Bloomberg News

Verizon Threatened as Wi-Fi Upstarts Lure Penny Pinchers: Tech

March 03, 2014

Pedestrians Walk Past a Verizon Wireless Store in New York

Pedestrians walk past a Verizon Wireless store in New York. Photographer: Ron Antonelli/Bloomberg

Nicolas Zimmerman counted the days until he could quit paying Verizon Wireless (VZ:US) $90 a month for mobile service and slice his bill to $20 by switching providers.

His secret? He moved to a company that delivers calling over cheaper Wi-Fi connections instead of cellular networks.

“I had 11 months left on my contract. I even circled the date in my calendar,” said Zimmerman, a Wrigley Field beer vendor and trade-publication editor based in Chicago. “My only regret is that I had been paying Verizon $90 a month forever.”

Lured by the prospect of a monthly service plan of $40 or less, people like Zimmerman in growing numbers are shunning $70 to $100 wireless access from big carriers. Wi-Fi, the low-priced signal in offices, homes and coffee shops, has spread to enough places to make it a viable alternative. A new crop of Wi-Fi-based carriers like Republic Wireless, Scratch Wireless, FreedomPop and TextNow are moving in, while mobile companies like Sprint Corp. (S:US) are testing out their own services.

Upstarts like T-Mobile US Inc. (TMUS:US) have already shaken up the $180 billion wireless-service market with no-contract offers and phone financing, igniting a price war. Even so, Wi-Fi upstarts may present an even bigger threat. These tiny carriers operate at a fraction of the cost of cellular rivals, letting them sell service for a discount.

“This is definitely an emerging threat to the major carriers, at least at the lower end of the market,” said Avi Greengart, an analyst with Current Analysis. “Carriers have many concerns, but this hasn’t been at the top of the list. I think that’s because these services have flown under the radar.”

Cellular’s Advantages

Mobile-phone companies still have the advantage of much wider coverage areas than Wi-Fi. While business owners and cities have configured Wi-Fi networks to extend throughout buildings or parks, they don’t cover entire countries the way cellular networks do.

To supplement their coverage, Republic and the other carriers offer plans that include phone calls on Sprint’s cellular network when customers aren’t using Wi-Fi. Even if they don’t opt for a service with a cellular backup plan, users can make 911 emergency calls on a mobile-phone network.

Some of the new Wi-Fi carriers also let customers jump from a Wi-Fi network to a cellular network when they move out of range, allowing them to stay on a phone call as they walk out the door of the house or office.

“Wi-Fi is one option,” said Torod Neptune, a spokesman for Verizon. “But we believe what consumers want is the absolute best overall experience, enabled by a network that connects them and over 95 percent of the U.S. population 24/7, regardless of where they are. We’ve built that for them.”

Republic, Scratch

Republic, based in Raleigh, North Carolina, and Scratch, based in Cambridge, Massachusetts, are two of the newest Wi-Fi operators. Both sell full-price phones by Google Inc.’s Motorola unit that have been programmed for Wi-Fi calling.

Republic, a division of Internet-calling service Bandwidth.com, sells only one phone, the Moto X, for $299. As long as they’re connected to a Wi-Fi network, users can get unlimited data, calling and text messaging for $5 a month. CEO David Morken says customer rolls are in the “healthy six figures” and are on pace to more than double this year.

Scratch starts at an even lower price, with a $269 phone and a free Wi-Fi service plan that includes texting even outside Wi-Fi range.

“The assumption by carriers that customers should have a $100 monthly bill is fundamentally flawed,” said Alan Berrey, CEO of Scratch.

Boosting Margins

The Wi-Fi companies are seeing fast growth. TextNow has been adding subscribers at a double-digit rate every month, said Derek Ting, CEO of parent company Enflick.

FreedomPop, which also offers service via Wi-Fi, when it’s available, and cellular the rest of the time, expects to reach 250,000 subscribers in the second quarter, and 1 million subscribers in 12 to 14 months, CEO Stephen Stokols said.

By offering Wi-Fi service, FreedomPop is able to boost its profit margin. The company just began installing software on its phones that automatically picks a Wi-Fi connection if it’s available.

The Wi-Fi feature could boost the startup’s margins to as much as 50 percent from 35 percent to 40 percent, he said.

“Our revenue per user is going to be 60 percent less than T-Mobile, and our cost to the user is 80 percent less than T-Mobile,” he said.

Using Sprint’s network for calls outside of Wi-Fi networks helps the Wi-Fi carriers give customers peace of mind that they can still use their phones when they need to. Republic has a $10 plan for unlimited calls and texts on cellular, a $25 plan for unlimited third-generation, or 3G, data, and a $40 plan for unlimited 4G LTE data service.

Sprint’s Money

Scratch doesn’t charge for Wi-Fi service and sells a $1.99 day pass for cellular service or a $14.99 30-day pass, good for 200 megabytes of cellular data service.

“Our service is free -- if you want to pay for more, we’ll take your money and give it to Sprint,” Berrey said.

Sprint is effectively empowering its competitors -- Wi-Fi carriers that want low-cost cellular backup.

Matt Carter, Sprint’s president of enterprise solutions, oversees about 130 of these wholesale phone-service customers that purchase capacity on Sprint’s network. He said he’s comfortable with the role the Wi-Fi carriers are playing.

“We wouldn’t be in it if it wasn’t a positive contribution,” Carter said. “We know we are never going to have 100 percent of the market. It comes down to a choice of getting something or getting nothing.”

Sprint Wi-Fi

Sprint is also beginning to offer Wi-Fi calling itself. The Overland Park, Kansas-based company announced last week that customers can use two Samsung Electronics Co. phones to make unlimited Wi-Fi calls and texts at no additional cost. T-Mobile also provides Wi-Fi calling on some devices.

Zimmerman, the former Verizon user, said his switch to Republic has gone smoothly, with no coverage issues. The only downside is a limited phone selection, with no option to use Apple Inc.’s iPhone, he said. Still, there’s no reason to pay “scads of money” when you are already shelling out for Wi-Fi at home, he said.

“I was paying $90 a month and watching for added data charges,” Zimmerman said. “I don’t worry about that any more - - its all unlimited.”

To contact the reporters on this story: Scott Moritz in New York at smoritz6@bloomberg.net; Olga Kharif in Portland at okharif@bloomberg.net

To contact the editor responsible for this story: Sarah Rabil at srabil@bloomberg.net


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Companies Mentioned

  • VZ
    (Verizon Communications Inc)
    • $48.31 USD
    • -0.38
    • -0.79%
  • S
    (Sprint Corp)
    • $6.06 USD
    • -0.18
    • -2.97%
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