The Evolving Hot Spot Market for Broadband Access

Transcription

1 The Evolving Hot Spot Market for Broadband Access Alwin Mahler Telefonica Deutschland GmbH 1 Charles Steinfield Michigan State University 1 Introduction Wireless Local Area Networks (WLANs) are proliferating throughout the world at an ever increasing pace, evolving from a private means of extending LAN access on company premises to home-based networks, community networks, and now public free and fee-based networks. Due to the growing presence of WLANs, some are calling it a disruptive technology that may threaten the status of established players, especially given mobile network operators moves to establish their own forms of wireless broadband data access (Camponovo et al., 2003). The low cost of WLAN hardware and the ease of installation makes it available to individuals and small venue owners that otherwise would not consider implementing network access throughout their homes, offices or shops. The utility of WLANs to cheaply and flexibly extend LANs in the workplace, or provide home area coverage in households subscribing to DSL or cable modem service is widely recognized. These are places where individuals require only limited mobility, spend extended periods of time every day, and have already invested in the Internet connections. Less clear, however, is the ultimate potential afforded by the rapidly expanding number of public WLANs (PWLANs) appearing in such places as airports, cafes, and hotels (Afrough, 2003, Economist, 2002; 2003). In many respects, the approaches to PWLANs now known as hot spots resemble those of the dot.com boom period in the mid to late 1990s. That is, new entrants are testing a wide variety of innovative business approaches, and many of the first movers have already exited the market. Moreover, just as established retailers eventually learned that the Internet offered opportunities as a complementary channel in the latter stages of the dot.com period (Steinfield et al., 2002), wireline and mobile network operators are also now entering the hot spot arena exploring the complementary opportunity arising with this technology. In this paper, we provide an overview of the evolving hot spot market and suggest four broad conclusions. First, the installed base of user devices is rapidly approaching a critical mass, and serving these users presents a significant business opportunity. We will continue to see both free and fee-based hot spots based on a wide range of business models according to the diverse interests of those involved in the public WLAN value chain as well as the different requirements of users. Second, the marketplace for PWLANs is in an exploratory phase in both technology and business models. The commoditization of WLAN access and its growing use in an increasingly diverse array of devices will spur continued service innovation and create additional opportunities for owners and operators of hot spots. Third, contrary to those who see PWLANs as a threat to mobile network operators 3G investments, our analysis suggests that the two technologies are more likely to be complementary than competitive. Similarly, fixed operators 1 Disclaimer: Any statement contained in this article are statement of the author only and do not necessarily reflect the opinion or viewpoint of Telefónica Deutschland GmbH.

2 find that wireless broadband access complements their wireline broadband services. WLANs in fact are not used to replace wired broadband access they provide access to access. Fourth, even though the business models are still evolving, using a resource-based view from organizational theory, we propose that existing fixed and wireless network operators are more likely to succeed with PWLANs than the new entrants. However, the likely role of the new entrants is to stimulate the growth of the PWLAN market, creating greater opportunities for the established network operators. The remainder of the paper is organized as follows. Section two provides a brief introduction to WLAN terminology and technology. In section three, we illustrate the rising popularity of PWLANs with recent statistics on WLAN diffusion and hot spot growth around the world. Section four explores the competitive landscape of the hot spot market by examining the different types of companies in the PWLAN value chain, their business approaches, and the various motivations for entering into the market. Section five explicitly addresses the issue of whether PWLANs represent a threat or an opportunity to existing mobile and fixed network operators. Finally, section six summarizes the basic arguments provided in the paper in the context of the four conclusions noted above. 2 Overview of WLAN Technology Various forms of wireless local area networks have been developed, including those using infrared as well as radio frequency transmissions between user devices and the network access point. Beginning in 1990, the IEEE Working Group began working on standards for wireless local area networks, with a first standard emerging in 1997 that provided 2Mbps in the 2.4 GHz Industrial, Scientific and Medical (ISM) band (Camponovo et al., 2003; Malladi and Agrawal, 2002). This band is reserved for unlicensed applications. Early usage was in organizational settings, enabling companies to extend existing LANs without requiring new cabling. In 1999, the b working group developed a standard allowing connections using the Ethernet protocol at 11Mbps speeds from base stations covering a range of about 50 meters. In order to ensure a positive user experience, manufacturers formed the Wireless Ethernet Compatibility Association (WECA) to guarantee interoperability among b products. WECA developed the brand Wireless Fidelity (Wi-Fi) to represent compatible equipment and software, and began certifying products in In 2002, WECA changed its name to the Wi-Fi Alliance to better promote the brand around the world. Due to Wi-Fi s ease of interconnection with the dominant fixed LAN standard (802.3, which is based on Ethernet), Wi-Fi has eclipsed other WLAN technologies such as HomeRF or infrared. A basic Wi-Fi network requires an b base station connected to a wired LAN or to some form of Internet access line such as a cable modem, DSL line or a T-1/E-1 line. Individual devices such as laptop computers, desktop computers, and PDAs need an b card to establish communications with the base station (also called an access point). The line connecting the access point to the nearest fixed Internet node is often called a backhaul line. Backhaul represents a significant, but often underestimated cost in public wireless LAN networks. It is also important to point out that true Internet access speeds are dependent upon the speed of the backhaul line, despite the potentially higher bit rates available between user devices and the access point. If an access point is connected to a low tier DSL service providing only 200 Kbps, then that is the maximum Internet access afforded by the Wi-Fi network.

