Hot-spot hopefuls could get burned

Companies are racing to set up commercial wireless Internet "hot spots," but high start-up costs, as well as uncertainties in demand and pricing, are threatening to put a chill on profits.

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McDonald's, Borders Group and Hilton Hotels & Resorts on Tuesday became the latest nationwide chains to step forward and say they will be offering Wi-Fi Internet access in their stores. Other hotel and coffee shop chains have also said that they will offer Wi-Fi services.

Such deals signal a potential windfall for companies such as T-Mobile USA, Cometa Networks, Toshiba and Intel, who are hoping to capitalize on a surge in demand for blazingly fast on-the-go Internet access. But there are already signs of the boom reverberating into a shakeout, with at least one hot-spot provider revisiting its business plan and another falling by the wayside.

T-Mobile USA recently slashed prices for a hot-spot network installed in Starbucks coffee shops. In addition, early entrant Joltage discontinued its service at the end of February, saying it was taking too long to acquire enough customers on its network for the company to sustain itself.

"Operators are facing the classic chicken-and-egg scenario," said Amy Craven, the In-Stat/MDR analyst covering hot spots. "The principal challenge is to get subscribers onto the networks, but (hot-spot operators) can't get the subscribers unless they have the network."

Hot spots are areas where wireless Internet access is available to the public using so-called Wi-Fi technology based on 802.11b, 802.11a and the coming 802.11g standards. Such access points have proved enormously popular among laptop users, who discovered they could tap into pockets of free high-speed Internet bandwidth, courtesy of unwitting corporations and cooperative neighbors. More recently, operators have begun to build networks of hot spots, so they can charge people for more-reliable and more broadly available service.

Tuesday's announcements underscore the growing popularity of Wi-Fi technology and hot-spot services as potential new revenue streams for storeowners, telecom carriers, and hardware and services companies. But the challenges for companies in this market include building hot spots in popular locations; connecting them to larger networks; and making them easy to use for subscribers--all while making sure their efforts aren't overrunning demand and are still able to make money.

The three-year cost for a particular location running a hot spot, including a business-class digital subscriber line (DSL), is roughly $165 a month. As more companies focus on one aspect of the food chain, costs come down and spread out. In addition, as more companies better understand the kinds of subscriber numbers they expect to get in certain locations, they can adjust their costs.

By not spending about $400 per month for a T1 connection, when a business-class DSL line costing $70 to $75 per month will support the number of subscribers coming to a location, Wi-Fi service providers can lower expenses and in turn drop the fees to subscribers.

Counting chickens
John Marston, a business development executive at Toshiba, cautioned operators to pay attention to the market and not be overly optimistic about subscriber numbers.

"Don't spend too much money," said Marston. "You have to think about every dollar you spend and how you expect to acquire locations."

The number of hot spots available in North America is expected to explode from 745 locations in 2002 to more than 7,000 locations in 2007, according to In-Stat/MDR.

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With the recent rash of companies entering the market and committing to thousands of locations this year, those numbers could even prove conservative. In-Stat/MDR's Craven is in the process of updating those projections, which will be available in the next month. Toshiba and Accenture have said they plan to have 10,000 hot spots across North America by the end of the year.

Craven said that with more and more players looking to provide roaming capabilities, it's more likely that companies will try to focus on certain parts of the hot-spot food chain. Roaming is expected to play a significant role in the development of nationwide hot-spot networks, because it will allow wireless users to avoid having to sign up for multiple accounts to use multiple hot spots.

Roaming also means more opportunities for recurring revenue for operators and for the aggregators who are expected to bring in subscribers. Aggregators are companies, such as Boingo Wireless, whose software and services allow subscribers to sign into hot-spot networks and receive a single bill and service experience at any location on the network.

The hot-spot market is still small, but it's evolving quickly. For operators it's increasingly becoming a land grab for the best locations and right partnerships that they think will give them access to the largest group of customers they want to target. Operators such as Wayport, Surf and Sip, T-Mobile USA and Cometa are the companies that negotiate with location owners, such as coffee shoes and bookstores, to set up hot spots.

Craven added that operators will have be very selective when determining the best locations to attract key customers. Blanketing the country doesn't make sense, but competition for key areas is building--and in some cases, the competition may already be over.

"A lot of the strategically significant claims have already been staked by either grassroots-type service providers or some of the big players," said William Bao Bean, an equity research analyst with Deutsche Bank Securities.

For example, the largest hot-spot provider in Portland, Ore., is a nonprofit organization called Personal Telco, which offers free service. The organization maintains 41 of the about 100 hot spots in the Portland area, which was recently rated the most unwired city in America in a survey sponsored by chipmaker Intel.

Cash for connections
Although there are still free hot spots, paid services are likely to take over, according to Sean Maloney, general manager of the Intel Communication Group. After all, service to the hot-spot operators isn't free: They have to pay monthly fees for a wired Internet connection for their Wi-Fi base stations.

"It looks like a preponderance of the hot spots will be paid," Maloney said. "There are a lot of people that are going to offer paid service."

Toshiba and Accenture are teaming to offer what amounts to a hot-spot kit for operators. The kits will include hardware provided by Toshiba and maintenance from Accenture, which operators can sell to and set up for location owners, and all parties would split the revenue--Toshiba and Accenture would receive 50 percent, the location owners 20 percent and the operator 30 percent. The kits are expected to be available in the second quarter of this year.

The competition for locations is already fierce, with T-Mobile USA, among other big names, already pounding its chest to intimidate rivals.

"We quickly ran past the point where start-ups could jump into this scene," said Bob Stapleton, vice chairman of T-Mobile USA. "The challenge is to get to critical mass...we're in 60 percent of the installed venues of hot spots."

T-Mobile USA has T1 lines set up in 1,200 Starbucks coffee shops, which many in the industry say is overkill for the number of subscribers in the market. The company recently lowered its monthly Wi-Fi fees for subscribers from $40 to $30. In announcing the cuts, Starbucks' new ventures director, Lovina McMurchy, disclosed that the service has so far attracted on average 20 customers per day, per location, in large cities.

Competitors aren't flinching, though.

"There are so many different ways to go with these models, and the important thing is realizing who your customer is and executing toward them," said Christian Gunning, Boingo's director of product management.

Telecommunications services company Matrix Networks is concentrating on business travelers and where they stay. Matrix is partnering with hotels to provide hot-spot services to guests.

"That's where all our customers are, and the return is growing?if I get 10 percent of a 120-room hotel, it adds up," said Nigel Ballard, director of wireless at Matrix.

The numbers of business travelers and consumers with Wi-Fi capability is expected to grow directly or indirectly because of Intel's upcoming marketing blitz for its Centrino family of processors. The chipmaker is spending $300 million to market its latest product, which should help to familiarize people with Wi-Fi and what they can do with it.

Efforts by the Wi-Fi Alliance should also help improve the awareness of Wi-Fi and the availability of hot spots. The industry group has developed a "Wi-Fi Zone" logo, which identifies hot spots.