Rural America’s (other) great broadband hope

NB: This is the second story in a two part series about rural broadband access in America. To read the first part, please click here.

FORTUNE — Engineers have long dreamed of using cheap wireless networks to do an end-run around the companies that now provide Internet access and cell phone service. Those dreams have always proven to be money-losing delusions, not real threats to firms such as AT&T (T) or Comcast (CMCSK). At least, not until now.

A new technology called “Super Wi-Fi” offers a new way to offer wireless home Internet connections and even cell phone service. The trick is transmitting longer-range signals using the empty “white spaces” that exist between local TV stations, valuable airwaves that federal regulators are just now opening for public use at no charge.

“There’s going to be a great business case for not just fixed wireless but mobile wireless using white spaces,” vows Rick Rotondo, the vice president of marketing at xG Technology. He says that the main opportunity will be in rural areas, where there are far fewer TV stations and as a result a lot more available white spaces.

xG is testing out its gear in a trial with Townes Telecommunications, an Arkansas provider of local phone and Internet service. By mounting antennas of schools and water towers, the companies hope to build a flexible network that will be able to hook a farmhouse to the Internet or a cell phone to the phone network.

The ability to have the network also support cell phone calls is particularly appealing to Townes, which like every older phone company has been losing landline customers to cellular competitors. Until now, there hasn’t been a cost effective way to fight back. “Wireless [over white spaces] is far more reasonable than putting fiber in the ground,” says Ben Dickens, general counsel for Townes Telecommunications.

Lots of tech companies share xG’s optimism about the ability of white space and are racing to design competing wireless systems. At the “Super Wi-Fi Summit” held in Austin, Texas last month, equipment companies competed for attention by unveiling products such as the “RuralConnect IP Version II.” That equpment, which is built by California-based Carlson Wireless, promises connections running over white space at up to 16 megabits per second.

In the past, companies that have attempted to build wireless networks to circumvent existing wired networks have tended to fare poorly. An early generation of “fixed wireless” companies, with names like Winstar and Teligent, spent billions before filing for bankruptcy protection. Clearwire (CLWR), which was supposed to finally popularize fixed wireless, is unprofitable and its stock is down 80% in the past year. Efforts to create “mesh networks” that would blanket cities in Wi-Fi coverage have also failed to turn profits despite the backing of companies such as Earthlink (ELNK).

Profits remain distant for xG too. In the first half of this year the company, which is traded on London Stock Exchange, racked up $6.2 million in expenses vs. $150,000 in revenue. The revenue came from a one-time payment from the U.S. Army as part of a trial installation at Fort Bliss, Texas. (The trial ended last month, and neither the company nor the military has announced the results.)

xG’s Rotondo argues that there’s reason to believe that this time will finally be different. He says xG has overcome what was supposed to be one major limitation of the free white spaces, the low power limits that the FCC placed on phones and other “personal communications devices.” Mobile devices using the white spaces may transmit using at most a tenth of a watt of power, while a cell phone can blast out a full watt or more when it needs to.

Nevertheless, Rotondo says that xG can get such phones to transmit 3 megabits per second to the towers. (The trick: using multiple antennas and smarter signal processing in its towers.) Download speeds will be twice as fast. In rural areas he says xG can reliably hit those speeds at distances of four miles.

Perhaps this time the big wireless promises will finally pan out.  Fortunately rural Americans will have other options too, including a new generation of satellites that will soon offer consumers Internet links at an impressive 12 megabits per second.  

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