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two notes on the economics of Hot spots etc.
From: Dave Farber <dave () farber net>
Date: Wed, 11 Dec 2002 07:05:41 -0500
TWO NOTES. DO READ Sky's response after Andys djf From: Gordon Jacobson <gaj () portman com> Date: Tue, 10 Dec 2002 10:50:16 -0500 To: dave () farber net Subject: Andy Seybold Skeptically Looks at Cometa's WiFi Business Model Dave - I have permission from Andy to send this to the IP list and for you to post it if you find it an interesting follow-up to the previous postings. GAJ
In todays Outlook for Mobility Publication, Andy Seybold comments on the ability of Cometa - the new Joint Venture of AT&T, Intel, IBM, Apax Partners and 3i - to make a profit. Gordon Jacobson
Cometa Wholesaling Wi-Fi Access
Wi-Fi hotspots are becoming the next gold rush for the computer and telecommunications industry. But is that gold in the hills or just fool's gold? Last week three big players, AT&T, IBM and Intel, along with two investment companies formed a new company called Cometa. Their plan is simple: Deploy over 20,000 Wi-Fi hotspots in the 50 largest cities and wholesale wireless data to whoever wants to buy it and resell it. Since no terrestrial network has ever made money offering data-only services, what do these folks know that the rest of the industry does not? Okay, let's see if I have this correct. Intel, IBM, AT&T (not wireless), Apax Partners and 3i have formed a new company called Cometa that is going to put into service and then wholesale Wi-Fi access in the top fifty U.S. cities so that Wi-Fi access is only a five-minute walk away from any city dweller and a 5-minute drive away from a suburbanite. With 20,000 Wi-Fi access points? Let's play with some math here. Each access point today can cover a roughly circular area out to about 300 feet from the center. That works out to about 283,000 square feet per access point. 20,000 of these access points will provide about 203 square miles of Wi-Fi coverage spread out over the 50 largest U.S. cities or 4 square miles of coverage per city. To put this in perspective, a typical 850-MHz urban cell site covers a radius of three miles or 28 square miles. This means that Cometa plans to provide coverage equivalent to less than one-fifth of a cell site per city. Access points will be scattered around the cities in locations where groups of people want and need high-speed wireless access. The announcement didn't mention anything about airports so I assume it will leave airports to others and T-Mobile already provides access at Starbucks coffee shops. That still leaves plenty of territory for Cometa. But it will probably run out of access points if it unwires a single university in each city. So I have to ask what the big deal is. There are ten or so hotspot providers today with more than 4,000 hotspots located in more than 300 cities in 43 states. Adding another 20,000 is a significant undertaking but I don't see anything in Cometa's announced plans about aggregating access to hotspots already in place. If this is the case, Cometa will become one of ten or more players that wide-area wireless operators will have to deal with when putting together their own wide-area/Wi-Fi offerings. Cometa admits that the backhaul is one of the most costly parts of putting together a Wi-Fi hotspot system. But since AT&T (the long distance company) is part of this new company it will be able to make use of AT&T's existing high-speed backhaul and thereby save a lot of money. What this means to me is that AT&T will underwrite the cost of the backhaul and many of the hotspots will be located where AT&T already has wired high-speed connectivity, not necessarily where there is demand. But until we see how and where Cometa rolls out its own hotspots it won't be possible to fully understand its business model. There are two established types of hotspot users: Those who travel and want and need access back to their corporate information (using some type of secure Virtual Private Network or VPN) and those who are local to a hotspot location and visit a Starbucks or other caf in order to take advantage of higher-speed access than they have at home. These two groups have very different usage patterns. Local folks want to sit in a caf sipping coffee for several hours while surfing the Internet while business travelers, for the most part, want to set up their system, get to their corporate LAN, download their email, check their calendar, perhaps retrieve a file and get off the system. Cometa appears to be aiming at both of these groups and we will have to wait to see whether it can be successful as a wholesale Wi-Fi service provider. With today's business models it is difficult to figure how a wholesale company can make money. On its Web site, Boingo states that hotspot operators get $1.00 per connection through Boingo. If they sign up Boingo users they receive an additional finder's fee. At $1.00 per connection how can a hotspot provider that doesn't have high-speed backhaul in place for some other purpose stay in business? One keys to Cometa's success or lack thereof will be how cost effectively it can set up this business and how lean it can run. The company will be located in two locations, one on the East coast and one on the West. Even if AT&T gives away its backhaul (which I doubt), I can't see how Cometa can make a profit. None of today's hotspot providers are making any money there have already been a number of failures (T-Mobile bought MobileStar at pennies on the dollar). I have to wonder what secret sauce Comenta has that the others don't. Yes, the demand for Wi-Fi access is growing and yes, wide-area operators are trying to figure out their own play in this space. But the number of mobile users who