As mobile data demand spikes, can Wi-Fi come to 3G’s rescue?

(This story is part of Connected Planet’s Mobile Data Paradox microsite – an ongoing collection of features, blogs and opinions on the key question facing mobile operators today: how do you make a business of 4G and mobile data?

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When AT&T (NYSE:T) bought Wayport for $275 million in late 2008, it had more in mind than just launching itself in the Wi-Fi hotspot business. Dealing with huge demand of mobile data traffic driven by the iPhone and other 3G devices, AT&T couldn’t help but notice that more and more smartphones coming from its vendors were embedded with Wi-Fi radios as well as the standard 2G and 3G chipsets. If AT&T could tap into a nationwide Wi-Fi network it could turn thousands of Starbuck’s coffee shops, McDonald’s restaurants, hotels, convention centers and airports into mobile broadband hubs that would not only provide cheap and fast capacity to its 3G customers, but take a sizable chunk of traffic off of its 3G network.

After acquiring Wayport, AT&T opened the 20,000+ hotspot network up to its 3G and AT&T home broadband customers free of charge. Within one year, total connections on the network grew from 20 million in 2008 to 85 million. By the third quarter of 2009, smartphones and other traditional 3G devices surpassed laptops in total connections to the Wi-Fi network. In the first half of 2010, total connections have risen to 121 million, far outpacing the totals for 2009.

“The driver for all of that growth is the proliferation of Wi-Fi handsets,” said Dennis Whiteside, assistant vice president for AT&T Wi-Fi services. “We’re seeing a wholesale change in customer behavior. Wi-Fi traffic is switching away from the laptop and moving to the smartphone.”

AT&T isn’t releasing specific figures on how many of its AT&T Mobility customers regularly access the hotspot network or what kind of Wi-Fi data consumption each is responsible for, but Whiteside said it’s safe to say the number is significant. In fact, AT&T views the hotspot network as critical component of its 3G strategy. “We look a Wi-Fi as part of AT&T’s wireless broadband network,” Whiteside said. “We have the 3G network, but Wi-Fi provides critical coverage and capacity where most needed.”

That’s resulted in two different, but complimentary, Wi-Fi business models for AT&T. For businesses it acts as Wi-Fi enabler supplying Wi-Fi connections and management services to coffee shops, hotels and other retail locations across the country, which, in turn, typically offer subscription or day-pass services or, in the case of retail venues like Starbucks, offer the service free to attract customers. Through arrangements with many of those same customers, though, AT&T uses the same infrastructure to offer a free access service to its 3G and broadband customers, essentially subsidizing their Wi-Fi access. Those separate models aren’t as conflicting as one might think.

Retail businesses using AT&T’s Wi-Fi services are primarily interested in bringing customers through their doors, and AT&T has a lot of customers constantly in search of high-bandwidth public connections, Whiteside said. In addition, AT&T hopes to marry the two aspects of its Wi-Fi more closely in the future, giving its Wi-Fi business partners the ability to market to AT&T customers that access their networks by offering coupons and other promotions sent directly to their phones, Whiteside side.

AT&T is continuously expanding its indoor hotspot footprint through new deals with stadiums, hotels and restaurants, but recently it’s taken to building a new type of Wi-Fi network, the hotzone. Unlike the hotspots it runs for its business partners, AT&T’s hotzones are intended for its own smartphone and mobile broadband customers, supplying capacity in key high-traffic areas. It’s built them in New York’s Times Square and Chicago’s Wrigleyville area—the area of bars and restaurants surrounding The Chicago Cubs’ Wrigley Field—as well as in the commercial districts of Charlotte, NC. So far, the deployments of such hotzones have been limited, but a shift in AT&T’s thinking about Wi-Fi is clearly evident. Rather than just latch onto Wi-Fi networks it has scattered in businesses throughout the country, AT&T is building dedicated Wi-Fi networks that act as a capacity relief valve for its mobile broadband networks. It can take data traffic off its 3G network in the most high-demand areas for a fraction of the cost it would take to add capacity to the macro network.

“AT&T was very astute to latch onto Wi-Fi early,” said Frank Dickson, vice president of research of In-Stat’s Mobile Internet Group. “It’s not just about saving capacity on 3G network. It creates a sense of stickiness for AT&T. If I notice my phone’s data connection works more often, I’m going to be happier customer.”