Google has a plan to lower your cellphone bill, and Verizon and AT&T should be scared

Project Fi keeps costs down by relying heavily on the wifi networks most of us have in our homes and offices. Wifi networks are cheap because they operate on frequencies that are freely available for anyone to use. By contrast, cellular companies had to pay billions of dollars to the federal government for the exclusive frequencies they need to build cellular networks.

But wifi networks have a big downside: because of power restrictions, they have limited range. So if you want to ensure you have connectivity everywhere you go, you need access to cellular networks, too.

The strategy of stitching together wifi and cellular networks was pioneered by Republic Wireless, a startup that entered the market in 2011. Today, the company offers unlimited talk, text, and data on a high-speed 4G network for $40 per month — much cheaper than conventional wireless networks.

Republic recently announced a shift away from unlimited plans. Beginning in June, the company’s customers will be charged based on how much data they use. Google is taking this same approach. On its plan, customers will pay $20 per month, plus another $10 for each gigabyte of data they consume. Both services automatically rebate customers for unused data.

That could translate into serious savings for most cellphone users. For example, I currently use about 2 GB of data per month and pay about $100 per month for my AT&T service. Under Google’s plan, I’d pay around $40 per month. And if Google only charges for cellular connectivity, not wifi, (which seems likely, though its website isn’t entirely clear), the savings could be even larger, since Google’s phones are designed to use free wifi networks more and cellular networks less than conventional cellphones.

Republic Wireless’s service only works with Android-based Motorola phones that Republic has customized to support seamless switching between wifi and cellular networks. Similarly, Project Fi will initially only work with the Google’s Nexus 6 smartphone, though presumably other phones will be added in the future.

Google isn’t planning to build its own cellphone towers. Instead, the search giant is reselling cellular bandwidth provided by Sprint and T-Mobile. Yet Google’s business model is likely to exert significant downward pressure on incumbent wireless providers.

By enabling users to seamlessly shift between wifi and cellular networks, Project Fi (and before them, Republic Wireless) could turn cellular service into more of a commodity. Right now, wireless providers sell phones that use cellular networks the majority of the time and charge them $50 to $100 per month for the privilege. Having spent billions of dollars on wireless spectrum and cellular towers, incumbent wireless providers have had little reason to encourage people to use wifi more and cellular networks less.

But Google has little to lose and a lot to gain by pushing down the cost of wireless service. Not only could it build a profitable business, but cheaper wireless service could also encourage people to use their smartphones — and Google products like Android and YouTube — more.

So if Project Fi catches on, it could force wireless providers to cut their prices and improve support for switching between wifi and cellular networks — something that’s awkward on cellphones today. The resulting cost-savings should benefit everyone who owns a cellphone.