Oversupply and low-cost entrants to the market for wireless Internet chips are causing prices to drop as volumes grow, according to a study released by market researcher TechKnowledge Strategies..

The average price for a chip that enables connections for an 802.11b wireless LAN (WLAN), also known as Wi-Fi, was $16.06 in 2002, but that price will drop to $6.61 by the end of 2003, said Mike Feibus, principal analyst for TechKnowledge in Scottsdale, Arizona. Revenue from the sales of all wireless chips is expected to decline to $340.2 million in 2003, from $368.7 million in revenue last year, even as volumes soar from 22.5 million to 41.3 million chips sold.

"There are a lot of newcomers in the market, and several from Taiwan emphasizing a low-cost approach," Feibus said. The established players in the market, companies like Broadcom, Atheros Communications  and Intersil, were forced to cut prices to match those entrants, he said.

As a result of the falling margins for WLAN chips, several vendors will probably be forced out of the business or be gobbled up by larger companies, Feibus said. "This is a tough climate to come to market with a new product as a start-up. You need to find money, and venture capital is scarce for wireless. Companies will have to look at acquisition targets or joint ventures," he said.

The price for chips based on the 802.11g standard is also expected to fall this year, from $18 per chip in 2002 to $9.68 by the end of 2003, Feibus said. The Institute of Electrical and Electronics Engineers (IEEE) recently approved the final draft standard to 802.11g, which will increase the data rate of wireless connections from the maximum 11 megabits per second allowed by 802.11b products to an average rate of around 20 mbps for 802.11g products. 802.11g networks are compatible with 802.11b networks.

Corporations will be more interested in 802.11g networks once the final standard is ratified next month, and will pay a premium for the faster connection rates, Feibus said.

Devices based on chips that support both those standards, as well as the 802.11a standard, are also expected to be popular among corporate customers, he said. While 802.11a networks allow fast data rates of up to 54 mbps, they are incompatible with products based on 802.11b or 802.11g networks because of the higher frequency on which 802.11a networks operate.

Prices for 802.11b chips should stabilize at around $4 next year, with dual-band and tri-band products priced higher, Feibus said.