Wi-Fi to cut into cell carriers' profits
Technology poised to shake up industry

By Jesse Drucker

Wall Street Journal, December 19, 2004 -- Last month, Japan's largest cellular carrier, NTT DoCoMo, started selling a cell phone that looks like any other. Most of the time, the phone, made by NEC, works like any other, too: When its owner is out and about, it uses standard cellular technology to transmit calls.

But if its owner is sitting at a desk in an office configured for the phone, the calls instead travel via the high-speed wireless technology known as Wi-Fi, and then over the Internet, using the voice-over-Internet calling protocol.

Why does any of this matter? Each minute of wireless calling over Wi-Fi is a minute of calling not made over a cellular network. That has the potential to shake up the world of cellular calling.

Unlike a traditional cell-phone call, which comes out of your bucket of paid minutes, calls over the Internet may not be counted at all. That means that if you were in your office - or eventually your home, or Starbucks or any place that has a Wi-Fi connection - you could make unlimited free calls (not counting the cost of the Internet service). That is particularly significant because roughly a third of all cellular calls actually are made from an office or home, according to a Yankee Group survey. DoCoMo's phone will work only if it is configured with a specific corporate Wi-Fi network; you can't just use it at Starbucks.

Already, as voice increasingly moves over the Internet, traditional land-line telephone providers are facing a threat to their core business: Internet phone providers such as Vonage Holdings are offering calling plans that in some cases are about half the price of a comparable telephone plan with a land-line phone company.

Cable operator Cablevision Systems offers phone service as a free add-on for subscribers who pay for both TV and cable-modem service. Even some executives at the old-line Bell phone companies say they believe it's only a matter of time before they will be forced to throw in phone calls as a free - or close to free - application on top of a broadband subscription.

The wireless carriers, currently the best source of growth in the phone industry, have so far been spared much of this tumult. That is likely to start changing with the advent of wireless calling via the Internet.

In addition to NEC's phone in Japan, Avaya in the United States is set to start selling a similar phone by Motorola to business customers. Any shifting of primetime minutes to the Web could motivate callers to bump down their cellular plans.

No one thinks that will start tomorrow, but such upheaval seems inevitable, similar to the effect of e-mail and free cell-phone long distance on land-line long-distance calls.

One big complicating factor: In the United States, calling via the Internet is much easier over land lines, where wired broadband connections provide a dumb pipe to the Web.

Wi-Fi phones provide a similar service wirelessly, but they run into difficulty when they move outside the Wi-Fi signal's relatively short range.

The dual-mode Wi-Fi phones can provide cellular service, but U.S. cellular operators exercise a lot of control over what phones can actually get onto their networks. That's because in many ways, the Internet and cell-phone networks are polar opposites: While the Internet is open, cellular networks, at least in the United States, are restricted.

The cellular operators restrict which devices will work on their networks. Among other things, that enables them to close their networks to devices or functions they want to block.