Is Wi-Fi a Threat to Cell Service Providers?

When it comes to how much you spend each month on your cell phone bill, you have two choices:
a. talk a lot and spend a lot, or
b. talk very little and still pay too much.
Is this likely to change any time soon?

Now that it is possible to conserve your peak airtime minutes by using a phone that automatically switches from your service provider’s network to your broadband wi-fi hotspot, there is a lot of speculation about whether the trend will catch on, and if so, what maneuvers service providers will have to make to keep from losing revenue.

How much revenue do they stand to lose? Will they be forced to jack up the cost of service plans and equipment to close the gap?
Maybe, but maybe not. Remember, your cell phone company is making a killing off of you, compared to how much it costs to provide your service.

Just how much does it cost your cell phone company to provide your service anyway? Unfortunately, that information isn’t exactly available to the general public for some reason, but analysts have made a few guesses.

When you compare Verizon and Sprint, who operate on CDMA technology, to Cingular and T-Mobile, who operate on GSM, it is reasonable to assume that per customer, Verizon and Sprint have lower operating costs. This is mainly because the CDMA network is well established, and requires relatively little maintenance to keep it in good condition.

Because GSM is fairly new to the US, Cingular and T-Mobile have had to invest a boatload of cash into the build-out of their shared network, it costs both companies a great deal more to provide service, per customer, than it costs Verizon and Sprint. (Cingular and T-Mobile share many cell sites to cut cost.)

Your service provider actually loses money on you for about the first three months you have service with them. This is because they give you a free entry-level phone, or a huge discount on a mid-level or executive-level phone.

To get these discounts, you typically are required to sign a two-year contract and stay on a service plan that will cost you, at minimum, about $60 per month.

After the ‘probationary period’ (the period, in which you cost the company money), they start to recover their investment and begin to make a profit from you. They do this by charging you for airtime somewhere in the ballpark of three to six times what it costs them per minute to provide the airtime to you. (This depends on your rate plan, and whether you go over your minutes.)

Airtime used to be the primary moneymaker for cell service providers, but now other services, like data and text messaging are raking in almost as much cash as airtime does.

What will happen when providing airtime becomes 30-50% less lucrative because of wi-fi? You can expect your service plans to start costing more, if you opt to use a phone that enables you to make calls with wi-fi.

This article from CNN.com mentions that “Voice Over Hotspot” could seriously threaten cell phone service providers.

…Spending an hour with its chairman will convince you that those cell phone execs may be due for some nasty surprises. Rafer also consults extensively with wired and wireless telcos, especially in Europe (He lives in Brussels.). His most striking view: what he calls “Voice over Hot Spot” could eventually suck most of the profits out of the cell phone industry. He reconfirmed my own impression that the combination of Voice over Internet Protocol (VoIP) with Wi-Fi hot spot technology is likely to be transformative.

To travel down the Rafer trail you have to rid yourself of the notion that offering hot spots will be, in general, a terrific business. “Think of Wi-Fi like air conditioning,” he says. “You don’t make money off it, but it seems to be most everywhere.” That’s the world we’re headed for, he believes.

He expects that Starbucks, for example, one of the most aggressive purveyors of hot spots, will eventually decide it’s more important to have the service — which will cause users to linger and drink $4.50 coffees — than to make money from it per se. Rafer says giving service away costs as little as $3.50 a day, while charging for it can be more than $30 a day. “The equipment is on a Moore’s law curve, but the billing systems are not,” he adds…

Don’t start crying for your service provider just yet. As crafty as they are, I’m sure they are already finding a solution to the problem. They may have to ’shift fire’ to survive, but I seriously doubt that VOHS will bring the industry to it’s knees.

How likely are you to use this Voice Over Hotspot technology? Do you think it will save you money on your cell phone bill?