Bloomberg Businessweek.com
Date: November 8, 2013
To run a wireless company, you need three things. You need enough transmitters (“cells,” the industry calls them) close enough to your customers to deliver a signal. You need a connection from that cell to the Internet (“backhaul”). And you need an available slice of electromagnetic spectrum to get that signal from the cell to your customer’s hand. As Scott Moritz and I wrote in last week’s feature on T-Mobile, it’s a hard business to get into unless you’re willing to spend tens of billions of dollars on tower sites, backhaul, and spectrum licenses.
But Americans make a lot of their phone calls near a short-range network that requires no extra capital to build. The backhaul is the home Internet connection you already pay for. The cell is your home router. The spectrum is unlicensed and free— the frequencies you use to run your Wi-Fi network.
This is the network David Morken is interested in, and he doesn’t have to pay a
thing for it. Morken, a 46-year-old former Marine judge advocate general, runs hybrid carrier Republic Wireless. Its phones use Wi-Fi when they’re near it, and they borrow capacity from Sprint (S) when they’re not. Republic has been in beta for two years (Peter Burrows wrote about them for Bloomberg Businessweek last year), and Morken was in New York on Thursday to announce that Republic now carries what he calls “market-relevant” hardware like Google’s (GOOG) Moto X.
The company hasn’t eliminated the need for expensive, tower-based networks with licensed spectrum. (If you need to call AAA to change a flat, Wi-Fi probably won’t cut it.) He’s just made them less important.
“Why would a carrier ignore 200 million POPs?” Morken says. “Why ignore the biggest network in the world?” (A POP is a point of presence, a person within reach of a network.) Morken is talking about a network composed of all the Wi-Fi routers in America. Carriers have had a couple of reasons to ignore it—some technological, most business-driven.
Moving among networks without dropping a call is tough. Republic has patents pending for the way it uses codecs—the programming used to encode the audio of your voice—to switch between Wi-Fi and Sprint’s network as you leave your house. But for 20 years the entire value of a carrier has been what it has sunk into its spectrum portfolio and tower network. While carriers muse about small-cell architecture that makes more efficient use of their spectrum, it’s as a way of increasing the value of their networks. Morken’s approach relies on networks the carriers don’t own. Your Wi-Fi network is no one’s asset but yours. It’s just there to be used, if someone can figure out how.
It’s been a hurdle, Morken says, to get the dial pad on the primary phone app to make a call through Wi-Fi. To pull it off, Republic had to create a new branch of the open-source Android software. Working with Google, Republic has made the capability native in the Moto X, but it’s still difficult to move phones between Republic’s service and other carriers. I ask Morken whether Republic will ever work through other operating systems. Not likely, he answers. Device makers are too dependent on the carriers to sell their gear, and carriers are too dependent on the value of their networks.
He acknowledges that, like John Legere of T-Mobile (TMUS), he’s stuck convincing consumers to think differently about what they want from a carrier. We want big, impressive, and national. Republic works with Devicescape, a company that has catalogued open Wi-Fi access points, to connect to as many hotspots as possible. Sprint’s network gets Republic to most of the rest of the U.S. But when I ask him about white-space spectrum, the potential unlicensed use of the bits of spectrum that keep TV channels from interfering with each other, he says he’s agnostic about what kind of network his phones use outside of Wi-Fi. “The bottom line,” he says, “is your home and your office is enough.”
In 2008, together Verizon Wireless and AT&T (T) spent $16 billion on spectrum rights to roll out high-speed networks. Those companies, along with T-Mobile and Sprint, are getting ready to spend additional billions, with the possibility of unused TV spectrum coming up for auction next year. If U.S. consumers start looking at Wi-Fi as their primary phone network, all that spectrum might turn into what analysts call a “stranded asset”—something you paid a lot for that’s become just about worthless.
They could adapt, of course. They could admit what is already true: that they offload a lot of their network traffic onto home Wi-Fi, then drop their prices to compete with Republic’s $19 monthly unlimited plan. But that wouldn’t improve the value of their networks. And it’s hard to imagine those companies adapting so readily. As Morken says, “Carriers are not born cannibals.”
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