That, at any rate, is the idea behind Wi-Fi, the much talked-about radio-linked LANs (local area networks), known to techies as “wireless fidelity.” To get into the Wi-Fi game, all a budding entrepreneur had to do was get a bunch of coffee shops, restaurants or even bus stations to pay for the installation of a network. He’d maintain the operation for a fee, as well as a cut of the revenues, and customers who bought the service would then market themselves as cool Wi-Fi hot spots where local Webheads could come to hang out and surf. Users would be charged a monthly fee for Wi-Fi access. Hot-spot owners would bet that being digital would bring in business.
Sounds suspiciously like the mantra of the first Internet revolution–build it and they will come? You bet. In an otherwise moribund tech sector, the Wi-Fi boom has whipped up passions not seen in years. Everyone, it seems these days, wants to be a hot-spot operator. Yet amid the furor, familiar warning signs are beginning to appear. One industry research firm, Gartner, charts what it calls a “hype cycle” for new technologies. Hot spots are coming off their peak, says analyst Jason Chapman, and are poised to plunge into a “trough of disillusion.”
In June, Lars Godell at Forrester Research created a stir with a report declaring that business models for most public Wi-Fi providers don’t hold up. “The gold rush is on as if the dot-com boom and bust never happened,” he warns. Forrester calculates that in Europe, 53 million laptops and PDAs will be equipped for Wi-Fi by 2008–but that only 7.7 million people will bother to use the technology. Another industry group, Pyramid Research, predicts that while global Wi-Fi users will soar to 707 million by 2008, average revenue per user will drop from $30 per month to $3 as prices are forced down in order to draw customers. Almost no one has yet seen any measurable increase in business from merely offering Wi-Fi access.
The first hints of a shakeout, in fact, can already be seen. Nearly a year ago, one closely watched Wi-Fi start-up, MobileStar, ran out of money. The big cell-phone spinoff of Deutsche Telekom, T-Mobile, quickly snapped it up. But since then, several other pioneers have folded or merged, and many are struggling. It won’t be as ugly as the dot-com crash, says John Yunker of Pyramid Research, but many of the hundreds of stand-alone companies in the field are likely to perish.
There are good reasons to like Wi-Fi: it’s much faster than current mobile-phone connections, and the spectrum is free. To get into the business, all a budding Wi-Fi operator has to do is crawl behind a customer’s coffee bar, connect a radio transmitter to a broadband telecom line, then arrange some software for handling credit cards. Presto, he’s in business. Over the past two years, eager entrepreneurs have hooked up thousands of hot spots around the world, fueled by venture capitalists afraid of missing the next big thing and egged on by optimistic analysts making the rounds of technology conferences turned pep rallies. Resellers such as Boingo have cropped up to coordinate accounts so that consumers can roam the world. And this year, AT&T, Intel and others formed a company called Cometa Networks, which will build a giant network to lease to operators across the United States. It’s already in trials with McDonald’s.
Hot spots are now in that weird bubble –phase when exuberance coexists with red flags. Wi-Fi start-ups have been racing to lock in prime locations, sparking a fierce competition for the best spots. “It would be suicide to get in the game now; you might as well give your money to charity,” says Rick Ehrlinspiel, CEO of San Francisco-based Surf and Sip, one of the first independent hot-spot operators in the United States. But for those already in, he believes, a flood of Web-eager customers is guaranteed. “By the end of the year there’ll be a jillion people looking for an autobahn to run that Porsche on,” he raves by phone from London, where he is personally installing his network in the Caffe Nero chain. (Employing just five people, and choosing sites carefully, allows him to break even, he says.)
The main problem is that consumers aren’t cooperating with the vision. “No one is making money, at least not yet,” says Sean O’Mahony, CEO of FatPort, Canada’s largest hot-spot provider. Not enough people use laptops, and those who do aren’t willing to pay enough for the service to keep operators afloat. Corporate IT czars are still too worried about security for vital business information. And while plenty of people are curious enough to road-test the idea in Lufthansa lounges or on Swedish trains, few care enough to shell out money for it. Operators are experimenting with prepaid cards and monthly rates, which average about $20 in the United States and can easily double or triple that amount in Europe. “That’s the big question: what are people willing to pay?” says Matt Lewis, analyst for tech researcher ArcChart in London, who thinks the hot-spot owners will have to swallow the cost and give Web access away for free.
Running a hot spot makes the most business sense where broadband infrastructure already exists. In hotels, Wi-Fi is attracting travelers in the way that air conditioning or cable TV once did. In Britain, Inspired Broadcast Networks already controls a network connecting its array of music and game machines in pubs, which has made it easy to begin offering connections to a Wi-Fi network called the Cloud. Square Mile International has just begun to service British marinas. Managing director Dominic Killinger says he found a pool of wealthy customers frustrated with checking for weather and tidal patterns over mobile phones, and eager for an excuse to spend more time working while on their boats.
But most of the spots who signed up with the operators are little outlets struggling to cover the $500 to $1,000 per month they must pay for their broadband access. O’Mahony calculates that operators in North America need four customers with monthly accounts in each location, but even that is a stretch. He averages less than three. Another unexpected problem: cafe owners gripe that surfers sip a cappuccino and hog the tables, instead of bringing more business.
As with the Internet revolution, the big established players with deeper pockets will most likely be the ones left standing. Ehrlinspiel’s ultimate aim is to sell Surf and Sip to a telecom company. O’Mahony expects FatPort to be the eBay of Wi-Fi, but only because his business model includes leasing mobile-phone service. Already, T-Mobile is the biggest global player. In pairing up with Starbucks in the United States, London and Berlin, as well as hotels and other partners, it now has 2,600 hot spots worldwide and expects 5,000 by year-end.
Just as the demise of online pet-food shops nonetheless left the Internet in-tact, Wi-Fi technology will survive a shakeout. It’s all part of the scramble to figure out the best way to transmit mo-bile data, instead of just voice. Equipment makers are now doing their part to get the hot-spot industry rolling. Intel, a big believer in Wi-Fi, is building wireless capability into its new high-end chip sets. Laptops, smart phones and PDAs increasingly include wireless access. Will all this be enough to tempt consumers to surf the Web in a public place? Only if the price is right: free or close to it. The companies that offer them the service can only hope that at least they’ll pay for their coffee.