3 Wi-Fi technology is continuing to develop. New IEEE working groups have developed higher speed versions, most notably a and g. Both of these versions support connections at 54Mbps, with a operating in the 5GHz ISM band, and g in the 2.4GHz ISM band. 2 Although the a standard was developed first, it was held up due to conflicts with an emerging standard known as HiperLAN2 under development at the European Telecommunications Standards Institute (ETSI). Moreover, it is not backwardly compatible with the now extensive installed base of b equipment due to its higher frequency range. For these reasons, g equipment, which is backward-compatible with b, has enjoyed early success in the marketplace. However, because the 2.4GHz band is becoming more congested, many believe that there is a role for a products, especially as dual frequency chipsets make it possible to incorporate existing b user devices into these networks. The ink is barely dry on the a and g standards, and new wireless LAN technologies are already on the drawing board. The e committee is working on quality of service issues, so that Wi-Fi may be more applicable for voice over IP or video services. The i committee has worked on new security methods in order to counter the growing concerns with the existing approach known as Wireless Equivalent Privacy (WEP). Perhaps the most significant new developments, likely to usher in a wide range of new applications for Wi-Fi, are the efforts to support outdoor and mobile applications in metropolitan area networks (MANs). The working group is developing a new standard known as WiMax, which will support higher capacity Wi-Fi connections for both fixed radio access and mobile access at normal vehicular speeds. WiMax base stations have a range up to 70 kilometers. The working group is developing Wi-Fi for situations involving high speed mobility up to 250 km per hour making it feasible for WLAN access on such vehicles as high speed trains. Both of these newer outdoor and mobile Wi-Fi standards are being defined for licensed and unlicensed spectrum. Wi-Fi is also appearing in many new devices, not just in laptop and desktop computers. Many PDAs have slots for Wi-Fi cards, and the first Wi-Fi capable phones are appearing on the market. The growth of devices will undoubtedly spur even more innovation in the public wireless LAN marketplace. As a final note, it is important to recognize the role of regulation in the diffusion of Wi-Fi. Wi- Fi spectrum is unlicensed it is not auctioned, and no one pays any fees to use it. This means that manufacturers can simply produce equipment that meets the appropriate power requirements, and anyone can install a Wi-Fi network where they want when they want. 3. This generates bottom up growth, but does create some governance problems related to interference, congestion, and the like. Additionally, in some countries where operators spent heavily on 3G 2 These speeds represent the raw data rate including overhead bits. Even under the best of conditions, the actual user throughput is roughly half the raw data rate for all versions of the family. 3 Regulations in some European markets (notably in the south) still hinder the rollout of broadband Wi-Fi services although Spain, Greece and Austria are now considering opening their 5 GHz bands for private and public access. As the benefits become apparent in France and elsewhere, other countries will free up spectrum for Wi-Fi. These developments mean that European enterprises can finally start integrating wireless LANs into their telecom strategies.

