Those advances aren't just creating faster Internet experiences. They're also giving rise to a new crop of cellular services. These alternatives to the traditional wireless carrier take advantage of the spread of cheap and plentiful WiFi to deliver low-cost voice, SMS and data in ways that should make the giants in the industry deeply jealous. If the budget-minded upstarts get their way, they could wind up overturning the entire way that cellular service is bought and sold. Here's how.
The country is dominated by four national wireless carriers that operate their own networks. These companies charge relatively high prices. Some of the cost is justified; in addition to providing your mobile service, the companies have to invest in upgrading towers, buying the airwaves over which your calls travel, and other infrastructure costs.
But the small cellular companies now moving aggressively to shake up this system pay no such costs. Collectively, these businesses are called MVNOs — mobile virtual network operators. By signing deals with the larger businesses, MVNOs get to use those companies' infrastructure without actually having to build it all themselves. In some cases, MVNOs also cut costs by foregoing customer service teams. That can add up to savings that are passed on to consumers.
The idea isn't all that new; in fact, MVNOs are really popular overseas. The United States itself is home to dozens of cellular operators that piggyback off of AT&T, Sprint, T-Mobile and Verizon. But the business model that helped sustain MVNOs through the 1990s and 2000s is changing.
Consider Republic Wireless, a Raleigh-based business that announced this month it would sell Motorola's new flagship phone, the Moto X. Republic enjoys all the traditional advantages of an MVNO — low capital expenditures on infrastructure and spectrum — but it's taken the additional step of cutting out 3G and 4G data use whenever it can. Technically, Republic operates on Sprint's network, but it's more appropriate to think of Sprint as a backup for when a call or message can't be completed over WiFi.
Yes, you read that right: WiFi. Republic's business depends on shunting all of your communications — data, voice, everything — onto the free stuff you get in your office or in coffee shops. What makes this beautiful is that whenever a Republic customer chooses to place a call over WiFi, that saves Republic money. As a result, Republic can offer a $5-a-month plan for unlimited talk, text and data. For another $5 a month, customers get access to Sprint's cellular network (minus 3G). Higher-tier plans provide 3G and 4G Internet on Sprint, though it's almost a joke to call them "higher-tier" when the most expensive plan tops out at just $40 a month. The tiered plan supersedes an old, $19-a-month all-you-can-eat plan.
"The crazy plans at $5 and $10 have never been tried," said CEO David Morken. "That's because we focus on unlicensed spectrum as the primary, and licensed spectrum as the secondary."
That's the opposite of the way traditional wireless companies work. Most national providers place a premium on "licensed spectrum," or spectrum that only they have the rights to. The problem is that while valuable spectrum can help increase call quality, buying the rights is expensive. T-Mobile, for example, is reportedly eyeing a $3 billion spectrum deal with Verizon.
Republic pays none of those costs. What's more, because its parent company is the same one that handles calls made over Google Voice, Vonage and a host of other VoIP services, it's gotten incredibly experienced at not dropping your WiFi calls.
It almost sounds too good. And your mileage will certainly vary, depending on where you are and the strength of your connection. But the business model alone is extraordinary, because it threatens one of the main ways that national wireless companies make their money: selling network access.
Other MVNOs are catching on, too. Toronto-based Ting, which charges you separately for minutes, text and data as you use them (rather than bundling it into one opaque monthly rate), reports seeing data consumption drop by between 50 percent and 75 percent as a result of WiFi offloading.
"Our users switch on WiFi at home and at work on their smartphones so much more than the average user," said Elliot Noss, Ting's CEO.
There's some evidence that the large carriers are relying more heavily on WiFi to manage loads, as well — they're just not talking about it much. The growing demand for WiFi all around is one argument for allocating more spectrum for unlicensed usage ahead of a major spectrum auction in 2014. A recent New America Foundation studyreports that WiFi offloading saves the wireless industry $20 billion a year, which amounts to 29 percent of its total annual revenues.
That poses a couple of big problems for us all, actually. In a future where MVNOs and large carriers alike push more of their traffic onto WiFi, the incentives to build new mobile infrastructure begin to erode. Why should a carrier invest in expensive network upgrades if it can provide the same experience by dumping traffic onto a customer's home or office network?
Not only does that create potential pitfalls over the long term, but it also transfers more business to providers of fixed, wireline broadband providers like cable companies, giving them a great deal more bargaining power in the process.
Asked whether he was concerned about potentially kneecapping one incumbent only to replace it with another, Morken laughed.
"One dragon at a time," he said.
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