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Adapt to Wi-Fi or Die?

The Baby Bells are going to miss out on a major growth opportunity if they cannot find a way to incorporate Wi-Fi into their service offerings.

That's the latest word from Cambridge-based Pyramid Research, whose new report "Beyond DSL" spells out the case for existing fixed-line operators to make a serious investment now in 802.11 technologies.

With demand growing for high-capacity Internet among residential users, there will be as many as 60 million potential wireless LAN users in the United States by 2007. "These subscribers are going to be served in one way or another, so at this point the operators need to ask themselves what the best way is to reach these people," said Daniel Torras, director of the Americas Group at Pyramid.

Torras and lead author Jonathan Tirone set out to crunch the numbers, and their findings may come as a surprise.

One might assume that the most cost-effective way for a fixed-line operator to deliver high-speed Internet would be through DSL or cable, since the hardware infrastructure needed to deliver service in this manner already exist. In fact, said Torras, "the return on investment for wireless LAN was much higher."

The researchers took into account the costs of marketing and installation, as well as the modem subsidy, and determined that it would cost an operator about $1000 to acquire a DSL subscriber. Comparable measures show that it would cost even more to secure a cable subscriber (about $1200) whereas a wireless LAN customer would cost about $800 to acquire.

The cost analysis is particularly relevant in the countryside. "The economics of 802 networks are ideal for rural areas in emerging markets," the authors note. "Systems can be deployed significantly below the cost of traditional network architectures, can operate over license-exempt frequencies, and pack the bandwidth to offer multimedia services."

In spite of these arguments, the idea of residential Wi-Fi is, at this point, barely a blip on the radar of most service providers.

To date, the 802.11 spotlight has shone brightest on the enterprise side, with analysts and media looking most closely at Wi-Fi in offices and on corporate campuses. This in turn may have distracted fixed-line operators from the residential potential for Wi-Fi. While the researchers acknowledge this phenomenon, they warn the Baby Bells and others not to overlook what may be a significant opportunity. "While enterprise adoption may drive the early growth of 802.11 networks, fixed-line operators face a much larger market opportunity in homes and public hot spots," the authors write. "Whereas many enterprises will ultimately own, operate, and manage their wireless LANs, the residential market is primed to generate ongoing cash flows generated through 802.11 services."

Maybe so, but other analysts say it is unlikely that the fixed-line operators will heed the call any time soon.

"I have not heard anything from the telecom guys about wanting to get into this space," said John Chang, senior analyst with Allied Business Intelligence in Oyster Bay, NY.

"Is the business case right? Yes. Are they going to do it? No," said Chang, who noted that the fixed line operators have traditionally been reluctant to adapt their business models in recognition of new communications trends. "Telecom carriers are slow to move to new technologies. They will do this, but they are not going to be the ones in the forefront."

The Pyramid researchers looked not just at the United States, but also at developing nations in Latin America, where they found that 802.11 presents an especially strong mechanism through which fixed-line operators might be able to gain market share.

In the developing world, Wi-Fi offers "a cost-efficient means to provide connectivity to rural areas that would never be reached through other solutions," said Torras. While U.S. consumers might expect to access Wi-Fi at home, Latin American markets would more likely consume bandwidth through a communal kiosk that would deliver Internet, e-mail and telephony capabilities. "You could have a single access point serving a whole village or small city."

The state of the Latin American market will however depend to a large extent on the stability of the Latin American economy, which at present is in dire straits. The authors acknowledge that declining foreign investment and deteriorating service capabilities may keep the telecom sector in check there, at least for the near future.

In the United States, meanwhile, consumers are ever ready to chew up bandwidth, and that creates a significant Wi-Fi opportunity for fixed line operators, or FLOs.

"In the long term, 802.11 networks can have a positive impact on FLOs' balance sheets," the authors write. Wireless LANs "have the ability to drive bandwidth consumption to significantly higher levels. In an industry that has as an underlying problem the commoditization of bandwidth, wireless LANs will spell relief to those FLOs first to craft strategies integrating them into their networks."