Wi-Fi? Why not?
Wireless phone companies need to embrace a new wave of Wi-Fi-enabled cell phones - even though it risks their core business revenue, says Fortune's Stephanie Mehta.
By Stephanie Mehta, Fortune senior writer

NEW YORK (Fortune) -- Wi-Fi phones were the talk of the town this week.

Executives of Nokia (Charts), the Finnish cell-phone giant, were in New York promoting a couple of fancy gadgets that they're billing as "multimedia computers" (don't call 'em phones) that have built-in Wi-Fi capabilities.

French wireless operator Orange unveiled its ulink service, which offers its Parisian customers unlimited local calls on a Wi-Fi phone. And The Wall Street Journal reported that T-Mobile is getting ready to offer new cellphones that work on a traditional cellular network as well as T-Mobile-operated Wi-Fi hotspots housed in Starbucks cafés and other locations.

If they're smart, the other U.S. wireless companies will follow T-Mobile's lead and start their own dual-mode wireless services. This is more controversial than it sounds. If the carriers offer Wi-Fi/cellular service, phone calls, text messages and data downloads that take place when a user is near a Wi-Fi "hot spot," they would essentially be free (or subject to a flat monthly fee).

Only the calls, messages and Internet surfing on-the-go - or away from hotspots - would be subject to the wireless operator's normal pricing structure. In short, if they started offering dual-mode services, the phone companies would risk siphoning revenue from their core wireless businesses.

Still there are plenty of good reasons big wireless operators Sprint (Charts) - and Verizon (Charts) and AT&T's Cingular, in particular - should start pushing Wi-Fi phones and service:

ï Competition. If T-Mobile starts offering fickle wireless customers an opportunity to make super cheap calls and surf their phones for next to nothing, the company, owned by Germany's Deutsche Telekom (Charts), could end up stealing customers from its bigger rivals. Rather than trying to retain and woo consumers with more gimmicky price cuts (10,000 free weekend minutes!) the other carriers should match T-Mobile's offer. That's because...

ï Wi-Fi phones will drive adoption of data services. Right now, data represents a measly 10 percent of total wireless revenue in the United States even though the carriers have spent hundreds of millions of dollars upgrading their networks for broadband applications such as real-time games and video clips.

The problem is that some consumers are reluctant to pay an extra $15 a month or more for service they're not sure they'll use - and some customers don't even know that there are special games and shows, dubbed "mobisodes," tailored especially for their wireless phones.

But if they could try a bunch of those services for cheap or for free while sitting at a hot spot (which, by the way, may offer higher speeds than the cellular network, and thus, a better surfing experience) they might get hooked, and pay up for the privilege of accessing their favorite games or applications when they're roaming off the Wi-Fi network, too. And if wireless data takes off...

ï Wi-Fi can help wireless carriers manage their networks. Today, data traffic takes up so little of the wireless telcos' networks that the quality of those systems remains pretty high. But once consumers do start using their cell phones to ship videos and other bandwidth-intensive files, watch out.

"When people want to do heavy downloads and streaming, let's hope they use Wi-Fi or they'll bring the network down," Martin Varsavsky, founder of FON, an international Wi-Fi community backed by Skype and Google (Charts), told an audience at Nokia's product launch this week. "Mobile operators will hate Wi-Fi, and then they will love Wi-Fi."

ï Wi-Fi phones will boost DSL sales. Wi-Fi, remember, basically is a wireless extension of a broadband connection into a home or business. To take advantage of a Wi-Fi enabled phone while I'm at home, I would need to have a broadband connection, typically a cable modem or DSL line.

Verizon and AT&T (Charts), Cingular's parent, face fierce competition from cable operators such as Comcast and Cablevision, which now sell land-line phone service in addition to broadband connections. Verizon and AT&T could entice customers away from cable modems by bundling Wi-Fi phones with DSL services.

Sure, the telcos would forgo revenue from their traditional land-line service, but a growing number of customers today just want broadband and wireless service anyway. Why not make it easy for them to buy that combination from the phone company?

Of course, there are lots of kinks that still need to be worked out before Wi-Fi/cellular service takes off. At the Nokia event, journalist and blogger Om Malik chided the wireless industry for the clumsiness of the current Wi-Fi phone experience. If you take a Wi-Fi phone to a Starbucks hotspot today, for example, you need go through a cumbersome log in process.

And the traditional wireless operators understandably are concerned about the quality of their customers' experience, and they have little or no control over problems that might occur if a user is trying to make a voice call via, say, a hotel's Wi-Fi service. But with more hotspot-ready cellphones coming out in the coming year, it may be only a matter of time before consumers aren't just talking about Wi-Fi phones but talking on them.

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