Cell Phones Co-opt Wi-Fi

Call it the Technologists Lament. Just when you begin to understand a business model, it changes. Im feeling that lament right now. The culprit? The cellular services industry. For the last few years, executives in that industry have touted their companies revenue growth in wireless data servicesservices such as downloading ring tones, surfing the Web, or exchanging text messages for example. After all, the anticipated upsurge in data applications was the reason behind the years of network upgrades, right?

But now, that’s not so clear anymore. On the one hand, it appears as though the long sought after data services are finally resonating with consumers. Verizon Wireless announced last week that its data services generated $255 million in revenue last quarter. Other companies, such as Cingular, have recently reported 80 percent year-over-year growth in data services. While theres some uncertainty over what kind of data, exactly, consumers are transferring, its clear these companies are now recouping the expenses they incurred in building the next generation wireless networks.

Whats thrown me into a quandary are two product announcements made last week. First, Hewlett-Packard introduced a new PDA phone (the iPaq h6315) that also features Wi-Fi capability through a partnership with T-Mobile. Then Motorola announced its own Wi-Fi-enabled cell phone: the CN620. Why would these cell phone companies start partnering to offer data through Wi-Fi, which typically employs an all-you-can-eat model, when theyre seeing success now with their metered data services over their networks? For T-Mobile, the operator of the nations largest fee-based Wi-Fi hotspot network, its a way to play both sides of the revenue fence. But industry watchers predict that the other major cellular providers will soon partner with Wi-Fi enabled phones. Won’t they be cannibalizing one of the rare successes for generating profits other than voice services?

The answer, in the short term, is yes. If these phone/PDA/Wi-Fi devices take off beyond expectations and begin to supplant cellular network-based data traffic, then clearly those data services revenues will suffer. But in the longer term, things look a little different. Even if Wi-Fi adoption on phones takes off, it could actually spur more data service usage over the next generation cellular networks that are still in the process of rolling out.

My Technologists Lament begins to dissipate, mainly because of the inherent conflict a phone with Wi-Fi capabilities presents. People use cell phones largely for the mobility they offer. Wi-Fi, even though it untethers users from a physical wire, still requires them in most cases to stay within a roughly 60-meter range of a Wi-Fi access point. Building out a Wi-Fi network to support the mobility needs of cell phone users is too cost prohibitive under the current standards. Whats more, several key issues remain for Wi-Fi on cell phones, such as billing concerns and smooth transitions between cellular networks and Wi-Fi signals.

As such, Wi-Fi may just be an interim phase for cell phones, something that companies feel they must add to their phones to cover their bases and the far-reaching data needs of their customers. Research firm InStat/MDR estimates that in the United States this year, 30,000 cell phones will be sold that have Wi-Fi capability. By 2007, that number will hit 22.7 million. That’s a pretty big jump, for sure, but when you consider that cell phone makers are expected to ship around 550 million units this year, its clear thats a very small percentage of overall phones.

For cellular companies, Wi-Fis inclusion on cell phones may ultimately serve to seed consumer desire for high-speed data access on their phonessomething that the cellular providers next generation networks provide. By the end of 2005, many major U.S. cities will sit within the footprint of high-speed data networks provided by Verizon, Sprint, and Cingular. Unlike Wi-Fi networks, these cellular networks will reach across milesnot feet.

Of course, another use for Wi-Fi on cell phones is to offer voice services. Thats something that can provide real cost savings to businesses today. But data applications alone are unlikely to drive adoption of these Wi-Fi phones. For that, cell phone companies will still want customers to jump on their high-speed next-generation cellular networks.