Update : A follow-on post to this has been added.
One of the trends that has emerged in the last year has been the increase of wi-fi capable smartphones. In the US market, originally most of the major mobile operators blocked wi-fi functionality. Only recently has this changed. And this has changed in a big way – operators are now saying they will have wi-fi functionality on most smartphones going forward. They have even announced plans to allow access to Wi-Fi hotspot networks.
What is driving this ? Simply put it is the explosion in mobile data usage and the strain it is causing cellular operator networks. ATT is the poster child of these problems and they have been the most aggressive in rolling out wi-fi as a solution for their cellular data capacity crunch. They have rolled out free wi-fi access to customers at multiple popular sites such as Starbucks, McDonalds, and the Barnes & Noble bookstores.
The thing that amazes me is that this took so long. There are probably multiple reasons for this.
- Some operators (and vendors) were concerned that adding Wi-Fi to the smartphones made the handsets too expensive.
- There just wasn’t much of a need for it as there was no cellular data capacity crunch. (i.e. no iPhones or Droids to strain the networks)
- In other cases, operators were afraid that it would result in lower usage of their cellular data plans.
I can’t say much about the first and second reasons except that it is now obviously an issue and adding network capacity may be more prohibitive. But if it was the third, I think this is a case where the situation is a bit more complex than such simple reasoning.
Assuming today’s predominant post-paid billing models, encouraging the use of Wi-Fi on smartphones for operators would have been a classic case of applying the “breakage” model. Examples of businesses relying on this model include Netflix and the gift card industry. For example in the gift card industry, everyone buys these cards for a certain fee, but not everyone use up the whole card. The ones who don’t use up the whole card’s value are in effect leaving money to the gift card company!
The link with Wi-Fi enabled smartphones is that operators are can be viewed as operating under the breakage model. The smarthphone users pay a certain monthly fee for cellular data usage. They also get Wi-Fi capable phones, so the users will have the ability to use celllular and Wi-Fi data connections. But if the operator makes it easy for them to use Wi-Fi then they will use it as in many cases it will be faster. But these mobile users, will still be paying the cellular operator their normal monthly fees for their data plans. (Note, this assumes most such users keep their cellular data even if they have Wi-Fi functionality on their phones and also that the cost of making Wi-Fi available in hot spots is not that expensive for operators.) This is exactly like gift cards !
So you would think that operators should have done this a long time ago ? Actually it has only become really important recently with the huge increase in mobile data usage brought about by the introduction of the “super” smartphones such as the iPhone. ATT’s cellular network has been under such strain that it has actively pursued the offloading of mobile data to Wi-Fi networks. The fact that due to the “breakage” model they are employing their bottom line is healthier is an added benefit.
Now the iPad is interesting, in that its recently announced data plan is different from this model. In fact, it is the among the first ones in the USA where the user can choose to use Wi-Fi most of the time and then just turn on their 3G cellular data connection only when they need it. So in some ways it is the first test of a case where “breakage” may not apply to cellular data usage when Wi-Fi is available. Only when people would really use 3G would they pay for it. So for operators this becomes a problem – they are only get paid for real data usage. One has to wonder how well the economics would work if this were widely adopted across all phones. Doubtless not too well.
Another wrinkle in this boat – is that going forward how would tiered usage pricing work in such cases ? Because that would have potentially similar effects to the iPad case – you can view the iPad as an extreme case of the the tiered dta pricing model but where the tiers are binary, you either have it or don’t. There would have to be some use of the “breakage” model at some level to make it profitable for the operator – i.e. it may be the lowest tier users, who will be asked to pay for a flat $15 dataplan even if they use no data.