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Bluetooth garnered much attention at last week's CeBIT trade show, but despite the hype, one factor could still kill the Bluetooth buzz: if Bluetooth chip prices don't come down, few people will be able to afford it any time soon.

For Bluetooth to become widely used, companies that make chips for the technology must reduce the cost to a level that's reasonable for makers of mass-market electronics products, say analysts.

At the same time, until those gadget makers start to order Bluetooth chips in high volume, prices will remain high. The catch-22 situation could keep Bluetooth on the back burner until 2003 or even 2004, according to some.

"At its current cost, Bluetooth is not going to work its way into the mass markets," says Ben Thompson, senior analyst at Gartner Group. Thompson's views seem to reflect those of a growing number of analysts and industry executives .

Hitting the Sweet Spot

The ideal price point for the set of components needed to bring Bluetooth capabilities to a product--typically a processor, radio transmitter, antenna, and flash memory--is around $5, Thompson says. Most Bluetooth chip sets on the market today start at $10 to $15--a substantial difference for device makers that produce low-margin goods in high volumes.

For users, the stakes are high. The wireless technology promises to free them from the tangled web of cables used to connect devices at home and at work. A PC with Bluetooth, for example, could send print jobs to a printer across the room over the airwaves.

Perhaps more exciting, Bluetooth could connect cell phones to laptops and handheld computers, turning phones into convenient wireless modems. In a more futuristic scenario, a Bluetooth shoe might connect to a jogger's watch, providing information about the runner's speed and distance traveled.

Those benefits won't become widespread any time soon if the price for specialized chips used in Bluetooth gadgets doesn't come down. And some analysts say companies seeking to promote Bluetooth as the next big thing are conveniently overlooking this fact.

Overhype or Underproduction?

"Bluetooth is one of the most over-hyped technologies of the century," says Phillip Redman, research analyst at Gartner. Redman agrees that companies must slash prices for Bluetooth to be successful.

Leading chipmakers say they each expect to ship, on average, only about 250,000 Bluetooth chips to customers this year. Philips Semiconductors sells a device to Ericsson for use in cell phones and headsets, and claimed it shipped 1 million Bluetooth chips last year, according to Philips spokeswoman Alexandra van Werkhoven. Gartner's Thompson was skeptical of that figure, saying it exceeds his expectations for most companies.

Single-Chip Solution

Most vendors are planning a single-chip solution that combines the radio transmitter, memory functions, and other components on a single piece of silicon, which they say will be more flexible and affordable.

One such company is Cambridge Silicon Radio, which hopes to bring the Bluetooth myth closer to reality. The wireless chipmaker has garnered investments from Compaq, Intel, Sony, and chipmaker ARM.

"The single chip promises to offer lower costs," Gartner's Redman says, adding that Cambridge stands a good chance of reaching the $5 mark before its competitors because it is designing a smaller, more flexible product. Ericsson has a Bluetooth module, for example, that is larger than a book of matches, while Cambridge will make a single-chip product less than a centimeter across.

More on the Way

Cambridge hopes to start selling a more advanced Bluetooth chip later this year that will integrate all of the components needed to Bluetooth-enable a device. The chip has the potential to be sold at the $5 mark--but only when it can secure orders for tens of millions of chips, which it doesn't expect to happen until 2003, says Matthew Phillips, the company's vice president of strategic marketing.

Gartner estimates that Bluetooth chip prices average between $8 and $9 this year, although its estimate doesn't include add-on components needed to fully enable a Bluetooth product. The company expects to see a fully integrated product that could be sold for $5 a year from now, but only if the volume of orders is sufficient. Bluetooth chip makers could generate about $293 million in revenues during 2001, the company estimates.

Cell phones will likely be the biggest driver for the early adoption of Bluetooth, thanks largely to their widespread use and ability to double as wireless modems, Gartner's Thompson says. If the market for Bluetooth chips in cell phones takes off, chip makers may receive sufficient orders to drive prices down.

While catch-22s typically continue ad infinitum, consumers can do their part to help put an end to the Bluetooth conundrum. If companies see enough user interest in a world without wires, Bluetooth could be widely available in cell phones, printers, laptops, and even shoes by 2003 or 2004.