4 mobile licenses, there are concerns that Wi-Fi could be seen as a substitute product, making it more difficult for licensed operators to recoup investments. 3 The Growing WLAN and Hot Spot Market The installed base of b networks has grown rapidly in the past several years. Wi-Fi installations can be broadly categorized according to whether they are private (e.g. in home or corporate settings) or public (e.g. standalone hot spots or networked hot spots) (Herslow et al, 2002; Camponovo et al., 2003). The early growth was dominated by private Wi-Fi installations, with spending in the enterprise market estimated at nearly $1.5 billion, and in the home market at $305.9 million in 2002 (IDC, 2002). At the same time, IDC estimated public WLAN spending to be $124.7 million. More recent estimates reveal the continuing explosion in the Wi-Fi spending, with one estimate from Proxim putting overall spending in 2003 at $3.5 billion reflecting 30% growth. Much of the new growth is being fueled by the rapidly growing number of public access Wi-Fi hot spots. According to Gartner Dataquest (2003), the worldwide number of locations with public WLAN hot spots rose from just over in 2001 to in 2002 and is further expected to significantly increase to about in 2005, levelling off to about by 2008 (see Figure 1). Gartner Dataquest further estimates that the worldwide number of public hot spot users will show dramatic growth in the next few years, rising from 2 million users in 2002 to 10 million in 2003 and up to a projected 75 million in 2008 (see Figure 2). Figure 1. Hot Spot Location Growth Source: Gartner Dataquest, 2003 Estimates regarding the number of public hot spots in particular regions vary, with some sources suggesting that the largest number can be found in the U.S. and others finding that the Asian market has the greatest growth potential. A Detecon (2003) study estimated that by 2006, 61% of hot spot user users would be in the US, with 26% in Europe and 13% in Asia (Detecon 2003). However a just released Pyramid Research study estimated that more than twice as many hot

5 spots will be put into service in Asia (24,000) this year as in the U.S. (10,000) or Europe (10,000) (Sharma, 2003). In the Asia Pacific region, Korea based on its extensive broadband infrastructure is the leading country. In Europe, early adopters could be found in the Nordic Countries, with the central European Countries catching up (i.e. there are currently about 1200 hot spots in Germany against about 150 last year) Figure 2. Hot Spot User Growth (in millions) Source: Gartner Dataquest, 2003 The rapid growth of Wi-Fi in both private and public settings is also seen in the overall growth in spending on the various equipment and components needed to build a WLAN infrastructure. IDC estimates that the WLAN semiconductor market, for example, will grow 13% CAGR, to a volume of $1.1 billion by 2007 (IDC, 2003). They further estimate that more than 80% of all professional laptop PCs will have an WLAN interface by These figures encourage the various hot spot operators to build out the hot spot infrastructure to give potential users a place to connect. As cards find their way into PDAs and cellphones, we can expect further demand for a public WLAN infrastructure. 4 The Wi-Fi Value Chain and Competitive Landscape It is possible to outline the basic generic activities that are necessary to establish a standalone or network of Wi-Fi hot spots. In Figure 3 below, we depict four functional areas that may or may not be fulfilled by different players in the hot spot value chain. In the subsections below, we describe the primary functions at that stage in the value chain. We further identify some of the key players, and note their general approaches and prospects for success in the hot spot market. A general observation is that there is a wide variety of business approaches, and we see greater innovation in business approaches moving along the figure to the right for firms that are closest to the end customer.

6 Figure 3. The Wi-Fi Hot Spot Value Chain Equipment/ Components Location / Venue Venue Operation Service Provisioning 4.1 Equipment and Component Provider At the upstream end of the value chain, WLAN hot spots require an installed base of hardware, such as base stations for the access points and cards embedded in laptops and handheld devices. Cisco, Lucent, and Linksys are examples of firms active in this stage of the value chain. In addition, semiconductor manufacturers such as Intel serve to provide the chipsets used in a, b and g, which may be provided to equipment providers. Moreover, manufacturers of the access devices themselves play a role in creating the hot spot market, as evidenced by Apple s early moves to bundle Wi-Fi in their laptops to help develop the mass market. Today, PDA and phone producers also build Wi-Fi into their devices. These device producers have a stake in the success of hot spots since such locations can give eventual buyers more reason to acquire the PDA or phone. Generally companies operating at this end of the value chain sell to other manufacturers or to businesses. However, the growth in the private residential market for Wi-Fi cards and equipment shows that these companies also sell directly to end consumers. In general, the motivation for these players to promote Wi-Fi is quite simple to stimulate more sales of components and equipment. If more private and residential users have Wi-Fi capability, the overall demand for hot spots should increase. This creates new demand for players at this stage of the value chain, since each hot spot needs one or more base stations. With greater volume come lower prices, further driving up demand. Some equipment suppliers, such as Sputnik, play an even more direct role in stimulating the hot spot market, by bundling software with base stations that enables buyers to more easily manage users and accounts. The outlook, then, for players at this stage is quite good, since all trends indicate that they are having a positive impact on hot spot growth. 4.2 Location/Venue Provider The venue is the specific location hosting the Wi-Fi access point, and should have attributes that encourage Internet access seeking patrons to visit. Typical locations are venues such as hotels, airports, other transportation terminals, and convention centers, which may involve a captive audience of business people seeking to make productive use of travel time or time out of the office. Indeed, companies interested in developing hot spot networks eagerly sought out exclusive relationships with desirable hot spot venues to enhance their positioning in the market. Other popular venues include cafes, restaurants, and bookstores all places where potential users congregate for extended periods of time. Large chains are particularly attractive since this can

