Update on Cablevision Free Wi-Fi, and What It Means for VZ (and everyone else).

Awhile ago, I wrote about Cablevision’s decision to offer free wi-fi to its subscribers throughout its footprint. As I explained then, this amounted to a “Plan B” after the failure to win usable spectrum in either the AWS-1 auction in August 2006 or in the 700 MHz Auction in the winter of ’08. Now, according to this story at DSL Reports, Cablevision is massively expanding and improving its wi-fi service for customers. This represents a real challenge for VZ, more so IMO than Time Warner’s participation in New Clearwire.

Why? See below . . . .

VZ has positioned itself to offer NYC customers, especially the high-end business customers most desired by vendors, a totally killer bundle of FIOS and wireless backed by 700 MHz spectrum. Especially if VZ really opens its network and doesn’t try any funny business for people trying to use expensive tech toys, this package will be a connectivity wet-dream for the person who demands a high-speed total plug-in experience. The 700 MHz spectrum will allow VZ to offer reasonably reliable wireless in otherwise inaccessible places and at speeds that put other licensed wireless technologies — including New Clearwire’s WiMax — in the shade. FIOS does not suffer from the technological limitations that make the cable guys such pricks to deal with for high-bandwidth applications beloved of high-end customers willing to pay top-dollar for always on connectivity. Put it together and it would look like VZ has everything the upscale customer could possibly want.

But Cablevision’s “poor man’s wireless” has a lot of advantages of its own, and Verizon faces some hidden costs and potential problems in deploying its 700 MHz wireless system. Five things in particular make Cablevision’s strategy particularly effective.

First, and foremost, it exists now. Once customers are on, you have incredibly powerful lock-in effects as customers do not wish to go through the hassle of switching — especially if it means buying new devices because a licensed system will not allow their old devices to connect to the network. Wifi has a standard interface available on just about every device, including things like Trios and iPhones, so you can use Cablevision wifi on your existing handheld without leaving your current wireless carrier.

Second, wifi is established tech and very cheap to deploy. Verizon is investing huge cap ex in FIOS, and will need to do the same in the 700 MHz band. Deploying new 700 MHz equipment will not be easy or cheap — although I expect it will be worth it when it is finally built. But again, delay plays into the hands of Cablevision, which already has a system and is offering its own voice product to steal away VZ’s existing customers.

Third, VZ has a huge wireless microphone problem in NYC. Remember my wireless microphone complaint and the FCC’s Notice of Proposed Rulemaking? According to an engineering report submitted in that proceeding, wireless microphones operating on Channels 52-69 are absolute death to cellular systems. That means VZ has a potentially huge hole in its coverage in Midtown Manhattan (around Broadway and the various broadcast production studios) unless the FCC adopts the PISC proposal or takes some other steps to get wireless microphone users on the 700 MHz band, both licensed and “unauthorized,” out of the band by the time Verizon is ready to go live.

Unfortunately for Verizon, none of the other 700 MHz licensees, including public safety, seem to think this is a big deal. Worse, the broadcasters and the wireless microphone guys have all asked for an extended transition of at least 2 years to get off the 700 MHz band. Unless VZ is successful in getting more licensees to weigh in (especially on the public safety side), the FCC is very unlikely to force the issue against politically well-connected wireless microphone users. That means either VZ pays out of its own pocket to migrate users, or it learns to deal with massive interference issues in the heart of its biggest market in the area where it hurts its most coveted customers.

Fourth, Cablevision will enjoy a huge boost in technology and reach if the FCC approves the use of unlicensed devices in the 700 MHz band at its Nov. 4 meeting. Fixed unlicensed broadcast white space nodes will allow Cablevision to deploy a network that has the same wall-penetrating and propagation characteristics as VZ’s 700 MHz licensed spectrum. While Cablevision will be hampered by the extremely limited availability of white spaces in NYC and the safeguards imposed by the FCC, it is important to recall that Cablevision’s wireless network does not have to be nearly as good as VZ’s to retain customers. It only has to be good enough to make it not worth the hassle of switching. (Go read my old white paper on cable market power if you want a more detailed explanation of how this works.)

Fifth, and last, there is cost and the economic downturn. The sad fact is that there will not be as many potential customers coming from all over VZ territory into Manhattan every day to work at the trading houses, law firms, and other high-end financial services jobs who want/need that always on super-connection. For those in Cablevision country, a more affordable wifi network may prove more attractive than the high-end bundle Verizon can offer.

None of these is insurmountable. VZ will still do quite well once it gets its wireless system deployed, especially if it sells bundled services to business customers that would make mobile high-speed connections seamless for all those commuters from Jersey or Westchester County (yeah, I know, such the out-of-date cliche). But it does mean that Cablevision’s strategy will prove a serious challenge for VZ on a going forward basis, and may inspire other cable operators that service densely populated regions to do likewise.

If that happens, invest heavily in manufacturers of 700 MHz equipment, because cable operators and other ILEC competitors will have significant incentive to buy and deploy 700 MHz unlicensed equipment, which will give consumer electronic manufacturers incentive to put 700 MHz chips in mobile devices, despite the rather significant limits on power and the database requirement proposed by the FCC.

Anybody Else Impacted?

It will also present something of a challenge for New Clearwire as well, if the technology is broadly adopted. But if that happens, New Clearwire can offer an attractive package that combines 2.5 GHz WiMax, 3.65 GHz WiMax (where available), and 700 MHz WiFi. They won’t crash and burn, but they will need to stay nimble. Given that Time Warner has the right to resell New Clearwire services under its own brand name, NYC may become a very interesting battleground between vertically integrated providers each with their own wireless strategy.

Stay tuned . . .