Subject: [NEXTEL-1] VC Returns -- Do They Exist in Wi-Fi?

From: [email-masked]
Date: Fri, 08 Aug 2003 03:09:33 -0400

When Do You Charge, When Should You Be Free?
Contributed by mmasnick on Thurs, Aug 7 2003

Apologies for the unusually long post, but it's an interesting topic, and a short
post wouldn't do it justice. Alan Reiter has posted the question on his blog about
charging for WiFi, saying he needs to tell his clients when to charge and when to
be free. It's a question that a lot of people are struggling with, and I think I
have a reasonable answer:
You can charge for your WiFi access point if there's a reasonable expectation that
there will be no competing WiFi in the area. It's that simple - except it isn't.
The "area" in which free WiFi might be available may differ based on the
customers. Some will be willing to travel distances to get the free WiFi over paid
WiFi. However, if you think that the majority of your customers (a) won't be
willing to do what's necessary to get to free WiFi and (b) are willing to spend
enough to make the additional costs (billing, tracking, maintenance, security) of
paid WiFi, then you can probably get away with charging. Other than that, if you
want to charge for your WiFi, it had better be bundled with something else, so
that the overall value to the customer goes up (making the competition no longer
between two equal products in the mind of the customer).
It goes back to simple economics: in a competitive situation, price will get
forced down to marginal cost - and the marginal cost of letting another person get
on your WiFi network is zero. So, if your WiFi is seen in competition with an
equal (in the mind of the customer) WiFi access point, the price will eventually
get driven to zero. Also, if there's no equal WiFi offering currently in
competition with you, you'd also better be sure there won't be in the future (so
it helps to control a wide area of land, such as an airport). So, if you're
JimmyBob's coffee shop and you want to charge, realize that BillieSue's laundromat
across the street may set up free WiFi, and your plans to charge will disappear.
The other option is to make your offering not in direct competition, and provide a
service in addition to the connection that has a perceived value that exceeds the
price you want to charge. For example, if you can convince people that a secure
VPN is worth it, then you can charge for that. In some cases, this value may be
entirely perceived (branding). So, perhaps people will be willing to pay for SBC
WiFi because they somehow "trust" SBC.

If those don't hold true, then you're going to be forced into providing free WiFi
- which isn't a bad thing. If you have something that is being driven down to a
price of zero, then you might as well use it as a promotional item to advertise
for something else. For example, Schlotzky's Deli using WiFi to bring in more
customers.

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VC Returns -- Do They Exist in Wi-Fi?

Scott Rafer\ POSTED: 07.25.03 @03:43
The popular press recently discovered that Wi-Fi access will not generate VC
returns. So it's time to ask "Why not?" and "What will?" Wi-Fi adoption has
followed a surprising path. Instead of enterprise network technologies eventually
trickling down to home use, Wi-Fi started in the home, moved to small business, is
a growing public Internet access technology, and is now being tested at large
enterprises. European mobile phone adoption followed the same path in the
mid-1990s, and camera-phones are doing the same.

In the Wi-Fi public access segment, Wireless ISPs (WISPs) are deploying hotspots
in all sorts of locations, including hotels, airports, cafés, mobile phone stores,
the Long Beach boardwalk, truck stops, and marinas. More than 50,000 hotspots
worldwide (a third of them Korean) existed by July 1. That number will double
before year's end.

There is almost no direct revenue coming out of this deployment, which is leading
to the adoption of three different strategies:

* The Good - WISPs that charge users fair prices to spur adoption.

* The Bad - WISPs overcharging users to attempt to recover their poor capital
investments or to prevent cannibalization of their existing communications
businesses.

* The Future - Location owners like Verizon, Omni Hotels, Schlotzsky's Deli, and
AO's own Jamis MacNiven, who give Wi-Fi away to sell other goods or services. They
undercut any pricing power that traditional service providers might have had. In
Korea -- whose citizens are the world's top broadband consumers -- the phone
companies lead the world in broadband deployment, and already offer Wi-Fi
semi-ubiquitously for $9 per month bundled with DSL or other services.

In the US and Europe, mobile carriers are following the second strategy. They are
working hard to avoid cannibalizing mobile data pricing for 2.5G (i.e. GPRS and
Sprint PCS Vision). While Wi-Fi won't be a replacement for mobile data for several
years, even its occasional (and rapidly increasing) availability makes GPRS
pricing look suspect in ways more devastating than Wi-Fi pricing problems. By
viewing Wi-Fi as an entirely new network, the mobile carriers have exaggerated
Wi-Fi's profit opportunity. Realistically, Wi-Fi is simply an extension to the
high-volume, low-margin IP-over-Ethernet business, not a new, large profit
opportunity. A few mobile carriers are showing signs of progress by offering
flat-fee GPRS data pricing. These bundled services cost $40/month in the US
(T-Mobile), $34 in the Czech Republic, and $20 in Estonia.

Here's the irony in Wi-Fi public access pricing: retailers can be profitable by
offering free Wi-Fi as a customer acquisition tool. But when they charge for Wi-Fi
access, these retailers, and the WISPs serving them, almost certainly lose money.
According to a market study coming out this summer, retailers are quickly learning
this lesson: up to 30% of US location owners who plan to deploy commercial
hotspots in 2004 intend those hotspots to be free or free-with-purchase.

The fully loaded cost of offering free Wi-Fi access is less than $6/day. Operating
a billable hotspot costs over $30/day. Half this cost comes from building or
altering billing systems, plus the endless associated customer care. The millions
of dollars already spent on systems to charge Wi-Fi users by the megabyte, minute,
etc., will never be recuperated. Next year, authentication should become cheap
enough to be part of a profitable Wi-Fi offering, but for the foreseeable future,
authorization and accounting remain dangerous distractions.

So are there profits to be made in Wi-Fi public access? Yes. But… they'll go to a
few very specific parties: Microsoft, Intel, and their OEMs -- who will all sell a
tremendous amount of new equipment; large, pre-existing billing entities like AOL,
Amazon, or the mobile carriers that assemble virtual networks without owning
access points themselves; retailers using Wi-Fi to support other revenue; WISPs
who rigorously focus on providing high-volume, low-cost IT outsourcing and systems
integration services to retailers; and providers of certain premium IP services
such as VPNs, SMS, and voice termination.

When deciding how much to invest in a Wi-Fi public access business, companies of
any size must avoid being distracted by the wireless hype, positive or negative.
This new opportunity is just as low margin as any other Internet access business
-- and just as enormous.

http://www.alwayson-network.com/comments.php?id=686_0_1_0_C

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