by Marguerite Reardon

U.S. cell phone operators are starting to embrace Wi-Fi in order to extend the reach of their high-speed wireless networks without breaking the bank, but some are being more cautious than others.

T-Mobile USA was the first major U.S. wireless carrier to see the merits of using Wi-Fi. Last year, the German-owned phone company, which is the fourth largest mobile operator in the U.S., launched its Hotspot @Home service that automatically switches between subscribers' home Wi-Fi networks and its cellular network. For $10 more a month, subscribers are able to talk as much as they like while on the Wi-Fi network.

Now it looks like other carriers are jumping on the Wi-Fi bandwagon. But operators, such as AT&T, are hesitating when it comes to offering Wi-Fi services for handsets. Recently AT&T, the largest mobile operator in the U.S., said it would allow its broadband subscribers and 3G, or third-generation, laptop data users to have free access to its 17,000 Wi-Fi hot spots around the country. The company also has launched a promotion with Starbucks coffee shops to give users two hours of free Wi-Fi access with the purchase of a Starbucks reward card.

AT&T primarily sees Wi-Fi as a way to fill in coverage gaps for its 3G wireless data service.

"Wi-Fi offers us a way to provide high-speed access in an area where we don't have 3G, like in a rural setting."
--Mike Woodward,
VP of business mobility,
AT&T
"Wi-Fi offers us a way to provide high-speed access in an area where we don't have 3G, like in a rural setting," said Mike Woodward, vice president of business mobility for AT&T. "There might be a coffee shop or some other hot spot in that area that offers our Wi-Fi service, and customers can connect that way."

But AT&T hasn't yet opened the free access to its mobile phone customers. Not even users of the iPhone--which has built-in Wi-Fi but doesn't yet allow the download of voice over IP clients like Skype--can get access to the Wi-Fi hot spots for free. What's more, AT&T seems cagey about putting any of its voice traffic over a Wi-Fi network.

"What we're offering today is about connecting laptop computers to a high-speed wireless network," Woodward added. "Right now, we don't do seamless hand-off from one network to another. And I have a hard time envisioning where that might happen."

Indeed, for Wi-Fi to be truly useful on mobile devices like handsets a seamless hand-off between the cellular and Wi-Fi networks is necessary. But carriers like AT&T do hand-offs between cellular technologies all the time. When AT&T subscribers travel between its 2.5G EDGE network and the 3G HSPA network, the device switches from one network to another and callers on either end have no idea.

Switching among networks
The same thing needs to happen between Wi-Fi networks and cellular networks. And while the technology for this hand-off is somewhat more complicated between Wi-Fi and cellular than it is between two cellular technologies, it already exists. T-Mobile uses a technology called UMA (Unlicensed Mobile Access), which detects when one signal fades and another comes into range.

Joe Sims, vice president and general manager of T-Mobile USA's Broadband and New Business Division, claims the hand-off between the two networks works very well.

"It's seamless," he said. "You can't tell that the call is switching from one network to another."

Cisco Systems also recently introduced a network-based hand-off technology that it's selling to its corporate customers. The software, which runs on its new mobility appliance, keeps track of devices and phones on the network. When it detects a device is leaving the Wi-Fi network , it automatically switches the connection to the cellular network and vice versa.

Even though the technology has been developed for large companies, Pat Calhoun, CTO for Cisco's wireless networking business, said carriers could eventually adapt the technology for use on their own networks.

Once seamless hand-offs between Wi-Fi and cellular are mastered, there are essentially no technical barriers that would keep a cell phone operator from using Wi-Fi technology. And, in fact, carriers could reap many benefits from using Wi-Fi to offload voice traffic, especially as the price for voice minutes continues to decline.

Better coverage, less cost
For one, Wi-Fi is an inexpensive way to improve in-home coverage. And as carriers migrate to 3G services, it's likely to get harder for them to provide in-home coverage because 3G service operates at higher frequencies, which don't penetrate walls as well. So if customers weren't getting good cell phone reception in their homes or offices with current cellular technology, the situation won't be much improved with 3G. But Wi-Fi could help because it allows operators to leverage a high-speed wireless network that already exists in consumers' homes to achieve full, "five bar" coverage.

What's more, because Wi-Fi mobile services are delivered over a consumer's own broadband connection, it reduces the transport cost that the carrier has to pay to get the traffic from the cell tower to its wired backbone network. Some experts say that Wi-Fi can actually help reduce this so-called backhaul expense by a factor of about 10.

And finally, Wi-Fi allows cellular operators to compete more aggressively on price. If the voice traffic is carried over a low-cost IP network instead of over a more costly cellular network, they can offer more aggressive prices and still make decent profit margins.

So why aren't more mobile operators jumping on the Wi-Fi bandwagon? The reason is simple: They're scared. Specifically, they are worried about cannibalizing their existing voice services and making their networks so open that subscribers can bypass their own services and applications completely.

When asked if its Hotspot @Home users could use a mobile version of Skype, T-Mobile's Sims said they could, but he added, "We're not necessarily going to advertise that."

This is a legitimate concern. Phone companies have already seen the same scenario play out on the broadband side of their businesses. Today, broadband providers compete on speeds and feeds. They have tried offering Web portals and content directly to consumers, but the reality is that consumers can bypass their traditional phone service with services like Skype or Vonage. And they can get content directly from the likes of Google or YouTube. Essentially, the broadband providers have been reduced to dumb pipe providers.

And their biggest fear is that the same thing will happen in their mobile businesses. Still, dual mode wireless devices are coming whether cell phone operators like it or not. In-Stat forecasts that the global supply of dual mode voice and data Wi-Fi handsets will increase by nearly 360 percent this year.

Popular devices such as Research In Motion's BlackBerry and Apple's iPhone already have Wi-Fi built in. Still some carriers, such as Verizon Wireless, say they don't need Wi-Fi. Instead, Verizon is focused on deploying a faster 4G wireless network. But in the meantime, there are already millions of Wi-Fi hot spots throughout the country, and with or without their mobile carrier, consumers will soon figure out ways to use them.