Can Wi-Fi Work Citywide in New York?

Imagine if smartphones always worked as fast as home Wi-Fi networks, and no one had to pray that a cellular signal was strong enough to send an e-mail or retrieve a map. A company called Towerstream (TWER) hopes to make that dream come true for New Yorkers in late June, when it turns on a network of about 1,000 wireless routers—souped-up, weatherproof versions of the Wi-Fi devices in millions of homes. The goal, says Towerstream Chief Executive Officer Jeff Thompson, is to provide a superfast mobile network that covers seven square miles of Manhattan, and sell access to the system to wireless carriers that can use it to fill in areas prone to spotty service. (Lots of those in New York.)

In theory—the company hasn't announced any deals with carriers—consumers may never know they're using Towerstream's network. Behind the scenes, Carrier X would seamlessly switch a customer's smartphone or tablet to Wi-Fi mode when that person comes within range of one of Towerstream's hotspots, and the connection speed would go up dramatically. During a demonstration recently on the corner of West Broadway and Broome Street in New York's SoHo district, an iPhone's data speed leapt from .35 megabits per second to 26 Mbps. That's fast enough to stream high-def video, and much faster than most home connections in the U.S.

Towerstream, a 12-year-old company that has specialized in providing broadband service to corporations, isn't the first to try large-scale Wi-Fi. In 2006 cities such as Philadelphia and Chicago announced networks; Google (GOOG) had plans to unwire its hometown of San Francisco. For a variety of reasons—slow speeds, high costs—those projects went nowhere. They were meant to cater to laptop users who wanted to connect wherever they were. Users weren't so desperate to do that, it turns out. Now users of mobile devices are.

While most of the failed experiments of yore were based on taxpayer-funded municipal projects, this time there's a clear business need for wireless carriers. Traffic that's processed via Wi-Fi doesn't take up any capacity on local cell towers and doesn't take up room on so-called backhaul connections—often decades-old copper cables—that bring traffic from the tower to the Internet. In Towerstream's network, data from iPads, Android phones, and such would be siphoned off by the nearest Wi-Fi antenna. Then the data would get passed along to other antennas until it reached one of nine large base stations around the city, including one at the top of the Empire State Building, and then travel right onto the Internet. "AT&T (T), China Telecom (CHA), and many others are doing this kind of 'Wi-Fi offload'" on a smaller scale, says Michael Howard, co-founder of market research firm Infonetics Research.

The antennas themselves are much cheaper and less obtrusive than cell towers. They're about the size of a football, cost about $800 apiece, and sit on poles or rooftops; cell towers can run upwards of $200,000. Towerstream representatives have fanned out in Manhattan, persuading landlords and building owners to let the company install the devices on their property. The company pays $50 to $1,000 per installation per month, depending on location.

There's little doubt about consumer demand. Last year, Towerstream conducted a three-month test of a 200-device Wi-Fi network in Manhattan. Without any promotion, the network handled 20 million Web sessions by consumers who happened to spot Towerstream when trolling for a Wi-Fi connection. That's a fifth of the Wi-Fi traffic generated by AT&T during the same three months at its hotspots, which include most Starbucks (SBUX) and McDonald's (MCD). Demand is expected to increase, even as cellular networks go from today's 3G technology to 4G. While 4G is roughly four times faster than 3G, overall data traffic is projected to rise more than 30 percent per year, according to multiple studies. "If any of these estimates are even close to true, those 4G networks will be filled up almost immediately," says CEO Thompson.

Towerstream's stock has risen from $3.71 in early April to $5.21 because of its Wi-Fi ambitions, says Morgan Joseph TriArtisan Group analyst Ilya Grozovsky. "Jeff is obviously very excited about this opportunity," says Grozovsky. "But until they get a carrier deal, this business is still very theoretical." If carriers choose to build their own Wi-Fi rather than rent from Towerstream, Thompson may need to take the riskier step of selling directly to consumers. Should his Manhattan project take off, Thompson says he'll proceed to San Francisco, then Chicago, then to seven other cities. As Thompson says: "If you can make it here, you can make it anywhere."

The bottom line: City-spanning Wi-Fi has been tried before. Towerstream's effort may work because of the rise of smartphones and tablets.

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