More than 100 Bluetooth base stations were erected by German technology company Lesswire at the CeBit technology trade fair in Hanover, Germany, making it the world’s biggest Bluetooth network. Ominously, Lesswire installed them in Hall 13; more ominous still, given the history of new technology demonstrations, it confidently invited the world’s media to witness the new short-distance wireless communications system in action.

The network was designed to find visitors carrying Bluetooth-equipped devices and direct them to specific stands on request. But when Lesswire’s project manager, Anja Bolicke, attempted to demonstrate it, her pocket PC failed to connect to the network and the only information displayed on the screen were the fateful words ‘server not responding’. Eventually, a connection was made — but only after 10 embarrassing minutes.

At the time, Bolicke said that the airwaves had become clogged with too many people trying to access the network. She suggested it would have worked perfectly well in the evening — once the hall was empty. Later, Lesswire would blame another participant for failing to provide the necessary software for its Bluetooth equipment. But, whatever the reasons, the fiasco seemed symptomatic of wider problems with the much-vaunted technology.

Indeed, while such episodes are not uncommon in the high-tech sector, for Bluetooth they are becoming a regular feature. For example, a demonstration by PC card maker 3Com at a Bluetooth conference in Silicon Valley in December 2000, which was designed to show two Bluetooth-equipped laptop computers communicating with out cables, also left the participants with red faces.

Now, observers insist that there is still considerable work to be done on three key issues — security, interoperability and radiowave interference with other technologies. And confidence in developers’ ability to solve these problems is fading fast. “I’m not sure that you will want to rely on it for really confidential information,” admits Yuval Ben-Ze’ev, president and CEO of Bluetooth chip provider and software developer BrightCom Technologies of Israel.

And Dr Michael Foley, Microsoft’s wireless guru, was equally pessimistic earlier in the year: “The holy grail of interoperability between every device and every application is never going to be reached.” In April 2001, Microsoft said it would not support Bluetooth in Windows XP, the next version of its PC operating system, which is due for release in October 2001. (People will have to plug in PC cards and load in external drivers to use it.)

At the same time, new wireless systems developed in the US have begun to threaten the size of Bluetooth’s market. While not in direct competion, wireless local area network (LAN) technologies such as HyperLAN and 802.11b are now expected to carry wireless traffic in so-called ‘hot-spots’, such as airport lounges and shopping centres, which might otherwise have been transmitted via Bluetooth. People who may have bought Bluetooth phones and PCs may instead choose to buy wireless LAN-enabled products. And wireless LAN technologies have come to market earlier than Bluetooth — many hot-spots in the US are already kitted-out with networks, for example.

Before the post-CeBit backlash set in, the hype surrounding Bluetooth drew in more than €1 billion of venture capital as thousands of hardware and software vendors initiated Bluetooth-related research and development programmes.

The hype
Most market analysts were bullish. Frost &Sullivan, for example, estimated that product shipments would increase from 11 million in 2001 to about 600 million in 2006, equating to revenues of €788 million.

These are big numbers for a technology that was originally conceived in the early-1990s as an advanced infrared-like system to replace the cable that carries data from a mobile phone to its accessories. It was only in the late-1990s that developers began to talk about Bluetooth as the ubiquitous means by which one device can interact with any other nearby device over a wireless link. The fear now, of course, is that the original developers had it right — and that Bluetooth will be good only for cable-replacement applications such as file transfer and contact synchronisation.

Companies banking on the more ambitious version of the technology stretch way beyond designers and manufacturers of Bluetooth chipsets. Those hoping to cash in include makers of servers, headsets, printers and cameras, and a growing number of software developers searching for the technology’s ‘killer application’.

Much of the investment ploughed in to generate the kind of revenues mentioned by Frost &Sullivan came from the key supporters of Bluetooth technology — Ericsson of Sweden, Nokia of Finland, IBM of the US, Intel of the US and Toshiba of Japan — who banded together to form the Bluetooth Special Interest Group in 1998.

But there has also been several hundred million euros invested in smaller start-ups between 1998 and 2001, particularly among the designers and manufacturers of Bluetooth chipsets and base stations. Many of these are based in the US, companies such as Silicon Wave, Conexant and Tality; some are located in the Far East, such as Alps Electric of Japan. But a large number are also headquartered in Europe, including BrightCom and Commil of Israel, and Cambridge Silicon Radio (CSR) of the UK.

The overcrowded hardware market now seems set for a period of consolidation: ultimately, there may be room for fewer than one in 10 Bluetooth hardware companies. Analysts say that investment opportunities remain in Bluetooth software research and development, although there is less visibility in the sector.

A new mood
The potential rewards for Bluetooth vendors are considerable, but so too are the risks. Bluetooth products may have slowly begun reaching the market in 2001, and the technology may have passed through two major revisions, but that does not mean that all technical problems have been solved — as the CeBit fiasco showed.

Reflecting the change of mood, analysts have begun to revise their earlier Bluetooth market predictions. Initially, for example, Cahners In-Stat Group, the US-based high-tech market research company, had said in July 2000 that shipments of Bluetooth devices would grow to 1.4 billion units in 2005. In a research note published in April 2001, however, it revised the projected number of units in 2005 to 955 million, citing ongoing product delays and the deepening US recession as the main causes.

Now, some leading Bluetooth supporters are hedging their bets and backing other wireless technologies. Intel, for example, is building semiconductors for 802.11b and 3G, while Nokia is developing wireless LAN networks as well as Bluetooth phones.

Many smaller companies, of course, do not have the resources to support a range of technologies, but their optimism may not have been entirely destroyed by events at CeBit. According to CSR co-founder Glenn Collinson: “There were about 50 Bluetooth companies showing products, all of which worked perfectly well. One particular demo didn’t work and that got all the media attention.”

But will working products translate into sufficient revenues to deliver the hoped-for investor returns? The omens are not looking good.