European Hotspot Access: Priced out of Reach
European Hotspot Access: Priced Out of Reach February 2004 by Derek Kerton Principal Analyst, The Kerton Group
In a comparison of European and US hotspot activity a couple of major differences stand out. Public Wireless LAN (PWLAN) access in the EU is much higher-priced than access in the US and is also far more influenced by incumbent telcos than by startups.
The nature of the differences is probably rooted in the fact that the US PWLAN sector is the product of venture capital-backed startups, like Wayport, Airpath, and Mobilestar. These companies, active since the turn of the century, have created a somewhat competitive environment where price control is difficult for any one provider. With executive backgrounds in networking and Internet, US providers naturally tended towards flat rate pricing for either a month, a day, or a short 2-hour session.
While startups were building early PWLAN hotspots, carriers worldwide didn’t know what to think about this Wi-Fi phenomenon. It wasn’t until 2003 that the global telco community finally decided they had better get involved, and the results were different depending on the region. In the US, where startups were already active, carriers tended to partner with existing service providers and aggregators, while announcing their intentions to build their own hotspots (of which we’ve seen few). In the EU, where startup activity was minimal, carriers like BT, Swisscom, and France Telecom decided to build the hotspots themselves, connected to their copper infrastructure. The results of these different evolutions are illustrated by a recent Cahners In-Stat report that 64% of EU hotspots are carrier-provided versus a lowly 19% in North America.
Having the incumbent telcos dominate the PWLAN market has its benefits and its costs. The benefits will be most visible in roaming, billing, and quality of service (QoS). With carriers dominating the market, the EU will have far less complexity to solve in order to develop Wi-Fi roaming, and also will be better able to leverage the carrier’s expertise in billing in order to more rapidly move PWLAN billing onto a mobile or telephone bill. EU hotspots are likely to demonstrate a higher overall QoS, since carriers will tend to backhaul with T1s or E1s and will be able to monitor hotspots from their existing Network Operations Centers where they have thousands of service technicians. Sounds great, doesn’t it? Problems are that it is still early, so the hotspot solutions aren’t yet mature; but worse, with telco-style high costs and without ample competition, pricing at EU hotspots is simply atrocious. According to Wi-FiRates.com, the average daily Wi-Fi access rate in the US is $7.70, while in France it is €25.50 (US$32.10). Further creating grief among customers is the fact that the EU telco-provided hotspots often charge on a per-minute basis strangely reminiscent of a circuit-switched phone call (with which Wi-Fi has little in common). Let’s call that ‘telco baggage’.
The Law of Supply and Demand is plain on this: the effect of higher prices has got to be lower demand. But with rates 317% higher than US rates, European hotspot providers aren’t just shrinking demand a little, they’re stifling it! Even for monopolists, the pricing decisions are too high: they’re not maximizing profit, and they are opening the door to competitors. EU telcos are in a good position right now, unthreatened by startup hotspots. But with new regulations limiting broadband wholesale prices and unbundling network elements, the more the telcos gouge users, the more they fertilize the soil for competitors to enter the market. If instead of suppressing demand with high prices, the incumbents were to strive to meet demand with reasonable prices, reasonable margins, and superior service based on high QoS, billing, and roaming, they would be able to own PWLAN for the foreseeable future, and increase the size of the overall market a great deal.
The marginal cost of adding a Hotspot customer:
EU hotspot providers would do well to follow the example of the ski resort industry. Just like the ski industry, there are certain hotspots that are in high demand and can risk charging more (ex: airports) but the average hotspot stands to gain revenue and profit by pricing its product somewhere in the neighborhood of what the target customer can afford. Evidence from the US would suggest the EU hotspots are way out of that range, and that service providers, customers, equipment vendors would all benefit from a drastic drop in price.
Derek Kerton the Principal Analyst at The Kerton Group, a firm specializing in marketing and business strategy in the wireless telecommunications industry. He can be reached at Derek @ kerton.com.
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