Wi-Fi Likely Has A Bigger Future Than 3G

HONG KONG DOW JONES - BEFORE 3G EVEN REACHES the mainstream consumer in Asia, it could be obsolete -- eclipsed by Wi-Fi, a cheaper, faster-evolving wireless technology that was never meant for telecommunications.

Originally a home-and-office product designed to link up personal computers without wires, Wi-Fi is an inexpensive way to send data over the airwaves at blazing speeds. Asia's fixed-line carriers are capitalizing on that bang-for-the-buck to offer broadband access to the Internet in more and more public places, like airports and coffee shops. In the last year, they've speckled the maps of major cities with close to 10,000 of these so-called hot spots, mainly catering to business people with specially equipped laptops.

That's the start of a trend that could spell doom for cellular operators. Mobile carriers bet their future on exorbitantly expensive third-generation networks, convinced that demand for high-speed wireless data would fatten their customers' monthly bills. But as Wi-Fi-enabled hand-held gadgets become increasingly widespread, hot-spot proliferation could make that same commodity cheap and abundant, destroying the 3G business case.

Because it's based on technology that's in the public domain -- allowing thousands of companies to freely tinker with it -- Wi-Fi technology is also advancing much faster than mainstream cellular systems. "Over time, it blows by proprietary technologies," says Robert Berger, a researcher at the Centre for Global Communications, an independent think-tank in Tokyo.

He predicts that within five to seven years, engineers will be able to adapt Wi-Fi's Internet-based capabilities to provide cellular-like services at much greater cost efficiency. At that point, fixed-line operators will be in the driver's seat. And because they already own the Internet's essential fibre-optic networks, they'll be in position to overrun the cellphone business.

Here's why it looks to play out that way: Wi-Fi's core technology isn't controlled by any company. Rather, it's an open specification put forward by the U.S.-based Institute of Electrical and Electronics Engineers, a neutral not-for-profit organization made up of engineers from around the world. IEEE working groups are continually developing and publishing blueprints for better Wi-Fi products. They then encourage businesses to use them for free.

That opens the business of making Wi-Fi equipment to virtually anyone. Hundreds of manufacturers, like Taiwan's D-Link and Gemtek sTechnology, compete to build better, cheaper Wi-Fi devices without having to worry about developing the central technology or making royalty payments.

As a result, Wi-Fi gear is developing fast, and it looks to go even faster now that Intel, the world's biggest semiconductor maker, IBM, Dell Computer and other hi-tech giants are making Wi-Fi standard in more products.

By contrast, the telecoms industry is dominated by a small group of giant vendors, like Lucent Technologies and Ericsson, who spend billions of dollars developing proprietary cellular systems in closed labs. They compete for contracts with a relatively small group of customers -- mobile operators around the world -- and therefore focus on customizable products and after-sales service. Margins have to support heavy research-and-development budgets, and a product line can have a lifetime of years.

A Wi-Fi access point, or base station, is just another off-the-shelf product that fits into the PC-Internet system, like a router or scanner. Because it's designed for mass consumption, the product cycle is much more rapid, and that drives down the price. In 1997, Wi-Fi access points sold for around $1,900. In 2000, they sold for $900 and today go for as little as $70. That's an average annual price decline of 42%. Base stations used by cellular providers, meanwhile, cost $50,000-250,000 each, and if their prices dropped at anywhere near that rate, the giant vendors would quickly exit the business.

This pricing advantage should hold firm even when Wi-Fi technology advances and acquires new capabilities. Without patent-holders guarding their profit margins, each new version of Wi-Fi is quickly turned into a commodity by computer manufacturers. And because the technology is rooted in the Internet and computing, it benefits from semiconductors' steady march toward greater power at lower prices.

There are still technical, practical and regulatory obstacles keeping Wi-Fi from waltzing into cellular's niche, of course, but many of these barriers are falling away faster than most in the telecoms industry realize. No. 1 is ubiquity. Cellular providers offer service virtually anywhere you are, whereas Wi-Fi is limited to within 100-300 metres of the nearest access point. However, Wi-Fi's low cost allows fixed-line operators to freely experiment. That experimentation could eventually take the wind out of cellular providers' sails -- intentionally or not.

