Wi-Fi versus 3G - will there be a winner?

The rise of Wi-Fi has galvanised some providers - notably operators such as T-Mobile - to offer a dual-pronged approach for wireless data. But dozens of other major players are solely sticking to their 3G guns. Stewart Baines looks at where the clever money is going...

The recent news that Californian hotspot operator Joltage had burnt more cash than it could generate suggested to many in Europe that the wind may have gone out of Public Wireless LAN’s (PWLAN's) sails.

In truth, it is evidence that the US market is maturing. And that may not be good news for 3G mobile operators' prospects if independent PWLAN operators like Joltage can emerge in Europe.

Analyst projections of a booming market continue to attract these small new entrants. Cambridge-based Analysys recently forecast that the number of Western European hotspots will grow from 1,400 to 30,000 in five years, producing $2.6bn in revenues.

There's little doubt that PWLANs continue to rip revenue from mobile operators - in fact, these could become powerful enough to completely change operators’ 3G plans.

Yet no matter what spoiling tactics mobile operators may use, independent wireless internet service providers (WISPs) continue to roll out PWLAN hotspots in the honey pots of hotel receptions, airport lounges, coffee house chains and now pubs.

But oddly enough, and despite a couple of UK sites being trialled by T-Mobile, UK mobile operators don’t yet generally accept there is any threat from PWLAN hotspots.

“There’s been some resistance from the UK mobile operators so far. They want to see how the market matures rather than jumping on the bandwagon,” explains Michael Ransom, mobile analyst at Current Analysis. “There've been so few people actually making money out of hotspots that mobile operators really aren’t looking at it as a threat.”

However, across the Atlantic, this picture is already changing. AT&T, T-Mobile and Verizon have all made significant direct or indirect investments in hotspot chains. In fact, T-Mobile is now the largest US PWLAN operator after taking over the 2,200-strong Mobilestar network a year and a half ago.

But not one of these businesses has been fully incorporated into its own mobile arm. Their mid-term intention is to offer a bundled voice and data service anytime, anywhere and so fend off the WISP threat.

Before the US government finally auctions its remaining IMT-2000 spectrum, the US hotspot market could be very mature, comprising up to half a dozen major players. The same pattern will inevitably be repeated in Europe.

“I can’t see small WISPs surviving," said Andrew Rodaway, marketing director of OSS developers Intec Telecom Systems.

"[They] need enough market presence, carrier-grade billing systems and suitable backhaul contracts, [so] the WLAN market will become very Darwinian. A lot of today’s start-ups just don’t stand a chance," he warns.

The attraction of PWLAN hotspots to users is obvious: cheap, unfettered internet access, something that mobile operators have so far been reluctant to offer. But some observers suggest that as soon as mobile operators begin taking a leading role in PWLAN, this pricing model will change, away from bit or time-based tariffing to value-based charges.

“Many of the current PWLAN models are flawed," argues Benjamin Ellis, leader of Juniper Networks’ PWLAN programme.

"Connectivity [alone] is not a high enough margin service, and may never be profitable by itself. The high operations costs, limited scale and service offerings, and the high upfront capital costs all need to change if PWLAN is to be profitable in the long term,” he says.

He believes WISPs should rather follow in the footsteps of mobile operators and move to a value-based pricing scheme. “Metered service has not been a priority to date, simply because many of the Wi-Fi networks are not [yet] congested,” he says.

Most users of commercial UK hotspots use a prepaid scratch card, based on time online, or for an unmetered set period, such as a single day. In future, users may well want an account-based service and the ability to roam around different hotspots in the UK and abroad, but only pay from a single account irrespective of their WISP.

This level of billing sophistication is clearly beyond the level of most WISPs, so unless they aggregate through a roaming reseller, the might of the mobile operator and its billing relationship with millions of potential Wi-Fi users could mean their entry into the WLAN market is unchecked.

But while profits remain hard to come by, it's certainly proving cost-effective for mobile workers to surf the web at high speeds through hotspots for a fraction of the price of mobile data services. Perhaps they will ultimately dictate the charging approach taken.

In fact, in a US market that is fast consolidating, PWLAN operators are already feeling this pressure and are slashing prices to boost demand. T-Mobile has cut its tariff for monthly access fees to its 2,000 hotspots from $49.99 to $29.99, removing the 500MB restriction on data transfers.

Of course, the wild card in this debate is the presence of free hotspots, either in public places as a service to customers or from the countless number of home Wi-Fi networks with little or no security to bar their access.

While this number is currently in the thousands, it is expected to grow significantly. In this scenario, why would users pay for something that may well be available free? This may not destroy the nascent PWLAN business model but it could seriously cut into hotspot - and even 3G - revenues.

George Polk, managing director of The Cloud, a nationwide network of 3,000 public house-based hotspots being set up by Inspired Broadcast Networks, is sanguine about free bandwidth undermining hotspot revenues.

“More people with WLAN at home is good for the industry," he claims."[Admittedly] there could be a loss of revenue because many of these will be open to free access, but by and large, it will help to create the market for people using WLAN services when out and about. I leave my access point at home open to anyone, for instance,” he says.

For 3G operators, PWLAN offers many opportunities for cross selling to an existing user base but a fully converged service is neither likely nor plausible in the short or medium term.

While live handover between PWLAN and 3G networks is technically plausible, it is difficult, costly and more than a little pointless. The opportunity to login only once, and not every time a user moves zones, looks very convenient. But this is more than countered by the fact operators will need to actively inform users that they are moving into a different pricing zone - one which is slower, more costly and charged completely differently.

Whether they like it or not, mobile operators will eventually need to stake a strong claim on the hotspot market. But expecting to port 3G models for content pricing is unlikely to wash with users who like a double skinny latte and all the internet they can quaff.