Public WLANs: The New Consumer Amenity
(Please note: Originally published in April 2003, exhibits from this report can be seen in the downloadable .pdf copy)
April 2003
Retail Brands: Beware the Land Grab
“WiFi”, or wireless fidelity technology, enables WLANs (wireless local area networks), both public and private. WiFi is good news. Good for consumers networking their homes. Good for enterprises wirelessly connecting their campuses, offices, and field workers. Good for network infrastructure manufacturers, at least until price competition does its predictable work on margins.
Telecom carriers are increasingly eager to recruit national retail brands to join their WiFi networks. Starbucks, for example, prominently features the Deutsche Telekom “T-Mobile Hotspot” service at many of their major, high-traffic US locations. The carrier proposition is basically: “we’ll set up your stores with WiFi access, label them as our (T-Mobile, Cometa, etc.) access point, contribute co-marketing dollars, and make your customers happier in the bargain”. And why not? So, through this means, T-Mobile, for example, has recruited over 2,500 locations in the US.
Retailers need to look again.
Telecom carriers aren’t telling retailers with valuable locations what’s really driving their apparent “generosity”, and what retailers have to lose by giving up control over their own valuable locations.
It turns out WiFi is more directly valuable to branded retail location owners than telecom carriers are letting on. Carriers are becoming aggressive players in the WiFi land grab for three reasons:
- Marginalizes ‘next generation’ cellular economics Carriers would like to control public WiFi access because it cannibalizes 2.5G cellular data services, further isolating them into an even smaller, less economically viable niche (see our December 2002 publication: “How High-Risk Business Models Are Jeopardizing 3G Wireless”). With control of the full wireless services portfolio, carriers could create bundled value (cellular + WiFi) offers and create arguably greater convenience for their own subscribers.
- The beginning of a ‘carrier-unfriendly’ trend towards diverse, low-cost access The 802.11B standard (which, at the moment, is what most people generally mean by “WiFi”) is just the beginning of a set of related wireless broadband access technologies. The 802.11 and 802.16 (“WiMax”) families can provide progressively greater bandwidth and geographic coverage, with economics unfavorable to traditional carriers “last mile” oligopoly. While carriers can’t stop this trend, they would prefer to own and control networks of this new and threatening type.
- Carriers trumped by branded locations The economics of providing public WiFi access services favor branded location owners over even a ubiquitously present wireless carrier (e.g. T-Mobile, Cometa, etc. some years from now) following traditional per minute, per packet, or even flat-rate pricing models. Stores, restaurants, and hotels can create more value than carriers, provide greater customer satisfaction, and strengthen their brand equity all at once.
Carrier-Centric Today…
While there is enormous fragmentation and variation in approaches to delivering public WiFi access, they net out to three prevalent business models (Exhibit 1):
- Free WLANs: (e.g. NewburyOpen.net in Boston) services are provided free of charge to consumers in a (small) geographic area. The infrastructure is paid for by a combination of small subsidies by participating locations (generally independent small businesses), and advertising value to the providing ISP (low CPM to a valuable, highly-involved set of customers). We are excluding from this model the grass roots, “Pringles can” approach, where consumer DSL or cable modem access points are made wireless for public access, generally in violation of the ISP’s Terms of Service.
- Fee-Based Services from Cellular or Broadband Carriers: (e.g. T-Mobile “Hotspot”, Cometa, Wayport) service pricing modeled after today’s cellular carrier “bucket plans” (i.e. x minutes/month, flat rate “unlimited”, prepaid minutes, etc.), with subscribers paying directly for connectivity and carriers competing with rates and number and types of locations.
- Private Label Networks: (e.g. Room LinX) services are provided and branded by the sponsoring location, the revenue model is at their discretion, and infrastructure provider acts as outsourced subcontractor for installation, maintenance, authentication and billing for a fixed monthly fee.
In each of these models the value created, whether charged for or not, is the dollar-equivalent value of the subscribers’ broadband sessions. Their “value” is established by today’s (declining) prices from fee-based carrier WiFi services.
Consumer Amenity Tomorrow
It would probably shock traditional telecom carriers to think of public WLAN access — that sexiest of new technologies — simply as a free latte, extra French fries, or premium toiletries — in other words as a consumer amenity which is a soft-dollar “give away”, but adds incremental value to an existing retail product or service at, say, a coffee house, restaurant, or hotel.
Emerging now is a fourth business model for WiFi access:
Retail Chain Value-Added: conditionally “free” WiFi access to selected brand-loyal customers and/or access in exchange for “soft dollar” payments (i.e. airline miles, hotel frequent stay points, etc.). In this model WiFi access is not geographically ubiquitous (e.g. the New York metro area), but “brand ubiquitous” (at most Panera restaurants, for example).
