Why Wi-Fi Scares Your Wireless Operator (But Is Good News For The Rest Of Us)

Five years ago I sat in the UK head office of T-Mobile, listening to George the product manager. George was earnestly explaining Wi-Fi hotspots, a technology he believed would disrupt the telecoms market and generate lots of money as a consequence. Wi-Fi hotspots are tiny radio stations that connect computers to the internet at broadband speeds without needing wires. George's theory was that it offered the prospect of a great new service to customers, but would not need to be backed by the same kind of serious spending commitment normally needed when rolling out a wireless network. In a normal wireless network, coverage is a vital selling point. In contrast, Wi-Fi hotspots work across a very short range, so the selling point would be the very high levels of performance relative to even 3G. Hotspots would hence be based in places where people were away from home, where they congregated in large numbers, but would be likely to sit still for extended periods whilst they accessed the internet. That means places like hotels, bus stations, or libraries. George did not need to labor his explanation of Wi-Fi, because the idea was not invented by telecoms businesses (although telcos often think they invent every good idea). The Institute of Electrical and Electronics Engineers developed the 802.11 wireless network standards some years before. Fortunately, some businesses clubbed together afterwards and gave 802.11 the much sexier name of "Wi-Fi". Lovers of acronyms should be aware that Wi-Fi is also known as Wireless Local Area Networking or WLAN. Whilst George was diligently explaining the benefits of Wi-Fi, I was biting my tongue and resisting the temptation to point out that my laptop was already Wi-Fi enabled. In fact, earlier that year I had been in LAX airport, sharing a beer whilst waiting for my flight and chatting with a software developer from Austin, Texas. He raved about how Wi-Fi had literally freed him from his desk. But whilst this amiable Texan could show me his laptop, he could not show me Wi-Fi in action. This is because public hotspots – the radio base stations that users connect to – were yet to become common, and there certainly was no coverage in that particular LAX bar. Which is why George and T-Mobile thought they would make a lot of money. Their plan, as George explained, was to build hotspots all over the world, and charge people for using them. As I tried to point out at the time, that seemed like a pretty risky way to increase revenues. Spending lots of money on building networks is what makes operators special. If anybody can build hotspots here, there and everywhere for very little cost, then anybody, and everybody, will do it. That makes it harder for any single business to charge a premium for using their hotspots. More likely, people with Wi-Fi enabled devices will get great wireless broadband access in many new places, but pay little or nothing. Worse still for T-Mobile and other networks, customers would eventually realize that internet connectivity can be used for far more than just browsing the web…

Fast forward five years and T-Mobile, like other networks, are still trying to, and sometimes succeeding at, making money by selling Wi-Fi access to laptop users. They also have many competitors, some traditional, some not so traditional. This has lead to a proliferation of hotspots. McDonalds has 15,000 Wi-Fi enabled restaurants worldwide. T-Mobile has a deal to provide hotspots throughout Starbucks in the US, and Starbucks has similar deals with T-Mobile and other providers in other countries. Whilst the number of hotspots has grown, so has the number of devices able to connect to them. It used to be that only laptops and PDAs came with Wi-Fi functionality. Now an increasing number of smart phones and other hand held devices come with Wi-Fi as standard. For examples, take a look at Nokia's range of Wi-Fi enabled phones or the new Apple iPhone-that-is-not-a-phone, also known as the iPod touch. During those five years you may also have noticed that fixed-line providers have taken a hit because some broadband subscribers have started to use clever IP services like Skype to make calls for free. It does not take a genius to work out that if Wi-Fi enables you to get broadband access on the move, and your cellphone can also connect you to a Wi-Fi hotspot, that some people will want to start using services like Skype on their cellphone and so cut the costs of traditional voice calls. So whilst investing in hotspots seemed like a great idea to George five years ago, it may not seem so great now. Though not common yet, Wi-Fi enabled mobile devices raise the prospect of saving customers a lot of money when making calls. It also means that customers can reduce the expense of using data services on the move. Hotspot operators may try to block access to certain kinds of IP service, but their problem is that low costs mean competitors can enter the market and cause further disruption, much like George hoped to do five years ago. That means if one telco tries to preserve its margins by restricting what can be accessed via its hotspots, a rival business may be able to steal customers and revenues by offering hotspots without restrictions. They also can go one further by offering hotspots that are free.

