Public Wi-Fi business models

Over the past two years, while most high tech sectors have faced major slowdowns, the Wi-Fi market has enjoyed tremendous growth. The evolution of "hotspots" or public WLANs however has had many false starts. Some business model pitfalls were a direct result of the flush capital markets of the late 1990s which encouraged reckless spending with little thought given to traditional income and expense models. Others were associated with the normal trial-and-error operations of launching any new business.

The original WISP model required substantial investments for network infrastructure and real estate with anemic subsequent revenues and subscriber uptake. WISPs such as MobileStar and Ardent Communications (CAIS Internet) expended significant initial investments since they had the cash and the theme of the day was nationwide buildouts. In addition, little emphasis was placed on cost-effective technological solution such as the usage of T-1 lines vs. DSL.

The original WISPs had anemic income for a number of reasons, including revenue-sharing model and service pricing. WISPs paid for everything and smaller WISPs kept only 10% of the revenues while MobileStar kept 80% to 90%. This model did not work, and today the marketing motto has changed to making the hotspot owner have "skin in the game."

WISPs are asking for a guaranteed monthly minimum fee to receive cooperation from hotels as well as monthly support fees. Lease financing has simplified this revenue model as well. Some hotel WISPs have a revenue-sharing arrangement on public meeting rooms.

WISPs have had a difficult time with service pricing as well. MobileStar charged $69.99 per month for unlimited usage. Both MobileStar and Metricom's fees have revealed that $70 is not mass-market pricing, especially for a service that is not adequately ubiquitous. Today, WISPs in both the U.S. and Europe are experimenting with DSL-type pricing between $48 and $50 per month for nationwide access. Local monthly access rates are between $20 and $30 per month. Daily usage can range from $7 to $12.

The Japanese, who have historically been more adept at service pricing, are charging between $12 and $17 per month for unlimited usage. This is a more effective solution for buying market share reminiscent of the early days of DSL pricing.

WISPs have also struggled with proper marketing techniques. Small start-up companies with limited resources have been expected to build brand, educate the consumer and drive the market. To be able to do more with strained resources, WISPs are best served to focus their initial efforts on one vertical market segment such as hospitality, airports or coffee shops rather than the general corporate or consumer markets. Customer acquisition costs dwarf the cost of network infrastructure in the hotspot space.

Some WISPs such as Wayport have figured out that providing wireless access alone is still not a moneymaking proposition. Similar to Sonera that bundles its WGate WLAN with its GPRS service, Wayport supplements its WLAN subscriptions with revenue from Laptop Lanes and its wired hospitality installations. Other revenue-generating methods include providing parallel wireless networks for the personal use of hotspot owners as well as the neutral host model currently employed in the Minneapolis airport, where many different service providers offer service on the same airport-owned WLAN network.

Many of the major wireless carriers in Europe, Japan, Singapore and South Korea have started launching public hotspots. The European PTTs were the first to embark on the WLAN initiative since they made the hasty yet wise decision they would rather lose 3G revenues to their own subsidiaries than to third-party WLAN service providers. Korea Telecom and Hanaro Telecom have the most aggressive buildout strategies with the latter committing to 25,000 access points by the end of 2002.

In the U.S., although announcements have been anemic, most of the major carriers are in the process of developing their WISP strategy. T-Mobile has been the most aggressive, entering into agreements with Starbuck's and Borders Books. The founding of Cometa, the start-up Wi-Fi wholesaler, may accelerate this process.

In reality, U.S. carriers are currently sitting on the sidelines and observing and learning from the initiatives around the world as well as their own internal trials. These trials are not necessarily only WLAN/hotspot initiatives, but rather service management efforts that will ultimately lead to the effective deployment of hotspots. For example, Verizon recently announced that it will provide and install WLAN networks to small and medium enterprises.

Sprint has also taken important steps toward providing managed LAN network services in the enterprise, which may be a first step toward providing WLAN services. Sprint has also become very active in the hospitality industry with the Sprint InSite--a service that provides advanced guest solutions and in-room entertainment. Although neither of these are wireless initiatives, they are no doubt a test bed for future provisioning of managed wireless services. More information on carrier and WISP efforts can be found in eTinium's upcoming study on Seamless Mobility: The Marriage of 3G and Wi-Fi.

Once the major U.S. carriers have covered the enterprise base, they may enter the hotspot market through a variety of methods. For one, major airports and public venues would prefer to deal with established players and a co-branding initiative could potentially launch the carriers' entry into the hotspot market. The carriers are learning about security, network management and provisioning through their enterprise experience. They already have the roaming/billing experience through their cellular divisions. All that would be left would be to marry these two together.

Goli Ameri is the president of eTinium, Inc., a telecom consulting and market research company specializing in wireless and switching technologies. She can be reached at gameri@etinium.net or (503) 968-8437.