7 minimize the transaction costs that hot spot providers face in securing exclusive rights of access. Among the more noteworthy chains hosting hot spots are Starbucks, with the hot spot network originally built by Metricom, but now run by T-Mobile, and MacDonalds, which is attempting to generate more productive use of its restaurants in an alliance with Cometa Networks. Venue owners have many different motivations for establishing hot spots. In all cases, the venue owner believes that the hot spot provides some additional value to customers. The additional value added by the hot spot must be enough to justify the investments required, including the Internet connection, if one does not already exist, the access point, operating software, and the time spend on operation and management of the facility. Some see this as a premium service, however, and either charge directly for hot spot access, or allow an external hot spot operator to install and operate an access point in return for a revenue sharing arrangement. Others view it as a form of customer service, and do not charge at all. Venue owners who offer Wi-Fi access at no charge may do so for a variety of reasons, including: increased customer traffic leading to more sales increased customer loyalty leading to more profit per customer and lower retention costs greater sales as customers stay longer at the venue due to their use of Wi-Fi opportunities for advertising, such as ads on the Web page that launches when customers connect to the Internet at their venue opportunities for cost reductions if customers actually use their local pages to access services (e.g. ordering items from the venue) providing network access to mobile employees at such locations as construction sites which would otherwise be impossible to connect via wired access. Venue owners face some risks when they invest in infrastructure such as Wi-Fi that is rapidly evolving, but not directly related to their core business. For example many hotels invested heavily in new fixed telephone systems several years ago, only to experience limited usage due to the rising popularity of mobile phones. Some cafes or restaurant have also found that WLAN users often occupy a table for long periods of time, with minimal extra food and/or beverage consumption. In some cases, hot spots are provided free of charge in community sites where usage is subsidized by the end users in a collective manner, such as at a library, school or community center. Both fee-based and free hot spot venues are proliferating, creating more places where people can use their Wi-Fi equipped devices, which in turn stimulates further purchases by end users and additional demand for more venues. One important functional requirement for venue owners is that they do provide the connection back to the Internet from the access point (also called the backhaul connection. For this reason, many venue chains (e.g. MacDonalds, Starbucks, etc.) partner with network service providers who offer the line plus other complementary IP services such as a VPN.

8 4.3 Hot spot Venue Operation Venue owners may install, operate, maintain and market their Wi-Fi network, or they may outsource these tasks to a third party specialized provider. Many hot spot networks are installed and operated by such specialized providers as Wayport in the U.S. and Monzoon in Germany and Switzerland. These companies build networks in hotels, airports and other places frequented by nomadic workers. Specialized hot spot operators seek exclusive deals with venue owners to build and operate Wi-Fi networks, and then share revenues from the usage fees charged to customers with the venue owner. Also, in order to provide wider coverage and enhance customer value, hot spot operators may forge agreements with each other to permit account holders to roam across different operators systems. Some Wi-Fi network providers specialize in the installation of b networks in community locations with free access. For example, Tech Superpowers provides the NewburyOpen.net on Newbury Street in Boston. Free Wi-Fi is available at retail outlets, cafes, and other businesses on Newbury street. The hot spot provider feels that the cost to administer a fee-based network exceeds the anticipated revenue, and sees the main benefit of putting in the network for retailers to be advertising. Pop up ads and the general exposure they gain helps them land contracts for software and other technical work. Various models of cooperation between venue owners and hot spot operators exist, with some mixing the two value chain stages. For example some airports, such as Zürich or Munich have decided to built up and run the WLAN infrastructure by themselves, but offer the network to service providers who then sell and market it to the customers. The airport can provide its own information over the network as a service to its customers for free, but allow the various hot spot service providers to market Internet access on a fee basis. In order to address concerns about the inadequacy of coverage, many of the early entrants, such as Mobilestar with its efforts to provide hot spots in Starbucks cafes, followed a build it and they will come strategy. The high costs for network build-out, coupled with limited revenues from fees created an uncertain economic picture for these players. As an alternative strategy, companies such as Wayport in the U.S. and Monzoon in Germany and Switzerland install and maintain networks for other players further up in the value chain, operating in effect as a hot spot wholesaler and minimizing the transaction costs associated with individual customer accounts. Even today, however, there are plans by would-be hot spot network operators to build large-scale networks of Wi-Fi access points in strategic locations (e.g. Cometa Networks plans for a U.S. national hot spot network). 4.4 Service Provisioning The final function in the value chain is service provision, which entails the range of activities related to managing end customer relationships. These include marketing, customer service, billing and collection, providing secure access, and account management. These services may be performed by venue owners or hot spot operators, or handled by service providers who do not own the actual Wi-Fi facilities. In many cases, the service provider may, in fact, be a wireline or wireless network operator that already has a billing relationship with potential customers. We

