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Commentary: High-speed hospitality

The Cisco and IBM announcement to provide customers such as hotels and convention centers with high-speed Internet access and services should be reassuring to those in hospitality industries.

The Cisco Systems and IBM announcement to provide customers such as hotels and convention centers with high-speed Internet access and services should be reassuring to those in hospitality industries.

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Cisco: Wireless networks everywhere

IBM Global Services will offer wireless network consulting, systems integration, site and help desk service, while Cisco will provide network infrastructure products through its Cisco Mobile Office program.

This announcement is an extension of a long-term, stable, nonexclusive partnership between IBM and Cisco, which are major players in the networking arena. This in itself should be reassuring to large hotel chains and other hospitality industry companies, some of which have had disappointing experiences working with smaller providers such as ISPs and wireless start-ups.

Leading hospitality players that are among the first to offer reliable high-speed connectivity may be able take advantage of these services to gain competitive advantage--which can be more important during a tight economy than during a boom. The question is how many major companies can afford to invest in these services during the current slowdown in the hospitality industry.

The trend toward high-speed Internet access at hotels, airports, convention centers, restaurants, and other hospitality providers to business travelers is clear. Currently, many business travelers pick their hotels partly on the basis of the availability of high-speed connectivity. Within the next three years, we expect these services to become generally available and expected.

The problem for travelers is that they do not always get the service they expect. Connecting to early versions of these services has sometimes required more technical knowledge than most business travelers possess and has not provided the advertised performance. Services in rooms sometimes do not work at all, and when problems happen, too often hotels have no one who understands the technology and can help. In some cases, business travelers find they can get better connectivity through dial-up than through the supposed high-speed option.

The keys to success
To succeed, high-speed connectivity services need to be simple, foolproof and survivable. The services cannot be so delicate as to be disrupted by cleaning staff pushing wires around or other normal hotel activities.

The IBM-Cisco team has proven its ability to provide high-speed networking in the business environment, and providing integration services to enterprises is an element of this technology company partnership. However, the most important part of this new service is the benefits to hospitality companies. IBM and Cisco, as leading global players, can assure a large hotel chain of standardized services across wide geographies.

By combining wireless and hardwired technologies, Cisco and IBM have created the correct technology model. Despite the hype around wireless connectivity, hardwired access will always be able to deliver higher speeds, and therefore more services, at lower costs. Furthermore, wireless infrastructure always requires wireline integration to the public Internet, which is an area that Cisco currently dominates.

For both the hospitality industry and corporate offices, we expect wireless to always be used as a supplement to hardwired connectivity (and analog modems will remain the most common method of network access for individual travelers). Therefore, we believe that hotels, for instance, will provide wired access to rooms along with wireless connectivity in public spaces such as conference rooms and restaurants.

How and when will hotels fund investment in these services, and how will IBM and Cisco make money on them? The announcement does not outline the revenue model for this service, but two basic models exist.

Under the more conventional model, the hotel or other user buys the hardware and software licenses (in this case from Cisco) and pays a fee (in this case to IBM Global Services) for consulting help in installing and setting up the network. It then pays ongoing fees for each location's high-speed connection. This can become very expensive for a large hotel chain that wants to provide services across its locations.

The provider-pays model
In the other model, which IBM has already tried unsuccessfully in its partnership with MobileStar, the provider pays for the hardware, software and installation. The hotel then shares the income from fees it collects from guests for using the equipment-- usually about $10 per night.

The problem with this model is that MobileStar and the other companies that have adopted it, such as Ardent (in the form of CAIS Internet), went bankrupt because of the huge cost of providing the connections to large numbers of locations. MobileStar is now back in operation, and companies such as STSN and Wayport continue to focus on the hospitality industry, but how long they can maintain operations remains an open question.

Hotel chains and other hospitality companies, already very hard pressed by the large drop in travel since Sept. 11, would greatly prefer the second model. Cisco and IBM presumably would prefer the first, which gives them profits up front and shifts more of the risk to the hospitality provider. Which model IBM and Cisco will eventually offer is unclear, since they did not include these details in the announcement.

Currently, hotel chains, conference centers, and other hospitality industry players can exploit reliable high-speed connectivity offerings to differentiate themselves from their competitors. This market differentiation is more important in the current slow economy, in which travelers have more choices in hotels and so forth than they did six months ago. Eventually, this service will become expected, just as cable TV is now. At that point, hotels and conference centers will need to provide the service just to stay even with the market.

Hotels can potentially boost occupancy and market differentiation by providing enhanced services for both business and pleasure travelers using the high-speed connection. For instance, computer game boxes and other entertainment could be offered for both children and adults. Automated concierge services such as ticketing, tourist information and restaurant reservations could also figure into plans.

Even so, the key question for hotels--and, in this context, for IBM and Cisco--is whether adequate occupancy rates can be maintained in this economy. Regardless of which revenue model IBM and Cisco offer, no one can make money on high-speed connectivity in empty rooms.

Meta Group analysts David Willis, Jerald Murphy, William Zachmann, Jack Gold, Dale Kutnick, Val Sribar, David Cearley, and Chris Kozup contributed to this article.

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