VoIP Over WiFi WILL Disrupt the Cellular Industry

It’s official.  You can read all about it in The New York Times today.

“What if, instead of burning up minutes on your cellphone plan, you could make free or cheap calls over the wireless networks that allow Internet access in many coffee shops, airports and homes?” asks Matt Richtel.

The Times has recently discovered what you probably already knew, The next generation of cell phones have WiFi access built into them.  Although there are some nasty non-technical details to be worked out, these phones can go online via a hotspot as easily as they connect to a cell tower.

But, here’s the rub for the cellular industry: when these phones log on in a hotspot, they can become VoIP phones as in free or very cheap calling, as in Skype.  Telco have invested their typical borrowed billions in wireless frequency auctions and in so-called 3G services.  These investments were made on the premise that wireless prices for voice and some services would stay astronomically high compared to landline and Internet connections.  Whoops.  You can hear the write-offs and bankruptcies coming!

I don’t usually give investment advice and I should never be believed in the short-term because I get notoriously ahead of the markets (called poor timing).  Nevertheless, I am avoiding investing in any company whose income growth depends on traditional wireless – even sold some mutual funds which were too heavily invested in the sector.  This includes most major telcos – many of which are now being touted by analysts again.

My guess if that the complete disruption of this industry will take five years (see note above on market timing).  This disruption may require that mobile phones support some varieties of WiMax as well as WiFi for nearly universal coverage.

Here’s a bunch of specific predictions:

• WiFi support in mobile phones will wipe out the distinction between the mobile phone and the home phone (about time!).  When you are in your house, your phone will be logged into your home WiFi and become your home phone.
• WiFi support in mobile phones will shift the balance of power from the big wireless operators to the cellphone hardware and software makers. Phones will be purchased independently of calling plans just as computers are purchased independent of Internet connectivity arrangements.  Coupons for access may be included with phones instead of phones being included with calling plans.  Why? Because voice calling will be too cheap to meter and hardware will still cost something.
• The about-to-happen incredible growth of the WiFi mesh will benefit from the savings in cellular costs it enables; and the incredible growth in WiFi availability will hasten the day when traditional expensive cellular connections (an the price paid for them) are obsolete. A true virtuous circle.
• Existing cellular infrastructure will be used as LOW-COST wireless access to the Internet (EVDO does this today at a fairly high price). This is exactly analogous to the use of today’s legacy copper network to carry DSL over which VoIP functions. Problem for the owners of this infrastructure (at least owners of the frequencies and radios – towers will be good) is that the rates they’ll be able to charge in competition with WiFi and WiMax won’t pay the interest on the debt incurred to build those networks. So bankruptcies will be required to lower the cost basis of these assets and make them affordable.

Telco history is particularly repetitious.  Here’s another excerpt from the NYTimes article:

“A spokesman for Verizon Wireless, Jeff Nelson, said the company was looking at Wi-Fi service but had no plans to offer a product in this area. ‘At this point, we don’t see a great application for customers,’ he said.”

The Times also says that carriers think use of public WiFi spectrum will degrade quality so consumers won’t want that.

You may remember that these are the same reasons telcos ignored VoIP ten years ago.  And why AT&T sold all rights to it mobile technology a generation before that. Their consultants told them no one would use a service with the poor quality and the insecurity of radio as opposed to the (illusory) security of wireline.

The telcos are afflicted with the incumbent’s dilemma:  they could embrace the new technology and hasten the death of their traditional wireless cash cow. They might survive better that way.  But they’ll be worse off next quarter and the quarter after that. And might have to write-off the assets currently on their books if they recognize the disruption.

That’s why upstarts who enable the disruption won’t have to worry about marketplace competition from the incumbents early on. Regulatory “competition”, of course, is another story.