9 discuss this players in the next section, and highlight here some of the other types of service providers appearing in the Wi-Fi hot spot market. One form of service provider is the Wi-Fi network aggregator. Rather than building out the hot spot infrastructure themselves, these companies combine individual hot spot venues or networks of hot spots offered by other providers, offering a single user account that is valid for all partners. Customers subscribe to the aggregator s service, which provides software to venue owners and hot spot operators for authentication. Well-known aggregators include Boingo, Gric and ipass. Such services are attractive to hot spot venue owners and providers because of the potential for revenue sharing. Aggregators offer an improved customer value proposition as a result of having more places where a common login ID will work. The value added services they offer such as account management and enhanced security justify the fees they charge. The larger aggregators even have global partnerships, enabling international business travelers to use their home account while overseas. Some integrate with other access technologies to offer one account for use on multiple types of networks, and not just Wi-Fi. An interesting form of Wi-Fi aggregation that has not yet achieved commercial success is the socalled micro-isp aggregation model. Innovative start-ups such as Joltage attempted to sign up any individual with a Wi-Fi base station to be part of a network, with the promise of revenue sharing as an incentive. These individuals could install client software to become part of the larger network, so that whenever another user came into range they could access the Internet using a Joltage account. This organic growth model, unfortunately, was too complex to administer, and involved revenue sharing among too many participants. It also was difficult to maintain adequate quality control, and the micro-isp aggregator could easily be overwhelmed with customer complaints. Joltage failed (Maier, 2003), and other players that attempted this model, such as Sputnk, soon changed their approach. However, in Europe, Netair appears to be attempting this micro-isp model once again. Today, an important driver now seems to be the quality of the hot spot rather than simply the sheer number of venues (Brynhi, 2003). There is a growing expectation that business users may pay a premium price for secure access to company networks and higher quality of service, although if prices are too high, as appears to be the case in some parts of Europe, growth will be stifled. More varied pricing strategies are emerging, with combinations of free and premium pay access even at the same location depending upon the target customers needs. Included among the many pricing and revenue models are: free access, as long as customers make a purchase at the venue free access supported by advertising prepaid access for a certain amount of time or volume pay per use period, including hour, day, week or month subscription offering flat rates per month differential fees for higher bandwidth or no advertising. It remains to be seen, however, if the many new entrants attempting to build or aggregate hot spot networks can effectively compete against the onslaught of traditional telecommunications network operators, who have finally decided that Wi-Fi represents an opportunity rather than a

