It's barely two weeks into 2005, and already the year ahead is not looking good for incumbent telecom service providers. In 2004, regional Bell operating companies (RBOCs) had to deal with increased competition and the threat of new services from several directions -- all designed to steal subscribers for voice, broadband communications, and media services.

Now, in addition to cable companies and VoIP startups, telcos such as Verizon Communications (NYSE:VZ) and SBC Communications (NYSE:SBC) can also count tech giant Intel (NASDAQ:INTC) outside their circle of trust. While Verizon and SBC have both prospered greatly from their wireless services divisions, Intel is attempting to turn the tables and use its favored flavor of wireless technology to deny the telcos what were once green fields of potential customers.

In 2002, Intel came out in strong support of Wi-Fi wireless technology, committing hundreds of millions of dollars to not only market it, but also to integrate Wi-Fi chips into its product lines. The result so far has been the successful Centrino product line, which lets users of Centrino-powered laptops connect to Wi-Fi networks that are within 300 feet of their locale.

Pundits had already painted Wi-Fi as a threat to the ambitions of telecom and wireless companies to add their own versions of broadband wireless access to service offerings. But the limited range of a Wi-Fi "hot spot" made it easy to dismiss the severity of competition and note that people would really only use Wi-Fi as a networking alternative in their home or possibly a coffee shop. Incumbents: 1, Intel: 0

The new order
To the surprise of some, though, crafty engineers have figured out how to expand the reach of Wi-Fi networks from 300 feet to several miles. By aggregating numerous hot spots together in a mesh topology where each transmitter talks to the others, wireless networks can now cover entire cities or regions. Suddenly, the principal argument that relegated Wi-Fi to a local-area technology vanished. On top of this, the networks can be launched in as little as a few weeks at less than half the cost of alternatives.

And while telcos have been reluctant to pursue expansive wireless networks that compete with the current network, somebody else has -- the government.

Cities around the world have been launching municipal Wi-Fi networks at a torrid rate. One benefit is a ubiquitous network for use by fire, police, and other municipal service personnel. Another is to improve the quality of life in the city by "bridging the digital divide" and offering economical broadband services to consumers in all areas of the city -- not just affluent areas. Many poor and rural areas don't have DSL or broadband cable service options because running lines and equipment into such areas does not present a compelling return on the investment. But meshed Wi-Fi can reach them.

Municipal networks are typically contracted by the city and sometimes funded through bond measures. Some cities even act as the ISP of the network. Residents often vote to commit funds to the project in return for the promise of inexpensive service through the network. It's a win-win for everybody -- except for telcos, of course, which are hoping to sell more DSL or broadband cable service.

With the rapid uptake of municipal Wi-Fi installations, Verizon in particular has been active in pressing for legislation that would block cities from launching their own networks. The argument is that it presents unfair competition, and heavy lobbying has actually proved successful in some cases. The most recent publicized case ended last year in Philadelphia, with Verizon conceding the city the rights to launch a network, but retaining first right of refusal for 14 months throughout the rest of Pennsylvania.

Another gauntlet thrown down
With many American cities, suburbs, and rural areas dissatisfied with the rate of promulgation of broadband wiring to their schools, businesses, and residents, the threat of legislation makes them once again feel powerless to affect incumbent providers. But municipalities have a new champion, Intel. Earlier this week, Sean Maloney, executive vice president of Intel's Communications group, made public statements in support of launching municipal Wi-Fi networks.

Of course, Intel would love to see Wi-Fi spread across every city in the U.S. -- all the more Centrino chipsets to be sold. So it is in its interest to make sure such networks are not blocked. Intel favors having cities open their plans for a network to a competitive bidding process that would even include incumbents such as Verizon. That way everyone is given a chance to provide the service the city wants, at whatever price they deem acceptable for users.

As Intel knows, the superior economics of the Wi-Fi mesh network would make it the more compelling technology choice in such cases. Several private companies, such as Tropos Networks, offer inexpensive Wi-Fi radios that can be easily mounted on light posts. For instance, Chaska, Minnesota, only needed a few weeks to launch a 16-square-mile "hot zone" that provides residents with better than 1Mbps symmetrical broadband Internet service for a mere $15.99 per month. The entire network cost only a half-million dollars and the city captured 20% of the population as subscribers in a single month. That type of competition is tough for telcos to beat.

What's at stake?
If you are a mega telecom corporation, it's bad enough contending with competition from nimble rivals in the private sector, let alone being undercut by government-sponsored networks. Verizon, Motley Fool Stock Advisor pick SBC, and cable companies will likely see their uptake of DSL and broadband services suffer in areas where municipal Wi-Fi networks are active. Municipal Wi-Fi networks will help push down service prices for wired broadband as well as wide-area wireless broadband networks that currently cost as much as $80 per month.

Municipal wireless networks based on Wi-Fi technology have the real potential for disruptive change in broadband services. Incumbents that choose to fight their spread through legislation must fight battles separately in each of the 50 states. Legislation is only a temporary reprieve from technological advancement -- eventually, the economic and performance advantages of any technology will force down erected barriers.

With its attractiveness in rural areas, cheap broadband could reverse the typical model of service adoption -- broadband wireless will sometimes find its way into affluent urban areas only after the surrounding rural populace has already been penetrated. This trend could have significant impact in growth models of telecommunication companies in the years ahead, so telecom investors should watch this area develop.

I'll be checking out my local municipal Wi-Fi network in Fullerton, California, when it launches in a few weeks. The first phase, a 24-block downtown network, was just installed in two days and will be free for residents during a 12-month trial period. It's likely the corner Starbucks (NASDAQ:SBUX) won't be seeing many customers pay for their Wi-Fi service this year, but I'll bet it will sell at least a few more lattes.

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Fool contributor Dave Mock remembers when Fullerton was all about orange groves, slurpees, and a flick at the Fox Theater. Sigh. He owns shares of Intel and Starbucks. The Motley Fool is investors writing for investors and has a disclosure policy.