In Asia, fixed-line operators are taking the lead on Wi-Fi services, since they're also the region's biggest Internet-access providers. South Korea's KT, for instance, is carrying out one of the world's most aggressive roll-outs, planning to double its hot-spot coverage to 15,800 locations before the end of this year. By that time, it expects to have half a million paying users.

The former monopoly isn't out to undermine its cellular subsidiary, KTF, though. These hot spots mainly cater to KT's existing home broadband customers, says Alayne Wong, a Singapore-based analyst with research company Gartner. KT is only building hot spots to enhance its digital subscriber line, or DSL, service, giving customers more places to use broadband.

And why not, especially as there's minimal financial risk? A new report from U.S.-based communications-industry research company, Pyramid Research, makes a hypothetical case based on Hong Kong's PCCW, which last week announced it had expanded hot-spot coverage to more than 200 locations in the densely packed city.

The independent report projects that with capital expenditure of just $10 million, PCCW's Wi-Fi service could cover 28% of urban Hong Kong by 2011 -- and, including operating costs, break even by 2009. That's charging as little as 3 to 5 U.S. cents per minute for Wi-Fi access.

By contrast, cellular operators must each spend some $250 million to blanket the city with 3G networks, plus at least $6.4 million annually in government licence fees. Even if these mobile players adopted Wi-Fi technology themselves, they'd still be at a disadvantage because they would need PCCW to provide a ramp to the Internet. In most cases, Hong Kong cellular operators' base stations plug into somebody else's fibre-optic network.

For a dominant fixed-line player like PCCW, wireless coverage is more simple: It puts Wi-Fi access points atop existing phone cables. Because they already have fibre-optic networks covering cities, "the incumbents are best positioned for this," says William Rojas, one of the report's authors. Such operators will also be able to extend hot-spot coverage to tall buildings without having to go one office or apartment at a time, he predicts, citing an emerging solution called leaky-cable technology that makes it possible to cover an entire building at low cost.

While these roll-outs creep forward, ownership of Wi-Fi devices is going to rise quickly. Nearly half the laptops sold today either have built-in Wi-Fi capability or include a Wi-Fi add-on card.

More importantly, hand-held devices, like personal digital assistants, are becoming Wi-Fi-capable, raising the chances of more spontaneous hot-spot use. "These new devices make it exciting," says Lucas Chow, executive vice-president in charge of consumer business at Singapore Telecommunications, which has around 150 hot spots. Most PDAs require special add-on cards to use Wi-Fi, but the recently released n20w from Acer and Toshiba's e740 both come Wi-Fi-ready.

Chow, like others at companies offering both fixed-line and mobile-telecoms services, says hot-spot proliferation is unlikely to cannibalize cellular-data services like 3G. Rather, Wi-Fi will only whet consumers' appetites for wireless broadband they can use anywhere, any time.

But even if only widespread -- as opposed to ubiquitous -- hot spots will make it tougher for cellular operators to recover the high cost of 3G networks, says Michael Robinson, a Beijing-based technology consultant. Mobile operators need customers to rack up big bills by using 3G's premium data services intensively.

"If they have the ability to do that over Wi-Fi at a substantial discount, they're going to," says Robinson. "Why use broadband here when you can walk five minutes down the block?" It's not just price, either -- Wi-Fi's download speeds are generally more than five times faster than 3G's.

A cellular carrier usually makes most of its money from the most heavily used part of its network, the bustling town centre, Robinson adds -- the exact place where Wi-Fi providers are focusing on building hot spots.

Wi-Fi's ultimate disadvantage is that it's not designed for mobility. People generally can't use broadband Internet while walking or driving -- they have to be sitting down -- though trains can be wired with it because they maintain contact with a fixed network along the track. That leaves 3G with a monopoly over only a limited market: Customers who need broadband while sitting in cars or buses and are willing to pay a premium for it.

Because it's based on computing, Wi-Fi technology is adaptable. With clever enough software running on constantly improving semiconductors, it can be programmed for new uses.