It has been written that the wiser the people, the more they are aware of how little they truly know. That unsettling thought nicely summarizes the state of RFID today. With each trial, companies discover how incredibly much they still do not understand. With each investment, they discover how its likely to be much more expensive than they had projected.
Legal intellectual property disputes, a major recent upgrade and organizational squabbling are just three of the latest problem areas, said Erik Michielsen, director of RFID for ABI Research. “By themselves, none of the three situations is a deal-breaker, but their cumulative effect will be to chill progress in the field for several months or more,” he said.
The intellectual property dispute involves an organization called Intermec and its IP claims to parts of the key RFID specification, specifically the EPCglobal Generation 2 spec. EPCglobal is the nonprofit organization that is charged with trying to commercialize RFID and other electronic product code (EPC) approaches. It is a joint venture between EAN International and the Uniform Code Council (UCC) and is governed by the EPCglobal board of governors.
ABIs Michielsen says the hope with some retailers and vendors that they will be able to avoid hefty licensing fees is no longer viable. “I can speak now with certainty: They are going to have to license,” he said. Analysts and vendors disagree on what the fees will likely be, although most believe it will a onetime flat fee ($500,000 is the highest figure speculated) and a per-item royalty fee, ranging anywhere from a half-penny to perhaps as much as two pennies.
Christine Spivey Overby, an RFID analyst with Forrester Research, played down the royalty problem. “A lot of the brouhaha over royalties is misplaced,” she said. “Royalties will only impact price tags so much.”
EPCglobal officials are also arguing with ISO about the part of the proposed specification dealing with RFID tag numbering systems. This is primarily a global issue, with other countries wanting the chips to be easily customizable for their geographies in the future.
The third problem that Michielsen is concerned about involves the latest release of the RFID specification—Generation2, which was released in mid-December. “Many prestandard products have been sold on the promise that they are firmware-upgradable,” he said. “It turns out that often means upgradable only to single- or multiunit use, but not to the dense configuration which is the only one that really matters. Buyers must scan the fine print and be very sure that their purchases are fully upgradable, or they risk having to replace all their readers.”
At least one EPCglobal official dismisses many of Michielsens concerns, although he did so without challenging any of the specific concerns. “On the board level, we are totally aware” of those concerns, said EPCglobal board of governor member Mohsen Moazami, a retail vice president with Cisco Systems Inc. “They are being addressed and addressed in a very accelerated fashion. Were making progress to a resolution.”
How Applicable Are the
Wal-Mart Results?”> Another analyst report issued this week cautioned the industry from reading too many positive things about RFID from Wal-Marts highly publicized trial, even as the latest details from that trial suggest its going better than feared.
First of all, the 137 participating suppliers in the Wal-Mart effort are investing at such an unrealistically low level—just enough to scrape by for the Wal-Mart trial—that its reckless to project cost and return from those results, said a strongly worded statement from AMR Research, which estimated that the suppliers collectively spent about $250 million and that—”for strategic impact”—they needed to spend $1.8 billion.
“There were too many hurdles to overcome in too short a period,” said Kara Romanow, research director at AMR Research. “Many of Wal-Marts suppliers are more convinced than ever that there is no ROI and, even worse, consider their technology investments to be a throwaway thus far. Because of this, theyve only spent the bare minimum needed to comply.”
In an interview, Romanow stressed that she did not mean to suggest the suppliers had done anything wrong, nor that she would have even counseled them—under these circumstances—to have done anything differently.
“Theyre spending exactly what they should be spending,” Romanow said. “They would be foolish to spend any more.”
Her point was simply that the industry should be cautious about what conclusions it draws.
AMRs Romanow said RFID prices are still too high and, perhaps more to the point, are significantly higher than the industry had projected they would be by late December 2004.
“While prices are slightly lower than last year and will continue to decrease as bigger vendors enter the space, the 25-cent per tag on average is still too high to support large-scale, pervasive implementations,” Romanow wrote. “Manufacturers are shouldering the burden of tag costs without any concessions from retailers, which is often compounded by the requirement for specialty tags that address physics difficulties, albeit at an even higher tag cost.”
That all contributes to the biggest obstacle to RFID: a much weaker ROI argument for suppliers. Nowhere is this more true than for manufacturers of low-priced goods.
“It took a while for companies to admit it, but for manufacturers of low-cost consumer products like toilet paper, toothpaste and most food products, implementing RFID technology provides little to no defendable ROI—even with tag prices significantly lower than they are today,” Romanow said. “In our conversations with many of these consumer products suppliers, none will admit to any value beyond complying with the requests of their largest customer. There is, however, a strong business case for retailers and manufacturers of high-value goods like consumer electronics, DVDs, pharmaceuticals, high-end apparel, or sporting goods.”
Although not addressing the long-term ROI issues, Forresters Overby did concede that the returns are—at best—significantly delayed. “Theres no questions that the benefits are backloaded and the costs are front-loaded,” she said.
The RFID Interoperability Nightmare
Three key concerns about the future of RFID deployments are familiar to any IT shop: long-term upgrade paths (or the absence of same); scalability; and interoperability.
On the upgrade path, some analysts are suggesting the most likely transition strategy for RFID is “start all over again.”
“You have to have that mentality, that this will be really short-lived,” ABIs Michielsen said. “The investment you make today is not going to be transferable into longer-term initiatives. You have to use it as a means to learn about the technology and make internal business cases.”
AMRs Romanow has a similar take. “The investments are throwaway. Most suppliers, barring a couple of exceptions, are considering their entire technology investments in RFID a throwaway,” she said. “These companies plan to completely replace the technology as Gen 2 products become available and as they scale their rollouts to additional SKUs and facilities.”
On the scalability and interoperability front, Michielsen said that the Generation 2 specification has not adequately addressed consistency.
“A major concern is that companies understand that all readers are not created equal,” the ABI analyst said. “Just because a reader is labeled a Gen 2 does not mean that it will function properly with 50 other Gen 2 readers. It might be able to work with one or two readers in a closed environment, but if you get to a busy distribution center with all of these readers, theres no guarantee.”
Michielsen questioned whether all three types of RFID readers—single-, multi- and dense-environment—will work well in a crowded environment. “Each reader has a limited capacity in dealing with traffic. The noise from the other readers can screw up the reads.”
Another issue to be considered for the future is that the current RFID trials are overwhelmingly focused on EPC passive tags, while the more advanced RFID capabilities are mostly requiring active tags.
“To get visibility into environmental conditions, you might need more than passive RFID, and a lot of the times you will need more,” said Forresters Overby.
She also pointed out that current retail RFID trials are going in very different directions. For example, Wal-Marts trial is across all product lines but is limited geographically, while Best Buy and some consumer goods manufacturers—such as Kraft Foods and Sony—are opting instead to attack the trial on a product category basis “focusing on perhaps DVDs or pharmaceuticals. Categories where there tends to be a more explicit ROI,” Overby said.
Retail Center Editor Evan Schuman can be reached at [email protected].