10 threat. The next section looks specifically at these service providers and their public Wi-Fi business approaches. 5 Wi-Fi and Existing Fixed and Mobile Operators Fixed and mobile network operators represent a special class of service provider in the Wi-Fi hot spot value chain. For both types of operators, there was some initial concern that Wi-Fi developments represented a potential threat to existing data networking services. However, as the public hot spot market develops, it is now clear that there are many ways that Wi-Fi networks complement existing offerings and hence represent an interesting new business opportunity. These operators can leverage a range of existing resources to create sustainable competitive advantage in the evolving WLAN hot spot market, an outcome that conforms with the literature on resource-based views of competitive strategy (Barney, 1991; Peteraf, 1993). 5.1 Fixed Network Operators and Public Wireless LANS We focus here particularly on fixed network providers who service the local access market, and distinguish between retail and wholesale opportunities. At the retail level, two types of fixed network operators that initially viewed Wi-Fi with some caution were cable TV networks offering Internet access through cable modems, and local exchange carriers (LECs) offering DSL services. When Wi-Fi began entering the home market, it generated some controversy among DSL and cable modem service providers. The main issue at the time was concern by these fixed broadband access providers that Wi-Fi users might give away access to others in their apartment building or immediate vicinity (Charney, 2002a; Wylie, 2002). Fixed network operators concerns were two-fold. First, cable modem services depend on shared channels in neighborhoods, and by loading a subscriber s allocated bandwidth more fully due to the increased number of users, it might cause congestion problems for others. Second, giving free access to neighboring apartments may discourage these other residents from subscribing to their own cable modem or DSL service, hence depriving the operator of potential new revenue. As a result, many DSL and cable Internet providers specifically prohibit subscribers from giving away access to others not residing in the same unit (Wylie, 2002). More recently, the LECs and cable TV companies have taken a much more positive view, recognizing that fixed broadband access and Wi-Fi exhibit strong joint purchase complementarities (Wildman and Guerin-Galvert, 1990). By bundling a Wi-Fi base station with DSL or cable modem service, these operators add value to their offerings. Some have even begun to loosen restrictions on sharing the access with others through the wireless base station (Charney, 2002b). Moreover, as more subscribers have devices with Wi-Fi capability, their desire for more locations where they may access the Internet will increase, driving demand for more public access points. To cater to this demand, and capitalize on their customer relationships, a number of fixed network operators are investing in public hotspots to which they give access to their own DSL subscribers (Charney, 2002c). Examples of this approach include Verizon s bundling of public WLAN access with their DSL service, BT s Openzone project, and Korea Telecom s network of public WLANs. This leveraging approach can be further extended to existing business clients by adding secure access to VPNs. Finally, carriers may also view public hot spots as a less expensive way to serve both rural areas and areas in need of a temporary broadband connection, where full wireline broadband is difficult to install. One fixed

11 broadband line may be shared across these less densely populated or temporary locations using wireless access points to minimize local wiring costs. France Telecom s Wi-Fi initiative highlights such an approach. Expertise in operating domestic hot spots may further be applied to international hot spot network expansion. Swisscom s Eurospot network represents this type of growth pattern. Such fixed-mobile convergence illustrates how these operators can create a competitive advantage by leveraging their existing subscriber base, increasing sales of DSL services and enabling entry into the new market for public WLAN services. A second way that fixed line companies benefit from public hot spot developments is through their ability to serve the wholesale market for broadband access. Every hot spot requires a broadband connection such as DSL or a T-1/E-1 line for backhaul, and so, even when built by a new entrant, they generate some additional revenue potential for the incumbent local exchange carrier. 5.2 Mobile Network Operators and Public WLANs Just as the early reaction among fixed network operators was to perceive public WLANs as a threat, so was the initial response among mobile network operators. The basic concern among mobile operators was that public Wi-Fi would cannibalize demand for evolving 2.5 and 3G mobile data services. Mobile operators had already invested heavily in licenses and infrastructure, and feared that Wi-Fi would reduce consumers willingness to subscribe to their own higher speed wireless data services (Volans, 2001). However, fresh analyses of the competitive threat view PWLANs to be complementary to 2.5 and 3G services (CDG, 2003). The thrust of the complementary view is to point out the importance of coverage in the provision of wireless data services. Even with the current explosive growth of public hot spots, they cannot by themselves offer anything close to ubiquitous coverage. Given that each hot spot only covers at best a range of 50 meters with current b systems, CDG (2003) estimates that the forecasted number of hot spots in the U.S. in 2003 would not even provide seamless coverage in the borough of Manhattan, let along the whole nation. Hence people who need access to data while away from their home or office cannot depend on always being within range of a hot spot and will need cellular data services as well. Moreover, these analysts also point out the fallacy of assuming that b provides 11 Mbps Internet access. They note that access is limited to the speed of the backhaul, which in many cases is a T-1 line or even lower speed DSL service. Thus the differences in access speeds between b and 3G are often overestimated. Mobile operators are now moving to incorporate Wi-Fi access into their service offerings. In crowded downtown areas, fixed location hot spots can offload stationary user traffic from the cellular network, leaving it to focus on providing voice and data services for truly mobile clients. Access to a carrier s hot spots can be bundled with subscription to wireless data services, enhancing sales and reducing churn among cellular subscribers. Cellular carriers are partnering with the wholesale hot spot providers to allow roaming across different operators networks, increasing coverage without the high costs associated with building their own network infrastructure. Prominent cellular company Wi-Fi activities include T-Mobile s acquisition of Mobilestar s hot spot network in Starbucks cafes, and Verizon Wireless plans to put public base

