Wi-fi goes to Washington

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Wi-fi goes to Washington: illustration

Wi-fi goes to Washington: title image

A new technology could not only restart economic growth but also help connect everyone, everywhere to the Internet at low cost.

The McKinsey Quarterly, 2002 Number 4

Remember when technology-based start-ups were going to put established companies out of business? The surviving incumbents are now having a last laugh. But their schadenfreude may be short-lived in the telecommunications industry because a new technology called Wi-Fi (wireless fidelity) is threatening the business models of the mobile carriers, the phone gear makers, and the providers of high-speed DSL and cable modem services.

Wi-Fi known among techies as 802.11, a reference to its underlying technology standard is an alternative means of Internet access. Simply hook up an inexpensive Wi-Fi base station (chip plus transceiver) to a high-speed Internet connection such as DSL, a cable modem, or a T1 line and place this base station within a couple of hundred feet of a house. All users in the vicinity who have a very inexpensive Wi-Fi device in their PCs or PDAs can then share low-cost, high-speed access to the Internet, without having to pay individually for more expensive dedicated DSL or cable modem service.

Even better, with exciting new technologies such as mesh and ad hoc networks, improved Wi-Fi devices could create overlapping Wi-Fi networks in hotels, airports, office buildings, and malls. Strings of linked Wi-Fi networks can stretch through apartment buildings, campuses, and neighborhoods. Forget about digging up streets for fiber to every building or about erecting forests of towers; Wi-Fi can stretch the fabric of Internet connectivity, cheaply and painlessly, over any community to points where traffic is aggregated onto high-speed fiber backbone networks.

Wi-Fi exploits the spectrum used by gadgets such as cordless telephones and microwave ovens airwaves that haven t been auctioned or allocated to an exclusive user. This is the proverbial free lunch of spectrum. At last, Internet access can be easy, cheap, always on, everywhere. And Wi-Fi access is fast: indeed, with a fiber rather than a DSL or cable modem connection from the backbone network to the Wi-Fi base station, the transfer speed of Wi-Fi can be faster than the typical speeds of those technologies.1A fiber connection of this sort would make it easy to download, stream, and swap movies or vast volumes of corporate data not only to computers but also to a new generation of flat screens equipped with Wi-Fi chips. Users will be able to make telephone calls by speaking into microphones in their lapels or on the edges of their computer screens. Guglielmo Marconi, the inventor of wireless communication, will have the last laugh on Alexander Graham Bell, the inventor of the telephone.

What s the rub? Telephone companies could find that Wi-Fi will replace the additional, or “discretionary,” phone lines that resi dential and business customers have had installed to supplement the traditional single “lifeline” connection. That change alone would probably make every telephone company in the United States unprofitable. Mobile carriers too could lose a substantial portion of their revenues (particularly future wireless data revenues) to Wi-Fi networks.

For the mobile and wireline phone companies, the market-based reaction would be to embrace the new technology and extend its applications. But the likely alternative though one that would poorly serve the economy and consumers is for those companies to use the power of governments to slow or thwart Wi-Fi s advance. Already, in Taiwan only communications providers licensed by the government can operate commercial Wi-Fi networks. Some European countries appear to have similar, albeit ambiguous, regulations. Under such rules, Starbucks, which has put Wi-Fi connectivity into many of its shops, may not be able to charge an additional nickel a cup to patrons who want to have the Internet along with their coffee. Meanwhile, in the United Kingdom, regulators in effect prohibited service providers from offering commercial Wi-Fi services but recently took the wise course and reversed this rule, and BT has already indicated that it will offer them.

Wi-Fi might also be squelched if governments decided to favor other industries that use the same radio frequencies. In Florida, one ham-radio operator has gone to court to shut down a Wi-Fi operator on the grounds that the apartment dwellers using this form of wireless Internet access were interfering with his radio. The electrical-lighting industry has petitioned the US Federal Communications Commission (FCC) to permit the use of the spectrum in a way that would create difficulties for Wi-Fi. And satellite operators have complained that Wi-Fi broadcasts will obstruct signals to and from satellites.

Such spectrum battles are chronic at the FCC. Each of them will give the government a choice: to promote Wi-Fi or to restrain it. Even if the FCC sided with Wi-Fi on all issues of competing use, consumers would still have to reckon with the possibility that the government might protect existing communications services by forcing Wi-Fi to meet regulatory requirements for the security of signals and the quality of service. Actually, meeting these standards would be a laudable goal, but it should be achieved through competition and innovation, not government mandates. Imposing such requirements is a time-tested regulatory way of deterring competition and delaying change.

Finally, the biggest risk is simply that the FCC might fail to allocate enough spectrum for free, unlicensed Wi-Fi and its many offshoots. If this new technology sweeps the country and the globe, as experts claim it can, spectrum auctions might become unnecessary to promote competition. Looking beyond auctions for revenues, the US Treasury Department might have to settle for reasonable taxation of a newly burgeoning information sector. But if governments become addicted to auction revenues, they may resist the allocation of free airwaves to Wi-Fiers.

Change is the elixir of growth in any economy, especially in the high-tech and innovation-driven economy of the United States. Now is the time for the US government to embrace Wi-Fi and, for that matter, many related new technologies. Let inventiveness again lead the country to new plateaus of high growth and to new solutions for the problem of bringing everyone into the Internet age.



Reed Hundt, the chairman of the FCC from 1993 to 1997, is now a senior adviser to McKinsey; Stagg Newman, chief technologist of the FCC from 1998 to 1999, is a consultant in McKinsey s Washington, DC, office; John Richards is a consultant in the Silicon Valley office.

1This approach, however, wouldn t necessarily cut the DSL and cable providers out of the business, since these companies own most of the backbone networks and would therefore be the natural providers of fiber connections from them to Wi-Fi base stations.

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