What Wi-Fi’s Popularity Means for Cell Phone Carriers

What Wi-Fi’s Popularity Means for Cell Phone Carriers | BLOOMBERG BUSINESSWEEK

By BRENDAN GREELEY

David Morken holds a Moto X smartphone out for inspection. “This,” he says, “is a Wi-Fi device.” Morken runs Republic Wireless, a national carrier based in Raleigh, N.C., that offers unlimited calls and texts for $5 per month, $40 if you want unlimited data. Republic keeps its prices low by avoiding something most carriers see as essential: It hasn’t built a cellular network. For customers on the road, the company rents network capacity from Sprint (S). All other Republic calls, texts, and data use Wi-Fi, which Morken says handles about 50 percent of its calls and texts and 90 percent of its data. “Wi-Fi is eating the world,” he says. “Why ignore the biggest network in the world?”

Three-year-old Republic, whose service came out of beta testing in November, declined to release sub-scriber numbers. A competitor offering similar prices, two-year-old Cambridge (Mass.)-based Scratch Wireless, also rents capacity from Sprint. It’s growing by invitation only. Both carriers require the upfront purchase of an Android smartphone modified to use a customer’s home or business Wi-Fi network for a phone call. The newcomers provide a radical response to a mundane fact confronting all mobile phone carriers: After a decade in which the big four U.S. wireless carriers spent tens of billions of dollars to upgrade their networks, arguably the fastest and largest network is the one we’ve all been building together, router by router.

A wireless network requires three things. A transmitter, or “cell,” sends a signal to a handheld device. This signal travels over an available slice of the electromagnetic spectrum. A hard-wired fiber-optic cable (“backhaul”) gets the signal back to the Internet. Traditionally, mobile phone companies put their cells atop towers on dedicated land and bought exclusive rights to a piece of the spectrum, at great expense. The Wi-Fi network was built on the cheap. The cell is the consumer-grade router blinking in the corner of your living room. You don’t pay for the spectrum, because Wi-Fi doesn’t require a license from the Federal Communications Commission, and you’re already paying for the backhaul with your home Internet service.

In 2012, according to Cisco Systems (CSCO), one-third of all data traffic from smartphones passed through a Wi-Fi router. Cisco expects that to rise to almost half by 2017. The trend is more pronounced with tablets, as more than two-thirds already connect to the Internet exclusively through Wi-Fi. That’s a problem for big U.S. carriers, who have spent a fortune on 4G networks to sell faster, pricier data plans as their revenue from voice plans tails off. Cisco’s report showed that traffic over cell networks didn’t grow as much as expected in 2012, partly because mobile-device users took a couple of minutes apiece to adjust their settings to automatically jump to their home and office Wi-Fi networks when possible, avoiding the fees for exceeding carriers’ new limits on data.

The rule of thumb is that a smartphone uses four gigabytes of data a month, says Torbjörn Wård, chief executive officer of Stockholm-based network-management company Aptilo Networks. Out of that, he says, one gigabyte travels over a cellular network, and three gigabytes travel through Wi-Fi, usually at home. “The question for the carrier is, ‘How can I monetize the three gigs?’ ” he says. “And for the consumer, ‘How can I minimize the cost of the one gig?’

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