Not just commercial operations are interested in the potential of Wi-Fi. In recent years, there have been several prominent projects to provide Wi-Fi access across whole cities. These municipal projects have met with mixed success. Cities like Auckland in New Zealand and Philadelphia have successfully implemented Wi-Fi across wide urban areas. In contrast, proposals for Wi-Fi in cities like San Francisco have faced criticism or wrangling over funding. Often local government wants to provide a free or low-cost internet service as a way to provide connectivity to all citizens, thus improving the prospects of the poor. However, concerns about such diverse topics as privacy, use of advertising as a way to generate returns for investors, and longevity of contracts between cities and suppliers have slowed if not stopped the anticipated wave of municipal roll-outs. In August, Earthlink, a service provider set to build some of the municipal networks, announced it was restructuring in order to cut costs; this also means increased scrutiny over whether its municipal projects really will generate sufficient returns on investment. However, it is not necessary to roll out Wi-Fi on a grand scale to undermine the business model of those wanting to charge for it. A small business, like a cafe or a guest house, may give Wi-Fi access for free as an additional way to attract customers. They will probably find it easiest to give the service away and hope to increase conventional sales; they will lack the resources to generate revenues directly from selling Wi-Fi connectivity. Furthermore, some domestic WLAN users freely allow others in range to connect to their home network. Whilst for a minority this is an act of pure charity, for most it is because they have failed to set up their security correctly. There are business models that encourage users to share access to their home networks. Customers of the provider FON agree to a reciprocal arrangement where every FON customer can roam for free on every other FON customer's home network. Customers can also get a share of the revenues earned when other Wi-Fi users pay to access the internet through their home WLAN. This model has attracted the attention of big telecoms operators wanting to disrupt the market. Recently French service provider Neuf Cegetel agreed to partner with FON, thus giving 600,000 customers the opportunity to opt in to the FON model. This was topped on October 4th when a similar deal was reached between British incumbent BT and FON to create a Wi-Fi community that will give 3 million subscribers the option to join. Deals like this give fixed-line telcos like BT the opportunity to steal back revenues from wireless providers by offering mobile phones that also provide voice and data services via Wi-Fi whenever possible. These phones can connect via Wi-Fi to the subscriber's home network, or to the provider's own hotspots, or to the home networks of fellow FON users. Only if there is no Wi-Fi hotspot in range will the phone then try to connect to a normal 2G or 3G wireless network. This means cheaper call costs for users and enables fixed-line providers to compete without incurring the costs of building a full wireless network with near-universal coverage.

It is not all upsides to using Wi-Fi for wireless voice and data calls. Many customers will dislike the relatively poor level of support they receive compared to typical wireless services. Speeds for data transfer can be great, so long as not too many people are trying to use the same hotspot. That also assumes you are within range of a hotspot, which for users away from home is only likely in cities and even then only in public places. However, if customers can accept they typically get what they pay for, then phones that can switch to Wi-Fi in preference to 2G or 3G network connections offer a simple way to cut costs. As more people adopt Wi-Fi and run their own home networks, so coverage will inevitably grow and the benefits of adopting Wi-Fi increase. On top of this, increased competition will drive costs down. After all, charging customers to use Wi-Fi may not be a good way to get their loyalty or their money if the rival business down the road gives them unfettered Wi-Fi access for free. The first signs are emerging that even the traditional corporate models for generating revenues from Wi-Fi are having to become more flexible. Starbucks profits from charges for using its Wi-Fi hotspots, but in a deal with Apple, people will be able to browse iTunes for free in Starbucks. The thinking here is pretty clear – better to give the access for free and make a margin on music downloads than to charge for access and hence impede lucrative iTunes sales. McDonald's has gone one better in the United Kingdom. McDonald's announced on October 6th that they will provide Wi-Fi internet access free of charge in all their 1,200 UK restaurants. This will make them the largest provider of free hotspot access in the UK, representing about 10% of all hotspots in the country. Clearly they think that there is more profit to be made from selling burgers than bytes, and that they will be enticing customers to come and spend more at relatively little cost. This will put pressure on other Wi-Fi providers to follow suit. So it looks like bad news for George, as the days of selling access to Wi-Fi hotspots may be coming to an end. Worse than that, those hotspots will also take voice and data revenues from wireless network operators by offering similar or better quality services at a fraction of the price. For the rest of us, it looks like the spread of Wi-Fi is very good news indeed.

Eric Priezkalns
Eric Priezkalns
Eric is the Editor of Commsrisk. Look here for more about the history of Commsrisk and the role played by Eric.

Eric is also the Chief Executive of the Risk & Assurance Group (RAG), a global association of professionals working in risk management and business assurance for communications providers.

Previously Eric was Director of Risk Management for Qatar Telecom and he has worked with Cable & Wireless, T‑Mobile, Sky, Worldcom and other telcos. He was lead author of Revenue Assurance: Expert Opinions for Communications Providers, published by CRC Press. He is a qualified chartered accountant, with degrees in information systems, and in mathematics and philosophy.