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Will Wi-Fi revolutionize the phone?

'Voice over Hot Spots' could replace cell services

By David Kirkpatrick

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start quoteI will go to my directory and hit 'David Kirkpatrick,' and it will ask, 'Is this a real-time voice call or are you just trying to send a message?' And the software will check not only if you're available but if you're available to me.end quote
-- Scott Rafer, chairman of WiFinder

(FORTUNE.COM) -- In January 2002 I moderated an hour-long lunch discussion on wireless at the World Economic Forum in New York. It included many CEOs and top executives of major U.S. and international cell phone carriers.

The conversation went on for a long time about the relative merits of various incremental improvements in cell systems, how people would pay, shifting of calls from landlines to cell phones, etc. But with about five minutes left, I remarked that nothing had been mentioned about 802.11b wireless networks (what had yet to be widely called "Wi-Fi").

My comment was met with dismissive, almost derisive, mumbling room-wide. The general reaction: Wi-Fi would be important, but not for a long time, and didn't represent a major threat to incumbent carriers.

Forgive the lengthy recounting of ancient history. But I was reminded of this experience when I recently breakfasted with one of my smartest friends, Scott Rafer, chairman of WiFinder, and a longtime tech industry denizen. WiFinder is a cool business that aims to be the yellow and white pages of the era of Wi-Fi. But this column is not about the company.

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.

So let's just assume that the infrastructure is coming into place. What devices will we use? Rafer says that within a year all the major cell phone manufacturers will offer the kind of phone we're all likely to want -- with both GSM GPRS (high-bandwidth cell phone data), and Wi-Fi. Cisco already has a precursor to that -- its 7960 IP phone, which is meant to be used on a wireless LAN.

He sees the biggest drive toward this coming from Intel and Microsoft. The chip giant wants to build chips for super-cheap multi-mode phones that reinforce its strategic move into Wi-Fi for all its laptop chips. The more users of Wi-Fi, the more people will want to buy Wi-Fi computers with Intel Inside.

Chips for both laptops and cell phones will increasingly incorporate radios on the same piece of silicon, alongside processing logic. Meanwhile, Microsoft's plan for cell phone software will almost certainly include the capability for the phone to automatically sniff out whatever networks are available at any location, and route calls over the least expensive one.

"This is a pure Clayton Christensen moment," Rafer says.

"It's classic 'Innovator's Dilemma' stuff. VoIP from hot spots works very well. This is the problem for the carriers. And it's worst for them in Europe, because of a practice there called 'calling party pays.' Receivers of wireless calls don't pay. So if you've got a Wi-Fi phone, you've got free inbound ubiquity. Then if you just walk to a Wi-Fi hot spot to make all your expensive long-distance outbound calls, you've hit the carriers where margins are now highest."

Rafer doesn't think Wi-Fi will end up taking a huge volume of wireless calls -- at least not anytime soon, but it will nonetheless hurt the existing businesses. "It's just another mediocre Internet technology that is disrupting the pricing power of more complete, but proprietary, technologies," he writes in a follow-up e-mail.

He faults the carriers, especially in Europe, for a hubristic presumption they can control their destiny. He says their "immature business planning processes" aren't prepared for a disruptive technology, because they've never really seen one in their industry.

By contrast, he says, "Microsoft and Intel and Sony and others have realized they can't predict the outcome. So when they see a disruptive technology coming they bet on all sides of it, just like a venture capitalist. They know they have to continue to dominate, and whatever money they lose by betting wrong is lost in the profits from eventually winning." He thinks the carriers should be much more scared of Microsoft's disruptive intentions than they are.

Down the road, he sees a convergence of instant messaging and Internet voice calling: "I will go to my directory and hit 'David Kirkpatrick,' and it will ask, 'Is this a real-time voice call or are you just trying to send a message?' And the software will check not only if you're available but if you're available to me."

This gets more interesting with the recent surrender by Verizon on the cell phone number portability battle. It's a subject that has had me gritting my teeth for years. For the cell phone industry to argue, as it has, that a lack of number portability isn't anti-consumer is idiotic.

Obviously cell users would rather not have to change their number in order to lower their bills, so we in many cases (like mine with AT&T) are forced to remain with mediocre service in order to be reachable. Now one of the top players has finally given in to logic, under gentle but steady pressure from the FCC.

So how's this related to the Wi-Fi brouhaha? Think of this, as Rafer does: what will be the limits of this portability, which most believe will be in place for the cell phone industry within a year at the outside? "Is portability limited to owners of spectrum?" Rafer asks.

He suspects it won't be. "What happens if next year AOL goes to court and says it wants the numbers, too?" Then your AIM address could be your phone number, and things might become better organized for all your communications.

OK, I realize all this is quasi-hypothetical and long-range. By now it's true that U.S. cell phone carriers at least have woken up to Wi-Fi. And the software to facilitate Wi-Fi roaming is still to be perfected. But it just illustrates all the three-dimensional chess pieces in play in telecom, as the Internet continues its steady march to transform much of modern life.

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