to accept that. Handspring will begin shipping its Treo phone-PDA combo at the end of this month – in the US, it's being delayed until March.

"The industry has to be careful about overhyping the technology," warns Roy Bedlow, Handspring's director of marketing for Europe. "The networks know that, thanks to WAP." That's a dig at Wireless Application Protocol, the ill-fated attempt to cram the Web into mobile phones with tiny bandwidth.

The hype centres on the new General Packet Radio System (GPRS), a high speed data extension to the GSM technology behind today's mobile networks. Handspring is cautious about GPRS – the Treo will operate over GSM at first. Bedlow paints a picture of standards shifting. Insiders speak of base-stations receiving software upgrades as the operators struggle to get GPRS right and overcome the differences in different vendors' GPRS infrastructure technology.

"It's not the Holy Grail," says Bedlow, and it's not hard to see why. GSM is slow – 9.6Kbps – and GPRS promises speeds comparable with a 56Kbps modem. But promise and reality are far apart. Bandwidth shrinks as more devices go online, dropping to barely 12Kbps, one insider claimed. That's a worst-case scenario, but it shows that the performance of a demo isn't always what users will experience.

GPRS operates alongside GSM, which is retained for voice calls, and billed separately. Because the connection is always on, users pay for the amount of data they send, not for the time it takes. "But who can say how many e-mails or websites equals your 10MB tariff limit?" Bedlow asks. Usage isn't limited to the monthly fee's bundled bytes, but you pay a few pence per megabyte when you go beyond it.

What bothers Research in Motion's Peter Cook, director of product marketing in Europe, is the lack of roaming. Phone owners are used to making calls in other countries without a hitch, so they'll be shocked to find GPRS-based devices won't pick up e-mail overseas.

That's a concern for Cook, as RIM's Blackberry is geared towards multinationals such as Shell and CSFB, keen to equip senior staff with go-anywhere e-mail. Like Handspring, RIM is partnering with MM02 to deliver network bandwidth. Other networks may follow and, they hope, so will roaming deals, initially through operators' continental subsidiaries. But don't expect it until the second half of the year, warns Cook.

Since you can only use MM02's GPRS service to view WAP sites – what few there are, because it doesn't support the Web's HTML standard – you might think Cook is being optimistic. To be fair, Vodafone only added Web support in December. Orange won't say what it supports, suggesting we wait for its GPRS unveiling in the second quarter. One2One has no plans to roll out GPRS for the foreseeable future.

So, Vodafone has the Web access but can't yet sell you an all-in-one device. Cellnet has the devices – including a pocketPC-based machine it's developing, the O2xda – but can't provide full access to the Web. It can't even say when it will, beyond "early 2002".

Vodafone's response is that it believes users will prefer a separate data-enabled phone and PDA, the better to take advantage of different circumstances: a phone for social occasions, with a standalone PDA or a laptop for work. Maybe once Bluetooth, the wireless alternative to infra-red and cables, becomes commonplace. Palm also believes users will want to keep these aspects apart. Bill Bauer, Palm's head of European wireless operations, says that putting the two together is too much of a compromise: the form-factors are too different because the large PDA screen jars with the compact phone.

Companies such as Nokia, Trium and Handspring that try to bring them together, he says, are missing that point. He singles Nokia's 9210 Communicator out as a "brick", and many buyers have been disappointed with it as a phone and as an organiser.

But Palm is preparing a PDA with built-in net access. It's called the i705 and will succeed Palm's VII model soon. Bauer says the GPRS network is too "immature" for the device right now, but since he also says "2002 is going to be the year that GPRS becomes a significant reality", don't rule out the i705 making an appearance here.

When it arrives, expect Palm to push its e-mail and text capabilities rather than the Web. According to Bauer, the company's experience with the "hundreds of thousands" of VII users in the US shows that messaging is what users want to do with a mobile device.

That explains the success of RIM's e-mail-oriented Blackberry – more than 285,000 subscribers at 13,200 corporates, it claims – and Handspring admits that it expects to see more interest in Treo because of its "texting-for-adults" keyboard than its Web browser.

Even with a GPRS connection going flat out, the Web remains largely unsuited to small-screen devices. Until the market becomes clearer what Web-based services users are willing to pay for – directly or by attractive advertising – few websites will be keen to splash out on parallel PDA-friendly versions of their content.

RIM's success with busy, executive mail junkies should give Pogo and Handspring pause for thought. Will consumers pay more than £300 for a fancy text-friendly phone? Not sufficiently, it seems, for Dixons and the rest to see mobile sales lifting for some time yet.