There are several important benefits, soft and hard, to the location-owning brand in granting conditionally free WiFi access to its customers:
- Reinforces customer loyalty and goodwill, increasing brand equity Rather than pay a telecom carrier, the retail chain customer associates the received benefit with the retail brand (“how nice of Panera to give this to me…”)
- It probably costs next to nothing Our survey of several major restaurant and hotel chains indicated that most stores and field locations already had (wired) broadband access in order to support internal IT applications (web-based management systems, download from Point of Sale devices, etc.). So the customer goodwill of “free” access at store locations is generated at negligible incremental cost (WiFi access points, cabling, additional security)
- A source of incremental revenue and/or liability reduction Retail chains can treat WiFi access as an opportunity to drive up-selling (buy 5 lattes, get an hour of free access, upgrade to club floor, get one night free broadband) or liability reduction (annual subscription for cashing in x reward points)
Analyzing the Economic Benefits
Based on discussions with retail chains, we analyzed three different scenarios: a national restaurant chain with approximately 1,500 eligible (company-owned, high-traffic) locations, a US-based global airline with clubs at 30 domestic locations, and an upscale hotel chain with around 100 North American properties each averaging about 250 rooms
These analyses focused on “hard”, cash-equivalent value, not softer brand benefits, and assumed no broadband presence — our model allocates that cost to providing WiFi service, even though in most cases it has already been paid for.
WiFi offered by the location owner adds significant incremental, hard dollar value, often exceeding the value provided by telecom carrier alone.
Exhibit 2 illustrates value per session, where session length varies depending on the setting — a customer at a casual restaurant or café, for example, might spend twenty minutes of connect time per session, a hotel guest one or more nights.
The “customer value” is simply a computation of what such a session would cost a subscriber at today’s broadband market prices.The “provider value” is the incremental value received by the retail location, based on up-sell probabilities, relevant prices of the goods or services delivered at that location, etc. In the airline case, it is an amortized amount assuming 15,000 frequent flyer miles are cashed in for an annual WiFi subscription, at prevailing award costs/mile.
What is interesting is how it all adds up.Exhibit 3 shows the aggregate value created by incremental purchases (or, in the airline case, reduction in annual award redemption liability). The “key ratio” is industry specific. For retail stores, it is the percentage of annual same-store sales. For airlines, the percentage of annual reward liability. For hotels, the percentage of “ADR” (average daily rate) at included properties.
If you are not familiar with, say, restaurant chains, you may not realize that an 0.5% increase in same store sales is far from trivial. Take Starbucks as an example: the Starbucks card initiative has produced around a 1.5% increase in same-store sales based on a combination of increased purchase frequency and interest on the float from daily aggregate cash balances on the card product.
What Does It Take To Deliver?
Retail chains, understandably, have taken a wait-and-see attitude about the relative value and hassle of delivering WLAN access to their customers. Approached by carriers or local ISPs, some have unwittingly given away valuable access in the early “land grab” stages of public WiFi deployment.
The “hidden secret” of WiFi is that it is so simple to deliver, yet so valuable to a retail brand. It can be delivered at negligible cost (several hundred dollars per location), and once installation is contracted for and a simple security policy established (generally partitioning the public WLAN separately), there is minimal on-going operating expense.
The key elements (Exhibit 4) of delivering a branded, retail location-sponsored WiFi service are:
- Identification: controlling which customers get access and under what terms
- Compensation: what rules or soft-dollar charges will you impose on your customers
- Implementation: tying the service to a loyalty program, imposing effective but simple security measures
Who Should Get It?
There is one further element to be considered, before delivering any access at all — segmentation.Public WLAN access is demonstrably valuable and very cheap to deliver. But it is far from a commodity, posing the question of how to define the target customer segments. The objective is to serve the broadest possible base while preserving some “premium” differentiation or loyalty value until public WLAN access becomes more commoditized
In some cases (airlines for example) there are clearly-defined, already existing customer segments of premium passengers and club visitors. For other types of consumer products and services the segmentation will be less obvious, and among the drivers will be:
- income demographics: can skew higher, even for “discount” brands (for example, high income demographics found in Costco customers)
- region/location: urban, suburban, ex-urban
- behavioral attributes: students, stopping point for field workers, professionals, etc.
- broadband penetration: expanding DSL and cable modem service will acclimate more potential customers to broadband as a “must have”
- device proliferation: WiFi equipped handheld devices will broaden the market, make casual, shorter usage more prevalent and overall demand more widespread
No matter what the product or service, as the competition for WiFi locations intensifies retailers should pro-actively assess how to best capture
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1 April 03
