McDonald's Wi-Fi recipe could define industry

Signs at a McDonald's in downtown San Francisco cordially beckon customers to surf the Web using its wireless Internet service, but no one is biting during a recent Wednesday lunch hour.

In fact, none of the 20-odd patrons scattered about the restaurant's two dining areas appears to have a laptop computer or wireless PDA on hand. A few peer over newspapers, while others talk quietly or stare out the window over trays of french fries and hamburgers.

The scene is typical, says supervisor Margie deGroot, whose restaurant near Market and Second streets became, last year, one of the first McDonald's in the country to offer wireless Net access to customers: "Why would these customers use this service when they can go back to their offices to use their computers?" she says.

She's not the only one asking the question. So-called Wi-Fi wireless broadband technology is catching on fast with computer users and sparking a new service industry that aims to cater to an increasingly mobile Internet audience. But it's still early in the game, and companies aren't sure what formula--if any--will work best to attract paying customers.

Wi-Fi providers have targeted a growing number of potential venues within which to establish access points, including hotels, airports, phone booths and restaurants. Coffee vendor Starbucks and deli chain Schlotsky's have already launched commercial Wi-Fi services aimed at driving more foot traffic into

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their stores and keeping customers there longer, and they've reported some early signs of success. Earlier this week, Barnes & Noble said it is working with Cometa Networks to install hot spot networks in about 650 bookstores by September.

McDonald's has been testing Wi-Fi in partnership with three rival providers since July of last year and is expected to announce its long-term partners, its pricing scheme and the locations that will offer the service as soon as this month.

The fast-food giant's entry into the hot spot service market could supersize the industry when McDonald's begins offering the service nationwide. Cometa Networks, Toshiba's SurfHere and Wayport are vying for the business, and the company's decision could dramatically boost the winners' prospects.

McDonald's representatives declined to comment for this story, citing a quiet period as they look over business proposals from operators.

Although it does not plan to install the service in all its locations, McDonald's would be the largest potential partner for a hot spot operator in the United States. The chain is using an "at" sign (@) with an M in the middle as a logo to help hot spot subscribers identify locations that offer the service.

"McDonald's has potential for operators because it has 13,000 locations and an All-American sort of audience," said John Yunker, analyst with research firm Pyramid Research.

Wi-Fi with your fries?
Hot spots are public areas where individuals can wirelessly access resources--such as a broadband Internet connection--available on a network established using Wi-Fi gear. They were initially set up haphazardly in a grassroots manner to give communities free access to the Internet. Although this continues to happen in cities like Portland, Ore., and San Jose, Calif., more and more companies have been installing secure networks and charging for the service.

Last year, 15 million units of Wi-Fi equipped consumer devices such as laptops were shipped--up 95 percent compared with 2002, according to research firm Synergy Research Group. And the thinking goes that as more devices are sold with built-in Wi-Fi connections, more device owners will want hot spot service.

"We need to build the scale of usage as quickly as possible," said Gary Weis, chief executive of Cometa Networks. The more locations an operator has access to, the greater the amount of traffic on their networks and the more attractive the operator becomes as a potential partner for cell and cable companies.

Analysts have been skeptical of the hot spot market and whether businesses, not to mention an entire industry, can be sustained selling the service. Providers have been offering the service on a daily and monthly basis. T-Mobile USA, for example, which partners with Starbucks, has the most hot spots installed in the United States and charges a daily fee of $9.99 and a monthly fee of $39.99. The monthly fee drops to $29.99 if a customer signs on to a yearlong deal. Monthly subscribers are more valuable to providers because they tend to mean a longer commitment and recurring revenue, but analysts argue that at this point, monthly charges are too high to encourage subscriptions.

McDonald's doesn't expect to earn money initially from its Wi-Fi service. It hopes instead to attract more customers and sell more burgers and fries.

Increasing the number of visitors to its restaurants is important as the company looks to boost its revenues after a troubling 2003, when it reported its first-ever quarterly loss. And with increasing scrutiny of the nutritional value, or lack thereof, of its food, the company has shown itself to be receptive to new ideas.

McDonald's says it is looking to attract what it calls the "road warrior" or "windshield warrior," someone who spends a lot of time away from the office, such as real estate agents or regional sales people. And McDonald's has a real estate advantage there, according to Dan Lowden, vice president of marketing at Wayport.

"It's all about getting to the right locations," said Lowden. "A lot of their locations are convenient to that audience because they're right off major roads."

But charging the right amount will also be important. McDonald's and its partners have tried a number of strategies for payments, such as offering free service for a limited time period with a meal purchase. Pricing has differed in each of its locations. The company has been bullish on urban areas and has said it won't offer the service in all its restaurants. Final pricing and locations are still being determined.

The negotiations are ongoing, but several analysts familiar with the McDonald's efforts said they believe Wayport appears to be the frontrunner for winning the bulk of the company's hot spot business. Business as well as technology issues are on the table. Still to be settled are key terms of the contract, including the revenue-sharing plan and who will pay equipment and set-up costs.

Customers stay longer
McDonald's is using rival hot spot businesses as primers.

Starbucks has the largest number of stores offering hot spot service in the United States, in partnership with T-Mobile USA. The two companies have been working on the service since 2002. Starbucks declined to disclose how many people have used the service to date, or financial details. But a company representative said the service has helped keep users in its stores longer, with the average session time lasting about 45 minutes.

"That more than likely leads to a second cup of coffee," said Anne Saunders, vice president of marketing at Starbucks.

Schlotzsky's also found that by offering free hot spot service in select restaurants, it could encourage people to stay longer. According to a survey conducted by Schlotzsky's, 6 percent of customers to restaurants with hot spot service say the service is the primary reason they come.

Those are the kinds of statistics that are raising interest at McDonald's.

A side benefit for McDonald's could be improved store management, something Starbucks has experienced.

Starbucks district managers have used the hot spot service to log into the corporate network from stores to order new supplies for each store and update sales data.

"One manager said to me that (hot spot service) was the single best thing they've been given to improve their productivity with the company," Saunders said.