Sure, we’ve all heard plenty about the explosion of smartphone sales. Apple had sold over 17 million units of the iPhone – the ringleader of the smartphone revolution – back in March, and some analysts predict that they could sell over 41 million more in 2010 alone due to the end of exclusivity contracts.

And while some viewed Verizon’s sales of the new Motorola Droid device as lackluster, it still sold more than 100,000 units in the first few days. That’s a lot of new smartphones landing in consumers’ hands in the last two years – and these are just two of the larger examples of the many smartphone devices that have hit the market since 2007.

As a result of these smart new devices that put tons of new data-intensive applications in the hands of millions of cellular users, data traffic on today’s 3G networks has spiked drastically, to the point where data traffic is outpacing new revenue for the carriers.

As Dean Bubley of Disruptive Wireless notes, while operators’ revenues have increased by 50 to 100 percent due to data revenue, data services have increased 3G traffic by anywhere from 500 to 1000 percent. This creates a very serious problem – 3G networks that are completely overloaded (especially in metro areas) that degrade the experience of the millions of smartphone users, and carriers that are not recouping anywhere near as much in revenue as they are being forced to provide in network capacity.

Wi-Fi is in (Even More) Demand

Due to the degradation of 3G data services in overloaded areas, many people are already turning to the built-in Wi-Fi capabilities of all of these smartphones as the only way to provide acceptable browsing, video-streaming, and other data-intensive application experiences. AT&T has said that the number of people connecting to its 20,000 plus domestic hotspots has more than tripled from 3.4 million in Q108 to 10.5 million in Q109. So what does this all mean?

The 3G Offload Problem

Simply put, the increase in smartphone usage and the subsequent explosion of data traffic on 3G networks has caused an immediate need for carriers to offload the data traffic from the 3G network, so that both voice and data services perform optimally. And due to the built-in Wi-Fi capabilities of the millions of smartphones on the market, users are often turning to Wi-Fi hotspot services to fill in the gaps when the 3G network can’t cut it.

And as we’ve seen from AT&T’s purchase of hotspot provider Wayport and Verizon’s partnership with hotspot provider Boingo Wireless, it seems that carriers are embracing the need to utilize Wi-Fi as a way to lessen the strain on their 3G networks. And while the carriers will still proceed in their plans to roll out 4G (to stay ahead of the competition), offloading data traffic from LTE networks will be an issue as well, so the 3G data offload networks put in place now will continue to serve as an ongoing solution for ensuring optimal voice and data communications moving forward.

Though AT&T and Verizon’s partnerships with Wayport and Boingo (respectively) are a good first step, that alone will not be enough to solve the 3G offload problem. Wayport and Boingo’s hotspot networks do not provide ubiquitous Wi-Fi coverage in even the largest metro areas, meaning that in order to provide effective 3G offload, the carriers must hope that customers stay within the designated hotspots (which, most do not do).

The Re-Birth of Citywide Wi-Fi Networks

So if carriers must rely on Wi-Fi to offload data from the 3G network in order to provide more reliable service to their users, but those users do not always stay within bounds of the current network of small, distributed hotspots – what are they to do? This brings us full circle to a movement started several years ago – the citywide Wi-Fi movement.

The citywide Wi-Fi revolution – also referred to as “municipal Wi-Fi” – was an ill-fated movement that aimed to blanket entire cities with Wi-Fi networks, giving everyone ubiquitous wireless broadband access. Unfortunately, the mantra of the movement was “Free Wi-Fi for All”, and expected cities to pay for the Wi-Fi networks as a service to their residents (hence the muni Wi-Fi moniker). That mantra proved to have to very opposite effects: first, it made citywide Wi-Fi a wildly popular idea that the media latched onto immediately, thus creating a large market of vendors competing to secure free Wi-Fi deals; and secondly, it caused an inherent lack of a significant revenue stream for most of these networks, which meant that cities could not afford to deploy them due to the lack of ROI (or were forced to shut them down if they did manage to deploy them).

If it Failed Before, Why Would it Succeed This Time?

So if municipal Wi-Fi failed, why would this proposed second generation of citywide Wi-Fi networks succeed?

It is important at this juncture to realize that the proposition of citywide Wi-Fi networks to offload 3G data traffic from carrier networks and the proposition of “municipal Wi-Fi” to provide free wireless connectivity to everyone are fundamentally opposite at the core. There are three main differences between the two models: the problem they aimed to solve, the business model, and the return.

As you can see, there is a significant difference in the 3G offload model that the market is currently proposing as opposed to the municipal Wi-Fi networks of old. With the 3G offload problem, there is a real problem that could cost the carriers billions if not solved. There is an actual business model made up of existing paid subscribers that can subsidize the cost of the 3G offload Wi-Fi network buildouts. And there is a clear ROI – preventing the possible loss of millions in revenue if unhappy customers were to switch carriers, and the deference of the need to spend billions in 4G network buildouts in order to keep those customers happy.

Learning from the Past, Moving Forward

Three years ago, there simply was not anywhere near the volume of Wi-Fi enabled smartphones that there are today. So when the municipal Wi-Fi market exploded, there wasn’t anywhere near the demand for ubiquitous Wi-Fi that there is today. Not only do millions more end users have the capability to access data networks everywhere they go, but they ARE accessing data everywhere they go, causing an immediate need for the carriers to respond in order to sustain user satisfaction.

As opposed to the municipal Wi-Fi revolution, the 3G data offload movement is a real (revenue affecting) problem for the carriers, one that is in desperate need of a solution.

And what’s more, it is a movement funded by carriers to ensure network performance for their paying customers, as opposed to a free model with no significant revenue to sustain itself. And even as carriers continue to plan and roll out their 4G networks, with the exponential growth in mobile data usage that is expected as smartphones continue to proliferate, the Wi-Fi networks deployed as 3G data offload networks today will continue to serve as 4G data offload networks in the future.

- Robb Henshaw