VERIZON USING Wi-Fi AS BROADBAND BAIT

Verizon Communications made its most aggressive move yet into the Wi-Fi wireless LAN market last week when it announced it would offer free access across New York City to DSL subscribers.

Verizon is wirelessly enabling 10 million residents with 1000 hot spots broadcasting from public phone locations. The goal is to lure customers to broadband and keep them on the carrier's service. Verizon is counting on free Wi-Fi creating loyalty and driving penetration rates beyond the typical 10% to 15% level achieved by other RBOCs.

Larry Babbio, vice chairman of Verizon and president of the company's telecom group, is the driving force behind the project. Babbio makes no bones about the carrier's aggressiveness: Verizon is packaging the Wi-Fi service with its national DSL promotion, undercutting most broadband providers' prices, upping the bandwidth and offering premium content through MSN. But Wi-Fi is the kicker. It goes far beyond any offer any other major carrier or cable provider has made in the past.

“This is a totally new approach that moves to a next-generation broadband strategy,” Babbio said. “Broadband is primed and ready to move beyond its original market of early adopters to the mass market. We plan to capitalize on that demand.”

Verizon is essentially rethinking the Wi-Fi business model. While the telecom industry tortures itself trying to find the elusive carrier business case for wireless LAN access, Verizon has come to the conclusion there is none. Instead, the carrier believes free Wi-Fi can serve as an effective enhancement to boost interest in other services. Last Tuesday the carrier turned up 150 hot spots on university campuses, in transportation hubs and parks, and on Wall Street. An additional 350 will follow this summer, and by the end of the year, 1000 access points will be transmitting from locations all over Manhattan.

The strategy should look familiar to residents of Celebration, Fla. Last year, independent telco Smart City launched DSL in the 15,000-resident community. To differentiate, it built a dozen Wi-Fi hot spots in the town's central business district where premium subscribers could get mobile access. Nine months later, Celebration has DSL penetration of 25% — more than the local cable company. Customers call daily asking for the wireless access package, said Marty Rubin, president of Smart City. “We have tiered pricing, but our customers care a lot more about the wireless aspects of the network,” he said.

According to Verizon, 60% of people with broadband have more than one computer at home, and many in that demographic use Wi-Fi in the home to link their PCs. Last year, Verizon started selling Wi-Fi networking equipment directly to consumers through its sales channels, and the results far exceeded the carrier's most aggressive expectations, said Jim Otterbeck, Verizon's senior vice president for emerging markets. It was only logical to take Wi-Fi to the public domain, he said.

Deploying the access points costs Verizon roughly $5000 per payphone site, but it can vary between $1500 and $10,000 depending on whether the phone has power and the quality of the copper loop, Otterbeck said. Verizon expects the returns on increased DSL subscribership to easily make up for those costs.

Analysts, however, think Verizon may end up harvesting existing broadband customers, not enticing new subscribers. The 15% of households that already have broadband access are the ones most likely to be interested in Wi-Fi, said Cynthia Brumfield, president of Broadband Intelligence.

“Wi-Fi is aimed at a more sophisticated group,” she said. “The average dial-up user isn't going to be attracted to the Wi-Fi elements of Verizon's promotion. They'd be more interested in the price or the MSN portal.”

Otterbeck disagreed. While Verizon's new prices, faster speeds and content services will appeal to different segments, Wi-Fi will be attractive to the mass market, he said. Wi-Fi technologies are being integrated into almost every laptop coming off assembly lines today, and while a new user may be reluctant to pay for a Wi-Fi service, Verizon's free offer will appeal to consumers who would love to test drive the technology, Otterbeck said. “I'm almost positive that this year, wireless Ethernet cards will surpass wired Ethernet cards in sales,” he said.

So far, Verizon has no plans to expand the offering to other cities. However, if the carrier sees the subscriber increases and reduced churn rates in New York that it's predicting, it will take the service to its other major metro markets, starting with Boston, Philadelphia and Washington, where it has extensive payphone penetration.

Other RBOCs and cable providers are watching Verizon's New York trial closely. Spokespeople for BellSouth, Qwest Communications and SBC Communications wouldn't comment on it directly but said they were considering ways to integrate the technology with their other consumer offerings.

Whether Verizon's approach would work in their markets also is questionable. Verizon's strategy depends on the benefit of low buildout costs due to the density of its major Eastern markets and its proliferation of payphones. While the other RBOCs have extensive payphone footprints, the sprawling layouts of many of their markets might make a widespread Wi-Fi deployment cost prohibitive.

Verizon's trial could prove worrisome to cable operators. “It's certainly a very attractive incentive to sign up for DSL instead of a cable modem,” said Brumfield of Broadband Intelligence. “It's only in Manhattan, but that's a huge market. It's going to create considerable pain for Time Warner in New York.”

Cable providers have played down the RBOCs' recent aggressive pricing, saying the cable industry offers a far more attractive proposition than DSL because of cable's ability to offer higher speeds and bundle cable programming.

But Wi-Fi may be the carriers' answer to the cable industry's boasting. It's a service most cable operators either can't or would be very reluctant to offer, Verizon's Otterbeck said. In the past year, some cable companies have warned cable modem users that sharing their broadband connection with others via Wi-Fi violates their user agreements.

“We view Wi-Fi as a cable killer,” Otterbeck said. “The cable companies don't like Wi-Fi. They're even tried to suppress it because it draws so much capacity on their networks.”