IPhone Turns Focus On Greater Wi-Fi Use By Handsets

NEW YORK -(Dow Jones)- The Apple Inc. (AAPL) iPhone, which has generated more than enough buzz for itself, is also corralling a lot of attention for wireless fidelity, or wi-fi, networks.

Already in iPhone's short life span, carriers are reporting greater demands on wi-fi as consumers seek a faster connection to the Web. The technology is a double-edged sword for carriers: It provides a short-term benefit by reducing the strain on their cellular networks, but could potentially wrest away their control over Internet service as networks expand. Sporadic availability and an unclear business model have kept consumer adoption muted, but that is poised to change.

"The iPhone is giving the industry a big shot in the arm in terms of imagination over different business plans," said Ron Sege, chief executive of network equipment maker Tropos Networks Inc.

More than laptops - the primary device used to connect to the wi-fi network - cellphones will be the primary driver for the adoption of citywide wi-fi networks. Some devices, like the iPhone, use the wi-fi hotspots as a means to access the Internet, but other true dual-band handsets are designed to make voice calls that can be seamlessly switched between the wi-fi and cellular networks.

So far, only a few devices boast that capability - around 1.9 million around the world - but that total should grow to 186 million by 2010, according to ABI Research analyst Philip Solis.

As more municipalities push for blanket wi-fi coverage - going beyond the hotspots offered by local business - the debate over their deployments gets increasingly tangled by a messy mixture of government, corporate and consumer interests. Local governments see wi-fi as a way to generate revenue while ensuring poor areas receive access to a high-speed Internet connection. Internet providers such as the telecommunications and cable companies view it as a potential threat.

Yet deployments are happening in the face of this conflict. Small towns across the country have installed municipal wi-fi networks that can be accessed anywhere.

"They say that a mayor can't get elected without a wi-fi strategy," said Karen Hanley, senior director of marketing for trade group Wi-Fi Alliance.

On a larger scale, Philadelphia is working with EarthLink Inc. (ELNK) to build a citywide network. But both it and San Francisco have faced delays in their rollouts. Some towns, meanwhile, have found that its wi-fi network has drawn disappointingly low interest, and have struggled to achieve a return on their investment.

Local governments hope that both residents and visitors alike will be more inclined to pay for wi-fi once dual-band handsets become more prevalent. Their portability brings true mobile Internet access compared with laptops, which are relatively stationary.

Some carriers and cable providers have felt threatened by the prospect that cities would offer their own access to the Web. Some have leveled criticism over the economics of such a business model.

"We're still looking at those networks," said Dan Yost, head of product management for Qwest Communications International Inc. (Q). "We haven't yet found an opportunity that makes sense for us to get involved in."

But things are changing. Yost said he doesn't consider city wi-fi networks a threat, since a physical line connection will always be faster and more reliable. On Monday, AT&T Inc. (T) waded into the business with a 3-square-mile deployment of wi-fi coverage to Riverside, Calif.

Near-Term Benefits

For now, wi-fi coverage is primarily accessed through "hotspots" of limited ranges and are used by hotels, restaurants and coffee shops as a way to retain customers. Many of the wi-fi hotspots are supported by big carriers such as AT&T and Deutsche Telekom AG's (DT) T-Mobile USA, as well as smaller private companies such as Wayport Inc. and Boingo Wireless Inc. They typically deal with the upkeep of the networks and take most of the revenue.

Last year, the worldwide hotspot business generated $1.49 billion in revenue, and should more than double by 2012, according to Solis.

The iPhone's slick browsing capabilities have people wandering around town looking for hotspots. Tropos' Sege said that in the week and a half since the iPhone hit the market, an estimated 10,000 unique devices have accessed wi-fi networks his company supports. "People are finding those networks with the iPhone," he said.

T-Mobile has been aggressive in pushing wi-fi as an alternative network for handsets. The company, which supports 8,500 hotspots across the U.S., last month unveiled a service to bring those access points into the home.

The service, called HotSpot @Home, allows for dual-band cellphones to switch networks, so customers wouldn't burn "anytime" minutes while at home. T-Mobile benefits through additional revenue and the chance to move some of its call traffic off of its cellular network and onto the wi-fi one, which is powered by the subscriber's separate Internet service provider.

By reducing the cellular traffic, T-Mobile can reduce the cost of running its network, which is among the higher expenses for a wireless carrier.

"The more they are using wi-fi, the less they are using the cellular network," Solis said. "That reduces congestion on the cellular base stations, and allows them to put off adding capacity until a later date."

AT&T, meanwhile, is using its wi-fi network as another arrow in its quiver of services used to protect its customer base. Last week, AT&T said it would offer free access to its 10,000 hotspots to customers who subscribe to either of the top two tiers of its high-speed Internet service.

Not everyone is jumping on the wi-fi bandwagon. Verizon Communications Inc. ( VZ) shut down its New York area hotspots in 2005 due to little interest and the need for costly upgrades.

"We concluded it wasn't getting a lot of use," said Verizon spokesman Eric Rabe. "Putting money up for an upgrade wasn't justified."

The company may have been a victim of bad timing - wi-fi was just getting its legs when the network was taken down.