It has been hard to miss the fact that everyone from chip vendor Philips to clothier Benetton has jumped on the RF identification bandwagon. RFID tags offer unparalleled asset tracking in real-time at relatively low cost and consumer convenience.

As with any new technology, however, the issues surrounding RFID tags are complex, and these devices have their disadvantages. They have deep security implications, as Benetton found out when it planned to sew RFID tags into its garments. The Italian clothier met massive resistance from consumers, who feared they could be uniquely identified.

Before we get too excited, it is worthwhile to recognize where RFID technology lives on the ubiquitous technology adoption life cycle. It has just moved from Step 1-usage by innovators-to Step 2: usage by early adopters. It will probably take a couple of years at minimum to get to Step 3: usage by the early majority.

The question is not whether RFID tagging will take hold, but when and how-and who will make the money? The security concerns are being addressed. For example, Philips is including a kill command in its Electronic Product Code specification to deactivate the tags at checkout counters.

A far bigger near-term problem is cost. The rather intelligent Philips I.Code chips that Benetton was to use sell for approximately 20 cents each in high volume. But feedback from major consumer products retailers like Proctor and Gamble suggests that RFID tags need to cost about 5 cents each to allow broad-scale item-level adoption and 10 cents each to justify pallet-level and case-level tracking. For better or worse, the semiconductor industry has seen a few years of 50 percent drops in average selling prices, so it is conceivable that RFID tags will get to such price points in about two years.

Companies interested in the RFID market should consider this: There is likely to be much more money, particularly profit, in the RFID services market than in RFID tags themselves. Just imagine all the systems integration work required to upgrade store shelves for inventory management and to upgrade checkout point-of-sale systems. RFID tags and readers are merely the tip of the iceberg.

Jeremey Donovan (jeremey.donovan@gartner.com) is chief analyst at Gartner Dataquest.

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