Wi-Fi, although starting to gain traction in the market due to several successful fixed-mobile convergence (FMC) launches and an increasing presence in flagship handsets, remains a niche feature for most mobile phones, according to a report by IMS Research. The number of Wi-Fi shipments has grown substantially over last year; however, consumer awareness and operator cooperation still act as barriers to its growth.

“We are at an interesting point when everything in cellular seems to be over-hyped,” said Bill Morelli, mobile technologies analyst at IMS Research. “That seems to be the standard cycle. Everyone gets really excited about stuff, and it always seems to happen two or three years after when people said it would be huge.”

At the start of 2006, there were globally approximately only 10 handset models featuring built-in Wi-Fi chipsets, accounting for 1.6% of total shipments. This has risen to approximately 25 handset models in 2007 and is expected to grow to one in five of annual shipments by 2012, according to IMS. While this is respectable growth, Morelli said it is far more moderate than what many FMC followers were projecting. The report also found that operators only provide a limited choice of handsets, with each service typically only supported by up to five different models, and many consumers who purchase Wi-Fi equipped handsets never actually use the functionality.

FMC’s failure to deliver can in large part be attributed to the unwillingness on the part of operators to relinquish control. By nature a conservative group, operators are reluctant to implement a technology they do not know how to charge for. Morelli pointed out that many operators are still anxious about the lack of commitment to a particular standard – UMA, SIP-based or another mobile VoIP solution. Coupled with a lack of consumer awareness, the demand for Wi-Fi equipped handsets has been minimal.

“Their interest is in keeping the traffic on the network in an environment they can monitor and control, so they can charge for it,” Morelli said. “A lot of the FMC solutions take those elements out of the picture. You walk into your house and transfer to your home network, and the operator now can’t charge for you. You’re not even on their network anymore. They’ve been understandably a little nervous about that.”

While the FMC market as a whole is moving forward slowly, one area that is experiencing accelerated growth is in high-profile flagship handsets that feature Wi-Fi networks. In particular, the successful launch of services such as T-Mobile’s HotSpot @ Home and France’s Unik service from Orange has shown operators the revenue potential in Wi-Fi.

IMS maintains that Wi-Fi should be a feature in every phone, not just high-end enterprise handsets, but there remains a need for awareness on the technology to be built up in the consumer base. Most consumers are still primarily using their phones just for voice services.

“The average consumer is not as well-versed with the technology,” Morelli said. “They want a phone that works. There is an education piece that goes along with this. T-Mobile has been getting more aggressive in educating consumers in what it is and how it works. Verizon and AT&T still aren’t talking about it.”

In general, Morelli said both Motorola and Sony Ericcson have not been aggressive in the Wi-Fi space, choosing instead to focus on other areas. LG has plans for handsets coming out in 2008 but also don’t have extensive short-term Wi-Fi plans. On the other end of the spectrum, RIM has been actively experimenting with Wi-Fi, and Samsung is already positioning itself as a strong player in the Wi-Fi market.

Morelli added that expanding from beyond the smart phone to the feature phone segment is important for technology to get widespread support. For as much attention as the smart phone gets, it only currently makes up 10% of the market. While it has the potential to grow to 20% to 25% of the market in the next four to five years, feature phones will concurrently make up 60% to 70% of the market, he said.

While companies like Apple and Nokia are spurring the market growth by including Wi-Fi in their flagship products, the iPhone and N95 respectively, the market for Wi-Fi in phones is still in its infancy. Considering the lag time involved with designing and implementing handsets, even if there are really significant changes in 2008, handsets reflecting those changes won’t appear on the market until 2009, Morelli said.

“We are still a ways away from seeing Wi-Fi as a widespread feature in cellular handsets,” Morelli said. “Operators are still wary of the technology, and they are approaching it fairly cautiously…I think in 2008, we may see some elements that would accelerate the growth. At this point it is fairly early to say.”