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Analysts: Wi-Fi Complementary to Telecoms

Wi-Fi should be viewed as a complementary -- not competitive -- technology to the Regional Bell Operating Companies (RBOCs) and wireless carriers, according to Deutsche Bank Securities analysts.

In an analysis Monday, Deutsche Bank analysts Viktor Shvets, Nigel Coe, Edward Bryant and Andrew Kieley moved to dispel entrenched notions that Wi-Fi technology will eat into the existing fixed-line broadband market and the market for data services from wireless carriers.

"Whether or not retail revenues ever reach the more optimistic forecasts of $5 billion to $6 billion (from around $100 million right now), the probability of large-scale disruption to existing platforms remains low, in our opinion," they wrote. "Indeed, our analysis suggest that Wi-Fi is entirely complementary to existing fixed broadband products, and since the fixed-line and cable industries own the 'anchor' home connection, the chances of Wi-Fi becoming commoditized by existing broadband players is much higher than vice-versa. For wireless, the ownership of billing relationships with the bulk of potential Wi-Fi users makes them very well placed to cross-sell the product."

Deutsche Bank suggested that while there are about 4,000 independent wireless Internet Service Providers (WISPs) currently in operation, the business case for those independent WISPs is not clear, because the bulk of the value in Wi-Fi resides in three segments: the provider of backhaul connectivity, the owner of the premises and the equipment vendor.

"When the likes of McDonalds are prepared to offer an hour of Internet surfing for the price of a Happy Meal, it is difficult to see how independent operators will be able to sustain current pricing of around $50 per month for unlimited Wi-Fi access," they said.

Given these realities, the analysts said they believe the telecom industry "will simply strap the Wi-Fi platform onto existing bundles, making Wi-Fi just another piece in their product armory."

They also noted that while this presents an opportunity for revenue accretion, the most likely value for the technology in telecom operators' eyes is churn-reduction.

"It is easy to see how the wireline operators can benefit as Wi-Fi becomes an increasingly important source of revenue, due to the backhaul link between the hotspot and the IP backbone," they wrote. "This link can feasibly be anything from a T3 down to a simple ADSL connection, although DSL would severely restrict the number of users and speeds that could be supported. A useful rule of thumb is that a T1 connection -- the benchmark backhaul link -- costs around $500 per month. Therefore, should public hotspots increase from around 4,000 to around 100,000 in number longer-term (in line with most consensus expectations), the incremental value accruing to the wireline telecom industry could easily reach $500 million per annum."

As for churn reduction, the analysts noted that about half of current Wi-Fi users also have a broadband connection at home, with the other half probably relying on Internet access at the office. By commoditizing Wi-Fi service, telecoms may be able to retain a higher portion of their customers, especially through plans like Verizon's DSL package, which will offer its subscribers free access at its eventual 1,000 public hotspots.

"This kind of offer, together with the natural advantage of owning the backhaul connection, confers upon ILECs [Incumbent Local Exchange Carriers] a status as the best-placed operators to take advantage of Wi-Fi penetration growth," the analysts said.

Meanwhile, Wi-Fi seemingly presents a more immediate threat to the wireless industry, where it is set to take over the large-scale bulk transfers and Internet surfing that some users rely on wireless networks for while on the go -- especially when they are stationary in airports, hotel lobbies and cafes. This is because Wi-Fi offers substantially faster speeds than current wireless networks.

"However, our data forecasts are not predicated on substantial volumes of traditional surfing, but on services such as short messaging, ring-tones, gaming, location services and low-value transactions -- quintessential wireless platform products," the analysts said. "These are low-capacity, low-speed products well-suited to the spotty coverage maps that will continue to persist in the U.S. for the foreseeable future."

The services also highlight the differences between Wi-Fi and cellular services, the analysts noted.

"Wi-Fi is best viewed as a wireline connection without the line, since users are tethered within the 100 meter hotspot shadow," they said. "While it would be possible to build out hotspots in a cell-like matrix with handover capability (thus allowing mobility), the low power output and high-frequency leads to extremely low wave propagation, meaning that it would be extremely inefficient to build such a network using 802.11x technologies."

Instead, Wi-Fi and cellular technologies both get a boost when used together, the analysts said.

"This seems to be the driving force behind aggressive moves by T-Mobile and AT&T Wireless into this space, which makes sense given that the wireless carriers already have a billing relationship with the vast majority of potential Wi-Fi users," they said. "When chipsets that allow roaming between incumbent cellular networks and Wi-Fi become widely available, the wireless operators are likely to capture the vast bulk of the business traveler market over time."