Cellcos bet big on third-generation wireless - and took a big hit. Now T-Mobile's John Stanton has a grand convergence plan. Starbucks is just the beginning.
As T-Mobile USA's John Stanton tells the story, his company's future was changed by a chance meeting with Michael Dell, chair and CEO of Dell Computer. During the 2001 Allen & Co. CEO schmoozefest in Sun Valley, Idaho, Stanton sat down for drinks on a sun-drenched patio and learned that Dell planned to build Wi-Fi into most of his company's laptops. It was a bombshell.
Stanton, chair of T-Mobile, had been spending much of his time discussing business trends with cell phone makers and network equipment providers, trying to figure out how to offer wireless broadband to mobile phone users. Like his peers in the cellular industry, Stanton thought Wi-Fi was just another open spectrum technology with no place to go - a fad like HomeRF and Bluetooth, a techno-hobbyist's Tinkertoy, a network for wireless weenies. The real solution to broadband wireless was 3G; it was just going to take a bit longer than expected.
But here was Dell with his plan to make devices that access the Internet wirelessly, and he's all about Wi-Fi. "Michael said they were going to build Wi-Fi into a significant portion of their laptops," recalls Stanton. "I was shocked. Up to that point, I thought [Wi-Fi] was nothing but more overstated expectations. But here was a guy that was deeply committed. It was at that point that I realized Wi-Fi was real. That was the seminal event."
The world of wireless communications has turned upside down. A few years ago, it was generally accepted that your phone would be your ticket to the wireless universe, and the cellular service providers, offering more and more services and bandwidth, would be at the center of the action.
The reality, as Stanton learned, is far different: Cellular was not cutting it. Its data and multimedia services were slow and ineffective. Computer makers wanted a wireless broadband solution, and they wanted it right away. They wanted Wi-Fi.
Stanton came to this conclusion just as T-Mobile was embroiled in a fierce political and financial battle. The company was born a year earlier, when Deutsche Telekom announced it would spend an eye-popping $50 billion to acquire VoiceStream, then the only US carrier with a network based entirely on GSM, the technology used widely by European carriers. Analysts immediately criticized the company for overpaying, and the acquisition (ultimately a mere $30 billion) coincided perfectly with the bursting of the Internet bubble, the cratering of tech valuations, and the beginning of a long, torturous decline in capital spending by wireless carriers. It was horrendous timing.
For a while, it seemed T-Mobile's salvation depended on 3G, the next generation of cellular technology, to revive the firm's dwindling revenue. Though there are many different paths to 3G (CDMA 2000, WCDMA, TDS-CDMA), the end result was to be the same: to make the Internet wireless, with a quantum leap in the capacity and speed of the networks. This was a pretty thrilling vision, so much so that the overheated European carriers got caught up in a bidding war for 3G spectrum licenses. Altogether, they ended up spending $100 billion just for the right to provide the service; the actual cost of building the networks and otherwise rolling out the technology would likely double that.
But the first trials of the favored European 3G standard, WCDMA, turned up troubling technical limitations, from disappointing data rates to high power consumption. And suddenly the massive debt that the carriers, including Deutsche Telekom, had taken on for the 3G landgrab started to look like a crippling mistake.
What this meant was that 3G was certainly not going to happen as planned, and might not happen at all. So T-Mobile settled on a more modest path: It quietly began upgrading its GSM networks to a cheaper, more evolutionary technology called GPRS (also known as 2.5G) and waited for something to happen. Rumors abounded that T-Mobile was on the block. By the middle of 2001, even GPRS was labeled a major flop in Europe, with slow speeds and very little customer adoption.
Meanwhile, back in the US, T-Mobile watched as Sprint PCS and Verizon got their own 2.5G networks up and running using the competing CDMA standards, which were cheaper to deploy and offered faster speeds. The situation started looking desperate, with T-Mobile seeming to fall behind. But a revolution had been brewing, a movement to elevate a grassroots technology into a worldwide broadband solution.
