Is AT&T building a Wi-Fi bridge to LTE?

(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?

It all leads up to the 4G Salon event at our upcoming Connected Planet Virtual Industry Forum. Register now to join us at this exciting, interactive event.)

----

An increasing number of AT&T’s mobile data services are limited only to Wi-Fi. But then again, AT&T (NYSE:T) is also making Wi-Fi available in a lot more places these days. This month AT&T expanded its outdoor hotzone Wi-Fi pilots to two more cities, Chicago and Charlotte, and announced that its nationwide hotspot network would now include all Sam’s Club big box retail locations throughout the country.

Wi-Fi access on AT&T’s hotspot network is free to its mobile customers with data plans, though it’s hardly as ubiquitous as its high-speed packet access network in the markets AT&T has 3G. But even with intermittent coverage, the 20,000-hotspot network handled 68.1 million connections in the second quarter, a year-over-year increase of more than 350%. While AT&T doesn’t break down which of those connections are made by subscribers to its Wi-Fi service or AT&T DSL and U-verse customers — who also receive free access to the Wi-Fi network — it’s clear that those huge growth rates are being driven by the iPhone and other Wi-Fi-enabled smartphones.

That amounts to millions of data connections that would have occurred on the macro-cellular network, saving AT&T enormous amounts of capacity over its heavily loaded 3G infrastructure. AT&T recognizes an opportunity when it sees one, so it's expanding its Wi-Fi strategy from the coffee shops, restaurants, airports and stores it usually targets with hotspots and moving into the big, outdoor public spaces, where confluences of the smartphone-toting masses could drive even the most robustly built network to its knees. AT&T’s New York hotzone is in the tourist mecca of Times Square, while in Chicago the hotzone forms a broad semi-circle around Wrigley Field, where 81 times a year 41,000 Chicago Cubs fans pack themselves into a century-old stadium and tens of thousands more clog the surrounding neighborhood bars and restaurants.

AT&T is leveraging Wi-Fi in other ways, shipping more than half a million Wi-Fi routers to its residential broadband customers as well as taking advantage of millions of existing home and office wireless networks. AT&T has offered no specific numbers on how much smartphone and mobile broadband traffic is offloaded to Wi-Fi, but those numbers must be substantial. According to a new study by ABI Research, about 16% of all mobile data traffic today is diverted from the wide-area macro network to Wi-Fi, femtocells and content delivery networks. By 2015, that number will increase to 48%, ABI predicted.

ABI’s numbers show that AT&T isn’t alone in utilizing Wi-Fi for network relief, but AT&T is fairly unique in how it uses Wi-Fi to deliver different types of services. While most operators don’t really distinguish between which types of applications that can access which network, AT&T has established some pretty strict guidelines. Video streaming applications such as Slingbox, Apple’s (NASDAQ:AAPL) FaceTime two-way chat video application for the iPhone 4 and even large-file app purchases are limited to Wi-Fi network.

AT&T is drawing a clear line between high-bandwidth services and low-bandwidth services and then assigning those services to the network that can deliver that content most efficiently and cheaply. There are some odd exceptions to the rule, such as 3G downloads of Netflix movies to the iPad and soon the iPhone, but that only makes me suspect that AT&T and Netflix have some kind of revenue-sharing agreement.

This is making a lot of consumers upset, who point to the lack of restrictions on other networks and in other applications, but deeming certain apps for certain networks is a smart thing for AT&T to do. Not only does Wi-Fi permit a higher quality of experience for these high-bandwidth apps, but it allows AT&T to move forward with its tiered pricing plans for 3G smartphones, which would have been all the more difficult if it allowed unfettered video access to its devices.

Ultimately, AT&T will be drawing these network distinctions between 3G and 4G, as the latter will be able to support these services much more efficiently. But AT&T’s long-term evolution (LTE) network is still well over a year away. You could make the argument that these capacity-consuming video services are really 4G services that operators have introduced early. If that’s the case, then AT&T is using Wi-Fi as an interim substitute for LTE.