12 stations in public phones in Manhattan. An interesting fixed/mobile cooperation is evident in Verizon Wireless plans since DSL customers can also access these public base stations. Increasingly, due to mobile operators existing customer relationships, they, too, should have a strong competitive advantage over hot spot aggregators. Bundled services may be more compelling to end users than separate subscriptions just for public hot spot access, just as bundled products in other fields often win out over separately sold products (Shapiro and Varian, 1999). Mobile and fixed network operators therefore look well-positioned to capitalize on the growing interest in public Wi-Fi hot spots. Several, in fact, have recently banded together to form the Wireless Broadband Alliance ( to expand global coverage for their subscribers through roaming agreements. Noteworthy here is the exclusion of aggregators like Boingo from this alliance. 6 Conclusions Wi-Fi is rapidly expanding from private company LAN and the home environments to public areas known as hot spots. The technology is evolving quickly, and an increasing array of devices is becoming Wi-Fi capable. Innovative new business models are emerging, bringing a range of new entrants into competition with established fixed and mobile network operators. We have decomposed the public hot spot market into a functionally-oriented value chain, including component and equipment provision, venue provision, hot spot installation and operation, and service provision. We have examined the key players, motivations, and the likely prospects in each functional stage in the public hot spot value chain. Wi-Fi equipment and component providers will continue to promote the technology, and stand to gain regardless of which models come to dominate the later parts of the chain. Venue owners may gain by having a more loyal customer base, but the actual revenue to be earned directly from Wi-Fi usage does not appear to be a major motivation. It is unlikely that venue owners would be able to recoup costs of installing and managing their own standalone hot spot, given the relatively limited value a single location offers to potential customers. Revenue sharing approaches, involving the outsourcing of hot spot provision and servicing, offer more potential, but this will not be a significant source of income for venue owners. Hot spot operators need to develop larger networks to achieve meaningful coverage, but cannot do this alone. Rather, roaming agreements and agreements with aggregators will help achieve the needed coverage. Additionally, these operators will also make their systems available on a wholesale basis to fixed and mobile operators who can bundle a branded service to their existing subscriber base. Aggregators are doing much to stimulate the hot spot market and encourage more end users to acquire Wi-Fi capable devices, but their longterm prospects are unclear. Rather, incumbent fixed and mobile operators, given their ability to leverage existing resources and capitalize on joint-purchase complementarities, appear to be in the strongest position. A critical asset for these operators is their billing and collection relationship with potential hot spot users. Moreover, cellular providers can offer seamless coverage, using their wide area network to maintain data connectivity (e.g. through GPRS or CDMA 2000) when customers are beyond the reach of any b base station. Fixed network operators will benefit not only by bundling hot spot access with fixed broadband access such as DSL, but also gain by providing the backhaul for other hot spot operators. Indeed, Wi-Fi is not

13 really a standalone broadband access technology at this point, but is more a means of access to some other broadband access network. For the hot spot to truly become a mass market, there are clearly many additional problems to solve not addressed in this paper. Security concerns with Wi-Fi are perhaps most prominent, requiring stronger encryption of the wireless traffic to prevent eavesdropping, and secure authentication, especially when business users are accessing company networks from a public hot spot. In addition, business users in particular will require more quality of service guarantees to justify premium subscriptions. Quality of service guarantees may come into play with greater force once Voice over IP (VoIP) phones become more widespread and users attempt to make calls via hot spots. 7 References Afrough, A (2003) Was Business-Kunden wirklich woollen eine End-User Erhebung zum Thema Mobilfunk, IDC Opinion. May. Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), Bryhni, H. (2003). Optimizing Wi-Fi hot spot revenues. Internet Telephony, June. Camponovo, G., Heitmann, M., Stanoevska-Slabeva, K. and Pigneur, Y. (2003). Exploring the WISP industry: Swiss case study. Proceedings of the 16 th Bled Electronic Commerce Conference, Bled, Slovenia, June CDG. (2003). CDMA 2000 & Wi-Fi: Making a business case for interoperability. CDMA Development Group, September. Charny, B. (2002a). Cable companies cracking down on Wi-Fi. CNET News.com, July 9. Charny, B. (2002b). Want to share Wi-Fi? Just ask. CNET News.com, July 30. Charny, B. (2002c). Want Wi-Fi? Verizon takes it home. CNET News.com, October 9. Detecon (2003), Der Markt für WLAN Detecon International Opinion Paper, Detecon International, August. Gartner (2003), Public Wireless LAN Hot Spot: Worldwide (Executive Summary), Gartner, May 2003 The Economist. (2002). Making Wi-Fi pay: Will enthusiasm for wireless networking translate into profits? The Economist, Apr 6 th. The Economist. (2003). Bubble trouble: Is the Wi-Fi wireless internet boom about to turn into a bust? The Economist, Jun 28 th.