Wi-Fi was an underdog from the outset. Built for data transmission across local-area networks with a radius of only about 150 feet, it was best suited to homes and corporate campuses. But in light of the 3G fiasco, it had some serious advantages: high speeds and low cost. Cellular carriers didn't know what to make of the new technology. Fear was the order of the day.
"Wi-Fi was about the worst thing that could conceivably happen to them," says Richard Dineen, a wireless expert with London-based market research firm Ovum. "It was unlicensed spectrum with no barriers. Unsurprisingly, they kicked and screamed and didn't welcome its arrival." Some even talked about trying to kill Wi-Fi by complaining that unregulated wireless technologies risked interfering with licensed spectrum and should be curtailed.
T-Mobile, however, was in too much trouble to waste time with tantrums. After his fateful meeting with Michael Dell, Stanton returned to the company's Bellevue, Washington, headquarters and set in motion a series of events that would radically alter Wi-Fi's fortunes - and, he hoped, T-Mobile's.
Stanton heard that Starbucks, another Seattle-area company, was dissatisfied with the Wi-Fi network MobileStar was setting up for it, and he saw his opportunity. "MobileStar was defaulting on its obligations, and Starbucks was looking for another provider," says Stanton. "We reached an agreement. Starbucks terminated the MobileStar contract, MobileStar went bankrupt, and we bought them out of bankruptcy."
T-Mobile put $100 million behind its Wi-Fi initiative and began lighting up 2,000 hot spots in Starbucks stores around the country. In so doing, T-Mobile tipped the scales in the battle for next-generation wireless services. It was a classic if you can't beat 'em join 'em moment. One by one, carriers - even ones that were betting big on 3G - began to recognize the promise of Wi-Fi. Sprint PCS invested in Wi-Fi service pioneer Boingo. AT&T announced a joint Wi-Fi venture with Intel and IBM called Cometa. While neither AT&T nor Sprint has announced plans to provide Wi-Fi service to their customers, that moment can't be far away. Even up-and-running 3G networks can't compare with Wi-Fi's speed and capacity.
Wi-Fi had fast become the thing carriers fear most: a disruptive technology. How disruptive? T-Mobile is now fiercely ambivalent about 3G as the future of wireless data. "We've always been an advocate and supportive of 3G, but frankly never saw a way to get it done in the US," explains Cole Brodman, senior vice president and chief development officer at T-Mobile and the man who hatched a business plan from Stanton's enthusiasm. "We looked at Wi-Fi as a disruptive technology and a chance to get something done. On the 3G side, we are in the wait-and-see mode, and we are working on evaluating some other technologies."
The goal for T-Mobile and similar wireless providers is a seamless network, where one device hops from the Wi-Fi network to the cellular network with ease. Call it communications convergence: a blissful harmony of technologies, invisible to the consumer, that allows broadband access anywhere, anytime, from any device. Despite significant technical hurdles (not the least of which is a lightning-quick power drain), chipset makers like Intel and Qualcomm are experimenting with built-in Wi-Fi, and dual-action handsets are on their way. Samsung and HP have already shown PDA-based Wi-Fi phones; Motorola has promised one by the end of the year.
Though T-Mobile is the only carrier that has publicly disclosed plans to converge Wi-Fi with cellular, others are working on integrated networks. In February, at the 3GSM Congress in Cannes, Texas Instruments floated a scenario that includes cellular microbase stations combined with Wi-Fi hot spots to blanket dense urban environments.
In the meantime, T-Mobile is still tweaking its strategy. As the company evaluates various 3G technologies, the Starbucks Wi-Fi experience so far has been only a limited success, with reports of just 20 Wi-Fi users per day even in busy locations. To spur demand, in March T-Mobile slashed Wi-Fi access prices, and it's pushing ahead to unite its Wi-Fi and cellular networks. The ultimate goal: offering customers the ability to roam between the two and get one bill at the end of the month.
If T-Mobile gets it right, the company may soon have a customer base accustomed to using phones to move around big data and multimedia files. That's not far from the previous 3G vision - except for the 3G part, which T-Mobile barely mentions anymore. Wi-Fi, even in its young and developing form, has everything to do with that.
