Wi-Fi Threatens Cell Phone Business With WiMax To Come

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More and more cell phones can access WiFi, allowing the phones to work in cellular dead zones, and potentially saving consumers money by avoiding using cell networks altogether. The Wall Street Journal writes: "Operators have resisted selling WiFi phones in the past, fearing that such devices would eat into revenue from voice and data plans by allowing customers to cut back on cellular-network usage."

But, that’s too bad. Handset manufacturers are making the phones, and consumers are buying them. The cell phone industry can either figure out a way to charge more for these handsets to offset network use, or they can take it on the chin.

The trend begs the question of what will happen if and when Sprint (S) launches its WiMax network. It is due to cover an area with 100 million people by the end of 2008. Other companies, especially Clearwire (CLWR) are building out WiMax systems in large cities. Sprint’s WiMax is designed to work with its next generation phones, but, as an open standard, it may be technically possible to build handsets that can take advantage of WiMax while being sold directly to the consumer. It would be yet another way to bypass the cellular infrastructure.

The other business incentive for tapping into WiFi and WiMax is that companies like Motorola (MOT) and Nokia (NOK) are captives of the cell service providers who market their phones. The Apple (AAPL) iPhone is clearly a break from this model, but other handset companies do not have the cache to circumnavigate their largest customers, the network providers.

Unless they can build phones that don’t need the network.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.