Random thoughts and insights – always shaken, never stirred

WiFi Business Model

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Ellen Simon of eWeek has discovered “skeptics” who question WiFi’s viability.  One has to wonder what took so long.  The idea that one could build a sustainable business model on the back of a service with just about the lowest possible barriers to entry – and at a price point which allows for a profit to be made – was always ludicrous. 

WiFi is cool.  I’ve had a wireless network ever since Apple’s first 802.11b Airport base station was released, and I can’t imagine returning to the tethered world.  Upgrading to the 802.11g Airport Extreme has given me far more bandwidth than the comparatively pokey DSL line provides (not that it kept up with the slower speed of the earlier standard).  I regularly check when I’m traveling for hotspots, and I’m constantly amazed how many free ones are out there.  Some are intentional like the waiting room of my mechanic, and others not like the neighbor whose Netgear router is promiscuously unprotected.

And therein lies the problem – why should one pay for access when it’s often available for free?  How is it that anyone thought this would not be the case?  Two of the things which made cellular telephony successful are simply not in place: ubiquity and roaming.  One thing which limited competition – the high capital cost associated with building out a network – is also not in place.  Anyone with an ISP account and a $60 Wireless router is a hotspot.  So long as there are little disconnected islands of access owned by multiple individuals and companies, the consumer’s only incentive is to engage in one-off transactions.  For example, when out and about, I observe a strict hierarchy:

1 – Is free access available?  If yes, use it. 
2 – Is paid access available?  If yes, consider: 
a) Can I expense it?  If yes, use it. 
b) If I cannot expense it, do I really need it?  If yes, consider: 
i. Is it no more than $10 a day?  If yes, use it. 
ii. Is it more than $10 a day?  If yes, do not use it.

Others no doubt make a different calculation, but if many consumers take a similar approach, paid WiFi simply cannot generate enough recurring revenue on this basis to survive.  Both cellular telephony and internet service provision migrated to a flat rate all-you-can-eat plan which benefits the consumer in predictable service and the provider with a recurring monthly revenue stream allowing those service providers to build a sustainable business.  I have no incentive to sign up with T-Mobile’s monthly plan unless I happen to be one of those select few who travel so much that I basically live in Starbucks, Borders, or the Admiral’s Club.  And if my hotel has Wayport, I’m burning cash because they have no roaming agreement like my cell phone company does. And I do travel a lot on business …

The right way is to use WiFi as an adjunct to some other service: 

But the talk of the industry is whether Wi-Fi service will eventually be free—with the technology’s low cost frequently borne by stores that hope wireless Internet access will encourage customers to linger.

Cities such as San Jose, Calif., Spokane, Wash. and Austin, Texas, have set up free hotspots. Companies including Best Western International Inc. hotels and Panera Bread Co. give away Wi-Fi access to lure customers.

This is the route my tire mechanic has taken, and the folks in Boston who sponsor  Starbucks may be raking off a couple of bucks a day per store, but the coffee shop with free WiFi gets my business for their coffee (too much of it, I’ll admit). For now, that’s the only way to generate recurring revenue – and it’s through another product. 

To change that, WiFi service providers will need to cooperate with roaming arrangements and extend coverage either through more hotspots or by embracing the forthcoming Wimax technology.  Until then, expect more of this:

One small over-the-counter company, R Wireless, recently left the business after building only one hot spot, at an office building in New York.

Why stop now? “Management believes that only Wi-Fi equipment manufacturers are currently successful in generating profits in the Wi-Fi industry, and service providers have yet to develop a profitable business model,” the company said in its most recent quarterly report.

And so, the filing said, R Wireless “has started looking for alternative realization opportunities.”

“Alternative realization opportunities.” That’s an alternative way of saying, “we’ve poured the shareholders’ money down a rat hole, and we’re pulling the plug ‘cause they won’t give us any more.”


Written by martinipundit

June 14, 2004 at 1:46 pm

Posted in Economy, Technology

Tagged with ,

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