Can You Kiss 3G Goodbye -- and Still Make a Buck?

Permit me to throw a stick of dynamite in the room: Third generation, or 3G, wireless is dead before it was even born. And after billions wasted on 3G, it's going to be replaced by free wireless local area networks, or LANs.

A technology that the cell-phone industry is spending untold billions on, 3G promises to deliver high-speed data precisely where you don't need it -- on your phone. On the other hand, homes, offices, coffee shops, airports and hotels are building out cheap and grass-roots wireless local area networks that deliver even higher-speed access where you do need it -- your personal digital assistant and your laptop.

Monday's Wall Street Journal ran a piece on this by Andy Kessler, a technology analyst turned fund manager and pundit -- not to mention a former columnist in good standing for TheStreet.com.

Kessler declares the 802.11b wireless LAN standard the victor in the battle for the next step in the evolution of the Internet. I agree with Andy, but he fails to answer the most important question for investors: How can you make money on this?

If you want to own the real innovator in the 802.11b space, Apple Computer (AAPL - Cramer's Take - Stockpickr) was there first. Apple's "Airport" system was the first consumer-targeted 802.11b network. It is well designed, and is now infused in the entire Apple product line. Like so many innovations, the cult of Steve Jobs has been instrumental in pushing "the rest of us" into wireless LANs.

But in the end, Apple is just a small proprietary boxmaker. The real winner in 802.11b (for an explanation of 802.11b, see this column by Jim Seymour) is going to be the company that dominates the components that everyone is going to have to buy if they want to play in this sandbox. And that's Intersil (ISIL - Cramer's Take - Stockpickr).

Intersil is the enabler of the 802.11b revolution. Intersil's Prism chipsets power more 802.11b networks than anyone else, and its technology is right out there on the bleeding edge. It is profitable, and Intersil is divesting itself of its slow-growth businesses, making it a pure play and developing a strong balance sheet at the same time.

So how much of this is real, and how much is hype?

As a loyal user, I can tell you that 802.11b local access networks are, in fact, giving sliced bread a run for its money. I have one installed in my home office, and it is fast, easy and just plain cool.

I can drag my laptop anywhere in the house -- including the hammock in my garden -- and never loose one tick of the market data streaming through the T-1 in the basement. And installing my wireless local access network was one of those rare satori-like moments of perfect bliss -- I just plugged it in and it worked. When was the last time a piece of technology did that for you?

But does it work in other locations? You bet -- perfectly. Airports, coffee shops and other peoples' offices. I have had success at all of them. Sometimes there's a subscription or a connection fee, and sometimes it just works. Either way, it's easy and fast.

And it's only going to get cooler. Intersil announced last week that it has worked with Z-Com to produce the first 802.11b compact flash card. Why is this important? Because it means that a host of devices -- everything from PocketPCs to cameras, theoretically -- can now support a high-speed wireless connection. Expect to see Intersil's tiny chipset in add-ons for pretty much every PDA format this year.

The costs are really quite minimal, and the technology is so simple that it inspires creativity. Community networks are sprouting up all over the place, helping to solve the last-mile problem in cities like Boston and San Francisco.

And the gorillas are supporting it. Microsoft (MSFT - Cramer's Take - Stockpickr) has abandoned the Bluetooth wireless standard in favor of 802.11b. Mister Softee is making a big bet on PocketPCs, TabletPCs and living room domination. And 802.11b is the wireless standard it is anointing as the way to connect it all. And Intel (INTC - Cramer's Take - Stockpickr) has stepped away from a lower-speed, proprietary technology from Proxim (PROX - Cramer's Take - Stockpickr) called HomeRF, in favor of the open standards-based 802.11b.

There are warts on this frog though, no matter how much of a prince it may be. 802.11b's ease of use comes with a trade-off in security. But remember what happened the last time we had a nearly insecurable open standard in networking -- we ended up with the Internet (God help us all).

Now let's look at 3G. I may be a technophile, but even I'm not suggesting that 802.11b networks are going to replace cell phones. But it is possible, I suppose. Two years ago you probably could have floated an IPO on the idea: "Ya see, we get all these coffee shops to sign up, then we give away all these personal digital assistants with headsets, and we make zillions!" But not today.

So this leaves us with a classic convergence problem: For most folks, a tiny, simple phone is all they ever want. 3G is pointless, because these people want something the size of a pea with voice-activated dialing and no screen. For some unknown fraction of consumers, the opposite is true: Their ultimate phone is complex and replaces their PDA. There are many examples of this happening already -- monster screens, Palm operating systems, long-life batteries -- they're all making their way into the hands of early adopters.

But do you really want to hold that kind of brick up to your head all day? Worse, do you really need to watch streaming video on a 2-inch screen while you're driving? Alas, this is a case where convergence is doomed, and one-device-per function is where the smart money is. Small will continue to be beautiful in phones, while the shrinking of PDAs will run into ergonomic limits. Like laptops, there is a minimum usable size for PDAs: You need to be able to see the screen, navigate and enter data in some way.

And if you plan to get data into your PDA, 3G is just a terrible way to do it. It's slow. It's primarily designed for voice. It's not based on open architecture, so things such as instant messaging are extremely difficult to implement.

And then there's the matter of cost. In Europe, more than $70 billion is being spent by carriers just to acquire the spectrum for 3G. Texas Instruments (TXN - Cramer's Take - Stockpickr) is so desperate to find a killer application for 3G that it has set up a $100 million venture fund to help companies develop 3G services.

So on the one hand, you have the wireless carriers spending billions and billions to build out a mediocre high-speed data network that no one is really sure is in demand.

On the other, you have cheap, grass-roots technology that already is solving wireless networking problems that real people have, using open standards and free spectrum.

Sounds like the 3G guys are pushing on a string to me. Or maybe that's a wire. Wait --- isn't this supposed to be wireless?