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Wi-Fi as weapon--telecoms vs. cable

Telecommunications companies are using already-installed public phones as potential Internet hot spots as they look to protect their local phone business from cable companies.

Telecommunications companies are starting to use Wi-Fi as a weapon against the cable industry's ambitions to infiltrate the local telephone market.

Verizon Communications, the largest U.S. telephone company, announced Tuesday that it had activated 150 of a planned 1,000 Wi-Fi hot spots at pay phones so that its DSL (digital subscriber line) subscribers can have roaming Internet service in parts of Manhattan--specifically the Upper West Side to start, with other high-traffic areas to be added in the future. The service will be free.

The move is meant to attract Verizon subscribers to as many services as possible, the idea being that the more that customers depend on a company, the less likely they'll be to leave it for a rival. The industry terms for these ideas are "reducing churn" and "bundling."

New York-based Verizon is experimenting with the Wi-Fi wireless-networking technology to see if it will successfully add to the bundling phenomena--which currently can include local phone service, broadband access and cellular--and if it will help stave off cable companies' efforts to gain share in the local phone-service industry, according to some analysts.

Cable companies have been somewhat successful in picking up subscribers for local phone service, in some cases making up 20 percent to 30 percent market share in a given region. They've even ignited some price wars, which are basically exercises in attrition, with the winner being the least battered.

"Telcos are scared for good reason that cable operators are taking away their subscribers," said David Burstein, the editor of industry newsletter DSL Prime.

Burstein added that cable and telecommunications companies are competing mainly for local phone services, which tend to have up to three times the margins of other services, including broadband or cellular. Part of the reason, according to analyst Danny Briere with TeleChoice, is that local phone service has been around a while--because the cost of running it is now relatively low, companies make more money off it.

The move by Verizon to launch Wi-Fi as part of its bundle of services makes sense, because of the low cost of setting up Wi-Fi networks and the unique advantage that it gives Verizon over cable companies, according to Burstein.

"It's a big strategic advantage for phone companies, because for cable companies to match them, they would have to re-architect everything," said Burstein. "It's cheap and easy for phone companies, and I expect other major phone companies to follow."

Burstein estimated that when compared with the $13 billion in capital expenses for Verizon last year, the $5 million necessary to set up a Wi-Fi network throughout Manhattan doesn't matter significantly.

Briere added that although this may be true, pay phones are gradually being weeded out of the Manhattan landscape, raising the question of how effective roaming will be in the future. And Briere had other concerns.

"Wi-Fi is more of an expense item than a revenue-generating item, so to experiment with it to see how it can contribute makes sense," Briere said. "But just like all the other services, it's generic. Once the other players offer the same service, the only thing they have to look forward to is a price war."

Briere said that bundling only works when services are unique, such as bandwidth bursts at certain occasions when subscribers are downloading a large file.

It's not clear that Wi-Fi is helping broadband adoption, according to Mark Kersey, an analyst with La Jolla, Calif.-based research firm Current Analysis. Broadband adoption was up 59 percent in U.S. homes in 2002 as dial-up subscribers defected.

Kersey estimates that broadband subscriptions, including cable, DSL and fixed satellite, will grow to 27.5 million customers by the end of 2003.

"This is the first time that Wi-Fi is being used as almost a value-added service for core broadband growth, and I think that it is going to be one arrow among many that Verizon will be able to use to shoot holes into its cable rivals," said Kersey.