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The big challenge facing Google's new smartphone service

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When Google announced a new cellphone service called Project Fi on Wednesday, I was pretty excited. The service aims to reduce the cost of wireless connectivity by helping customers rely more heavily on cheap wifi networks rather than expensive cellular ones.

But reading and thinking more about the service has tempered my enthusiasm somewhat. I still think these services will exert some pressure on incumbent wireless cellphone carriers to cut prices. But so long as Google is reselling those companies' services, there's a limit to how much savings it can offer.

The big question is how much Google can help customers shift off of cellular networks in favor of free wifi networks. The experience of Republic Wireless, a startup that pioneered Google's wifi-first model, suggests that it's not as easy as it looks.

Why Project Fi can't make cellular service cheaper

Ars Technica's Ron Amadeo compiled this chart showing how the service stacks up against competitors:

(Ars Technica)

Amadeo notes that this chart has some caveats, as different carriers' plans aren't perfectly comparable. But there are two broad trends evident from it.

First, Project Fi will be most appealing to customers at the low end of the market. If you want a bare-bones plan that uses less than 1 GB of data from cellular networks, Project Fi is a more affordable option than any of the alternatives you see here.

On the other hand, for customers who need large amounts of cellular data Google's offering isn't a particularly good deal. Other providers offer cheaper packages at the 3 GB and 5 GB levels.

And if you know how Project Fi works, this makes perfect sense. Google doesn't own its own cellphone towers; instead, it's reselling capacity provided by Sprint and T-Mobile. The people running those companies aren't stupid, so they're not going to sell Google capacity at a price low enough for Google to undercut their own offerings.

Google could save customers money by offloading data to wifi

Wifi routers are cheap and easy to set up. (Squallwc)

Google can't offer customers lower rates for cellular data, but it might still be able to save its customers money by helping them shift more of their traffic from expensive cellular networks to affordable wifi ones.

Wifi networks are more affordable than cellular ones for two reasons. First, setting up a cellular tower is a complex and expensive undertaking, while installing wifi equipment is so simple and cheap that most of us have one in our homes. Second, cellular companies have paid billions of dollars to the federal government for exclusive wireless frequencies, while wifi uses freely available shared spectrum.

If Google can help customers use wifi more and cellular service less, it can save customers money. There are two basic ways Project Fi tries to do this. One is to make it easier for people to use the wifi networks they already have. Virtually all modern smartphones have built-in wifi chips, but switching from wifi to cellular networks — or vice versa — can be a hassle.

Following in the footsteps of a startup called Republic Wireless, Google Fi offers a phone service that can automatically switch between wifi and cellular networks without dropping calls. That allows users to make calls from their home wifi connection without worrying about losing the call if they go out of range.

The second way Google helps people use wifi more is by helping users find other wifi networks to log into. Google has a "network quality database" to help it identify wifi access points that are freely available. And it uses a privacy technology called VPN to prevent the owners of these networks from eavesdropping on a customer's communications.

While Google hasn't announced any plans in this direction, it would make sense for it to take steps to expand the number of available wifi connections. Google will have detailed data about where its customers consume the most cellular data. It could pay households and businesses in these high-demand areas to provide wifi service to Project Fi customers, reducing those customers' dependence on expensive cellular service.

The technology behind Project Fi could also work in concert with cable companies like Comcast that have enabled public wifi hotspots in their customers' homes. Right now, these networks are hard to find and not always easy to join. But Google could work with Comcast to make sure the process is automatic, while paying Comcast for the bandwidth used.

The Republic Wireless model hasn't worked as well as expected

(Don Emmert/AFP/Getty Images)

While it hasn't gotten as much attention as Google's announcement, news this week from Republic Wireless suggests that it may be difficult to use wifi to dramatically reduce cellular data use.

Republic's original business model in 2012 was to couple wifi-first technology with unlimited cellular data service for shockingly low prices — starting at $19 per month. Republic hoped that customers would offload so much of their traffic to wifi networks that it could make a profit.

Evidently, that plan didn't work out, and over time the company has raised its prices. Today, you can get unlimited data over slow 3G networks for $25 per month or unlimited 4G data for $40 per month. That's still a pretty good deal, but not nearly as good as the original pricing scheme.

This week, the day before Google unveiled its wireless service, Republic announced yet another change to its pricing structure. While Republic didn't announce specific prices, it signaled that it would be shifting to the same model Google is using — a flat rate for unlimited talk and text, plus metered pricing for data.

This suggests that after three years of trying, Republic couldn't figure out a way to use wifi offloading to radically reduce customers' cellular data use. If they had, then that original pricing model should have worked.

Of course, Google has some advantages Republic doesn't, including a strong brand name, a ton of capital, and a vast database of open wifi connections. It may figure out ways to improve on Republic's approach.

But the wifi-first model will likely always still depend on cellular networks for backup. And those networks cost billions of dollars to build and maintain. So while Project Fi will probably help cellular customers save some money, people are going to continue spending significant sums for cellular service for the foreseeable future.

Disclosure: My brother is an executive at Google.