Economic Fundamentals

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As mentioned previously, a HotSpot operator can choose to go it alone, but there are risks: excessive customer acquisition costs, insufficient revenue streams, backhaul costs, and poor footprints. Thus, it's hard to find a viable economic model for an independent HotSpot business outside the venue layer. But venue owners and HotSpot operators who take the "community" approach may find that their model has sound economic fundamentals. In addition to the normal fees received from a local or "owned" end-user, the HotSpot operator finds that:

  • The aggregator pays its partners (typically HotSpot operators) a fee for adding its access points to the aggregator's network footprint. The fee is usually a wholesale fee ranging between $1 and $2 per connect day (24 hours per user per location) for each connection generated through the aggregator's distribution channels, which might also include original equipment manufacturers, ISPs, and major telecommunication carriers.

  • The aggregator takes on some of the more onerous tasks that can drag down its HotSpot partner, e.g. back-office chores and roaming agreements.

  • The value chain is simplified.

Thus, it's possible to create an economic model on the basis of not only end-user fees, but also payments (based on some assumptions about traffic) from the aggregator based on roaming agreements. The principles of roaming revenues are that:

  • End-users will pay more if roaming outside their home network. This is the same pricing model that cellular uses.

  • It's the visited network providers that set the roaming charge that the end-user pays. For example, the retail roaming charge could be $1.50 per hour versus a normal $1.00 per hour usage fee.

  • Every end-user using a HotSpot outside of his or her home network generate revenues for both the home and the visited HotSpot network chain (venue, operator, and aggregator).

  • Hosting visiting end-users provides the network chain a guaranteed revenue stream since all payment risks are borne by the home network chain.

  • Roaming charges are dynamic, i.e. they can change over time and may differ from partner to partner.

  • There is a difference between what the end-user is charged and the whole inter-network fee.

For instance, a busy location with numerous visiting end-users (say, an airport lounge) can generate hundreds of roaming Wi-Fi connections per day equaling hundreds or even thousands of dollars in revenue per day. Even a small HotSpot may find that it hosts as many as ten or 20 roaming connections a day.

Small Can be Good

One of the ways "small is better" is that small venues may be more important to the overall health of the WISP industry than the larger venues because a viable national network most likely will be built upon the foundation of small HotSpots. (The number of small venues will far exceed the number of larger venues; the very propagation of HotSpots in small venue locations is what will eventually enable the aggregator layer to provide nationwide synchronized roaming.)

Another is low operating expense. As illustration: Surf and Sip provides high-speed wireless Internet access, mostly for small venues—cafés, hotels, gas stations, and other public establishments. But its 150 or so locations are set-up for a limited number of end-users and thus can get by with reasonably priced DSL connections. (Interestingly, most of Surf and Sip's Hotspots generate a positive cash flow.) And if the venue owner already had a high-speed pipe to the Internet (e.g. DSL or T-1) in place, then it can use that same service to provide the backhaul for its HotSpot service, resulting in the overall provisioning expense for the HotSpot being much lower than a venue that had to subscribe to a high-speed service specifically for wireless access to the Internet. Conversely, a higher volume location such as an airport, hotel or convention center generally requires more expensive equipment in addition to one or more T-1 lines (DSL usually won't do). This means that larger venues incur higher monthly fixed costs than the smaller venue. However since the traffic volume in these HotSpots is also usually higher, the costs may be offset.

click to expand
Figure 11.9: The brand charges its end-user and pays the aggregator fees for network aggregation, roaming, settlement, support, and software. The aggregator in turn settles with the HotSpot operators, paying a wholesale connect fee for each of the brand's user connections.

The small venue also gains the most from indirect benefits. Although a small HotSpot can receive revenue through roaming agreements within its value chain, these venue owners typically have a limited marketing budget, thus they reap benefit from venue listing on HotSpot operators' and aggregators' websites as an affiliated location, mention of its locale in value chain members' press releases, marketing efforts on its behalf by value chain members, and more customers drawn to the location because of the wireless Internet access. If the venue is near a travel hub, the benefit can be enormous—business travelers are increasingly seeking out Wi-Fi service.

Also, offering a Wi-Fi network as a carrot to attract business (often offering the capabilities as an amenity rather than charging a service fee) can foster loyalty, increase the amount of time customers spend in the venue, and create the opportunity to sell more goods and services. Moreover, the wireless network can provide a platform for future value-added services like location-based marketing ("We have a special on 2003 calendars and datebooks in aisle 3"); loyalty programs ("Welcome back, Ms. Wright, in honor of your fifth visit to our restaurant, we want to offer you a free order of fries with the purchase of our super value meal."); content distribution ("click here to download the latest video game to play until you reach your final destination.")

Thus, ignoring the Wi-Fi phenomenon can not only mean missed revenue, but inaction also holds the potential of incurring dissatisfied customers, lost business and lower profits.

An Evolution

The pricing structure in every layer of the WISP industry is evolving as the industry continues to search for a balance between the price that needs to be charged and the price the market will bear. To illustrate, as this book went to press:

T-Mobile, which previously charged for data transfers at the rate of $.25 per Megabyte above 500 Megabytes per month, now offers unlimited data transfer. Its service options include: a pay-as-you-go plan that charges $6.00 per hour, $.10 per minute thereafter, and a prepay option that costs $50 for 300 minutes (the prepaid minutes expire 120 days after purchase).

Wayport provides unlimited data transfer and its service operations include daily and monthly rates, which vary per venue. For example, at an airport the daily rate might be $7.00, and at a hotel it may run as high as $10.00. The "day" designation may also vary from time of purchase to midnight, a 24-hour period, or from time of purchase to check-out time the next day (in the case of a hotel). The monthly rate is $30 for a one-year commitment with a cancellation penalty or $50 for a month-to-month subscription.

Surf and Sip, on the other hand, offers prepaid cards in increments of 30 and 120 minutes (the hourly charge is $5.00); or one-day ($5.00), seven-day ($20.00) and 30-day ($40.00); the cards are activated at the time of purchase. This HotSpot operator also offers a monthly rate of $20 for a one-year commitment with a cancellation penalty or $30 for a month-to-month subscription.

The contractual area—the various agreements that are executed throughout the industry segments—is also still evolving. The standardization of these agreements, especially those entered into between the venue operator and HotSpot operator, is one of the keys to the success of a sustainable WISP industry. These standardized agreements must resolve such issues as: venue exclusivity, degree of cost and revenue sharing, ownership of infrastructure, ownership of the end-user, roaming criteria, and length of contract.

John Marston, a business development executive for the electronics maker Toshiba, advises the HotSpot industry to pay attention to the market and avoid being overly optimistic about subscriber numbers. His advice is not to spend too much money; the HotSpot operator must "think about every dollar they spend and how they expect to acquire locations." Still, with universal roaming, ease-of-use and enough in-venue marketing, HotSpot economics will become quite compelling in the near future.



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Going Wi-Fi. A Practical Guide to Planning and Building an 802.11 Network
Going Wi-Fi: A Practical Guide to Planning and Building an 802.11 Network
ISBN: 1578203015
EAN: 2147483647
Year: 2003
Pages: 273

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