Wireless Hotspots: Who will own the customer?
Who will own the Hotspot customer? July 25, 2003 by Derek Kerton
In the Public Wireless LAN access market (PWLAN), few business models have appeared that are runaway winners. Most have suffered under the weight of their capital-intensive deployment costs, and all have suffered from disappointing customer usage rates. One major coffee-shop Hotspot operator claims a minuscule average usage rate of 1-3 daily users per location to mitigate their high installation costs. The problem of current PWLAN models is that big businesses are applying Big Business Economics to Small Business services. Ultimately, the winning solution will be a combination of Small Business Economics at the local level, and Telco Solutions at the Wide Area level.
Telco-Grade Economics Versus MomnPop Economics If I could set up a WiFi access point in my house for $50 in gear, and $50 a month in DSL fees, why does it cost so much to deploy commercial Hotspots that WISP Mobilestar went bankrupt? The answer lies in the two, very distinct, ways a Hotspots can be set up:
Case #1, MomnPop: A laundromat owner installs a Hotspot to stimulate the core laundry business by offering free WiFi connections. This small businessperson will gain increased revenues in the laundry machines, which will pay for the WLAN equipment and the backhaul (DSL). Setup is simple, with no e-commerce or logins required. Small business, small investment, small returns.
Case #2, Telco-Grade: Wayport deploys Hotspots in an airport. This requires multiple WLAN access points, wiring above the suspended ceiling, huge fees payable to the airport authority and union labor, a T3 for backhaul, and ongoing support, e-commerce, authentication, and an operations center. The investment is hundreds of thousands of dollars. Both of these cases provide customers with about equal access to the Internet, although Case 1 will be easier for the customer to use due to the removal of login and e-commerce issues. Which of these business models is likely to be profitable? The laundromat WISP, since that project will have positive ROI, however small. Although we are enamored with big businesses, by bringing Telco-grade economics to bear, we often crush the business opportunity.
WiFi WLAN exploded onto the scene because it provided great Local Area connectivity at low cost. WISPs latched onto the WLAN euphoria but created business that took the low cost factor right out of the equation. Many Chiefs, Few Indians
With the recognition that build-out of commercial grade Hotspots was too expensive, in late 2002 businesses shifted strategy from building Hotspots to being aggregators of Hotspots that someone else built. The aggregator business model looked great, since it eliminated those ridiculous capital expenditures, assuming some other poor sod would pay them. Of course, the problem then became one of everyone aggregating, but no one building out locations. In the US, there is currently a whole lot of bluster about 20,000 Hotspots in 2003, but a disproportionate effort to actually build them. Its like we have 700 chickens in Wayport's barn, and everybody has been given the right to re-sell the chickens. All of a sudden, the country appears to be full of poultry, but when we actually want to eat, it all runs afoul.
If hype were WiFi, you'd be checking your e-mail on a camping trip in Utah backcountry. In reality, the number of Hotspots just isn't adding up very fast, despite all the hype. T-Mobile, who bought the bankrupt Mobilestar, has just over 2,400 commercial Hotspots, and that's about half of the total in the US. In late 2002, the long rumored Project Rainbow emerged as Cometa, a joint venture between AT&T, Intel Capital, and IBM. They promised to roll out 20,000 Hotspots by the end of 2003. They may be right if by, we will roll out they meant, there will be a total of, and by, in the US, they meant, in the world. Today, after months of Project Rainbow rumors and six months of Cometa, they have achieved tests in a handful of McDonalds restaurants. Its amazing that in the year 2000, I was connected to free PWLAN in Singapore's Changi Airport, but three years later many major US airports still offer no connection greater than dial-up through a payphone.
Hotspots Wanted The dearth of Hotspots leaves aggregators little to aggregate. At the end of 2002, Boingo had some 850 Hotspots in its network, short of its goal of 2000 5000. The PWLAN industry is desperately looking for someone who will grab the bull by the horns, and actually go out and build the infrastructure of the sector. But with the awful economics, who will?
Building Out The Hottest Spots High traffic, captive-audience areas like airports actually do have the potential to earn significant revenues. The coveted mobile professional will pay a premium to connect in these locations, and the volume of users is highly concentrated. High volumes of business customers mean these locations require a Telco-Grade solution, thus telcos are a natural choice to provide these Hotspots. These companies have always had to invest large sums to set up their networks and are willing to make the investment to reap the long-term reward. Bold startups like Wayport will also venture into this space, but the capital required may limit their ability to grow. Yet Wayport may survive well by adopting Cometas strategy of being a carriers carrier, and letting the Telcos re-sell. That would be fine, since Cometa has not yet adopted the Cometa strategy.
Building Out The Warm Spots Meanwhile, in the Laundromats, auto shops, cafés and light-traffic locations, we need a Hotspot provider who can keep the capital expenditure down, or else the venture will never turn a profit. The location owners themselves fit the profile some already have a DSL to use for backhaul, and most only need to install cheap equipment to create a Hotspot. Usually one access point will do. However, those who want to charge for their WiFi service will also need someone to help them with billing, provisioning, and customer service. Enter companies like Pronto, SurfnSip, and Toshiba. These provide a Hotspot in a Box (HSB) solution, which includes the necessary hardware for a Hotspot, as well as installation assistance and customer provisioning, billing, and service. The location owner owns the hardware, but does not operate it. With a solution like this, the location owner needs only enough technical ability to open the mail and cash a check.
Sidenote: many Hotspot owners provide fee-free Hotspots simply to stimulate revenue in their core business. The Kerton Group, consultants in the wireless industry, estimates over 25% of Hotspots are fee-free. These are not community groups, or homeowners susceptible to war driving, which also unknowingly often provide service (thanks!), but deliberate business efforts to offer free WiFi.
What is common about the HSB companies is that they are content not to own the customer. They have made partnerships where another firm re-sells access to the Hotspots they operate. For example, Boingo, a customer-facing brand, provides its subscribers with access to SurfnSip Hotspots. In fact, they may prefer not to be the brand, a partner with a national brand, and a reputation for wireless connectivity would make a better front man. This is where the telcos come in. The wireless telcos have the natural experience, the billing experience, VPN software solutions, the existing business relationship with 50 Million American customers, the marketing muscle, and the roaming expertise. The telco will be the brand with which the customer associates their WiFi Access Service. Wise telcos will avoid building out expensive networks in what Ive called Warm Spots, and instead have relationships with the aggregators, HSB companies, other telcos, and the independent network owners. They will provide a roaming experience across them all and bill the customer. The service will likely be bundled with wireless voice, 3G wireless data, or wireline broadband. The first such business model was recently unveiled by BT in the UK in partnership with Toshiba HSB.
Conclusion Within the next few years, the telco will come to own the relationship with the commercial PWLAN customer, but not necessarily the Hotspot, and probably not the Hotspot gear. A mass network of PWLAN access will be centrally managed, but locally owned. Done this way, the large-scale economics might just work. |