are willing to camp out at a location, boot up their notebook computers, log onto the provider for that location and then use the service (at a reasonable price) is a small fraction of the notebook user population. I believe that the only way to justify the cost of an extensive public Wi-Fi hotspot network is if there is a value proposition beyond the pay-for-usage model. The benefits realized by the company that bills the customer for Wi-Fi service must go beyond the fees they receive from customers. Intangible benefits include keeping a wide-area voice-and-data customer from jumping ship to another network with a combination wide-area and hotspot system, adding revenue per user (ARPU) that can be quantified or perhaps even selling more coffee. I believe in hotspots and I use them often (but only the ones with reasonable pricing). I also use my wide-area wireless data PC Card often. I do want a combination Wi-Fi and wide-area wireless data service but I want to receive a single, reasonable bill. Cometa's idea of becoming a Wi-Fi wholesaler is interesting and if it were the only company a wide-area wireless network had to deal with in order to obtain a large enough Wi-Fi footprint I might believe that it had broken the code. Someone at Intel or IBM or AT&T or all three must believe that there is money to be made as a Wi-Fi hotspot wholesaler. I welcome any of them or the folks at Comenta to share their business model with me and prove to me that it can make money as a standalone business for the partners that have invested in it. In the meantime, the Wireless LANd grab continues. Wide-area wireless companies are trying to figure out how to put together the best locations at the best pricing for their own customers. They are trying to figure out how to charge for both wide-area and Wi-Fi data access because they know there is a demand. But it appears to me that Wi-Fi hotspots may become similar to the dot-com frenzy: lots of folks believing all of the hype that surrounds this new, hot set of services getting into it without filling in the blanks on a spreadsheet. Those who move ahead because there is a business case, those who can prove to their investors that they can make money here and those who have stepped back and looked at the total size of the market and how much of that TAM they can capture should be moving full speed ahead. Those who are jumping into the Wi-Fi hotspot market because the industry is looking for the next big thing and Wi-Fi is it had better take a few days off, walk around the block or on the beach, and then sit down with their spreadsheets and figure out how they are going to make money at the Wi-Fi game! Andrew M. Seybold
------ End of Forwarded Message ------ Forwarded Message From: Sky Dayton <[mailto:sky () boingo com]> Dave, Andy is a smart guy, but I think he's underestimating potential demand. If busy hot spots will only generate a few connections a day, even in venues with hundreds or thousands of daily visitors, then I agree the economics don't work. However, busy locations are likely to generate 100's of connections per day. At $1-$2 per wholesale connection, plus marketing bounties, it's not hard to see how hot spots can be profitable. Even with only about 10 connections a day, a small hot spot can make great money for a business owner. For example, here's the monthly economics of a cafe hot spot with conservative assumptions: Traffic assumptions ------------------- Daily cafe visitors 300 Conversion rate 3% Monthly connects 270 Monthly in-venue sign-ups 10 Revenue ------- Wholesale connect revenue @ $1.50 each $405.00 Bounty revenue @ $20 200.00 Total revenue $605.00 Costs ----- Equipment depreciation ($500 over 36 mo) $ 13.88 Business DSL 100.00 Maintenance 50.00 Total monthly cost for hot spot $163.88 Monthly operating profit $441.12 Note that in this example, an aggregator like Boingo handles all the marketing, technical support, software development & distribution, billing, bad debt and all other back-office functions, so the operating profit goes in the pocket of the venue owner. A higher volume location such as an airport, hotel or convention center requires more expensive equipment and a T1 line, so fixed costs are higher. However, the profit potential is also much greater in these locations because they have much higher traffic. Since monthly costs are fixed, the key to profitability is conversion rate -- the percentage of visitors that connect. Many external forces are pushing this number up, including Metcalfe's Law (more hot spots = more value for everyone, so long as there is universal roaming which is what we're trying to do at Boingo), in-venue marketing (these materials are supplied by Boingo at no cost to member spot operators), Wi-Fi awareness and the proliferation of Wi-Fi devices by enterprises, home users, and by Intel, Dell, Sony and dozens of other OEMs. There has never been a greater push to put low-cost wireless radios in the hands of the mass market. There are still challenges, such as hot spot scarcity, universal roaming, ease-of-use and awareness that a hot spot even exists -- challenges the industry must overcome. However, it's a worthy goal because the economics are quite compelling, something the smart folks at T-Mobile, Wayport, Cometa and other hot spot companies have figured out. Sky ------ Forwarded Message ------ End of Forwarded Message ------------------------------------- You are subscribed as interesting-people () lists elistx com To unsubscribe or update your address, click http://v2.listbox.com/member/?listname=ip Archives at: http://www.interesting-people.org/archives/interesting-people/
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- two notes on the economics of Hot spots etc. Dave Farber (Dec 11)