14 Herslow, L., Navarro, C. and Scholander, J. (2002) Exploring the WISP industry: analyzing the strategies for wireless Internet services providers. Institute of Economics Research, Lund, Lund University. IDC (2002), Wireless LAN: Outlook for Equipmen and Hot spots, IDC Telebriefing, September. IDC (2003), WLAN Semiconductor Market To Reach USD 1,1 Billion by 2007, IDC Press Release, June 26 th. Maier, M. (2003). In Wi-Fi, it's survival of the biggest: As yet another startup goes out of business, the major wireless providers can only benefit. Business 2.0, March 04. Malladi, R. and Agrawal, D. (2002). Current and future applications of mobile and wireless networks. Communications of the ACM, 45(10), Peteraf, M. (1993). The cornerstones of competitive advantage: A resource-based view. Strategic Management Journal, 14(3), Shapiro, C. and Varian, H. (1999). Information rules: A strategic guide to the network economy. Boston: Harvard Business School Press. Sharma, D. (2003). Study: Hottest hot spots in Asia-Pacific. CNET News.com, October 21. Steinfield, C, Bouwman, H. and Adelaar, T. (2002). The dynamics of click and mortar e- commerce: Opportunities and management strategies. International Journal of Electronic Commerce, 7(1), Volans, I. (2001). 3G operators must tackle WLAN threat. Wireless Web, IOP Publishing, December. Wildman, S. and Guerin-Calvert, M. (1991). Electronic services networks: Functions, structures and public policy. In M. Guerin-Calvert and S.Wildman (eds.), Electronic services networks: A business and public policy challenge. New York: Praeger, Wylie, M. (2002). Sharing the Internet via Wi-Fi: Generosity or theft? Newhouse News Service.

15 8 Author Biographies Dr. Alwin Mahler is a Vice President Strategy for Teléfonica Deutschland GmbH (Part of the Teléfonica Group). He is responsible for strategic planning, legal and regulatory affairs as well as lobbying within Teléfonica Deutschland, which is Germany s largest independent IP carrier. In parallel, he is an Adjunct Assistant Professor of the Department of Telecommunication at Michigan State University, where he had a one year appointment as a Visiting Assistant Professor in 1997/1998. From , Alwin Mahler held several positions within WorldCom Germany s and Worldcom International s strategic units, closing with the responsibility as Head of E-Roadmap and Strategy. From he worked for WIK, Germany (Institute for Scientific Research on Telecommunications Services) as senior researcher in the area of new telecommunications services in the research group telecommunication markets, with a special interest in the banking industry and electronic commerce. He has published and spoken widely on those issues and consulted for such clients as the Ministry for Post and Telecommunications and private companies. He holds a Ph.D. in Business Administration from the University of Bayreuth, Germany and an M.B.A. from the University of Delaware, USA. Dr. Charles Steinfield is a Professor in the Department of Telecommunication at Michigan State University and a recipient of MSU s Teacher-Scholar and Distinguished Faculty Awards. He has conducted research on communication and information technologies for more than two decades. He holds a PhD in Communication Theory and Research from the Annenberg School for Communication at the University of Southern California. He has published four books, including two award-winning titles: Organizations and Communication Technology and Convergence: Integrating Media, Information and Communication. His articles have appeared in such journals such as Organization Science, Communication Research, Electronic Markets, Management Communication Quarterly, Journal of Business Research, Journal of Information Technology, Telecommunications Policy, Info, and the Journal of Computer-Mediated Communication. In addition to his faculty position at MSU, Charles Steinfield has been a visiting professor and researcher at a number of institutions in the U.S. and in Europe. These include Bell Communications Research, the Institut National des Télécommunications in France, Delft University of Technology in the Netherlands, and the Telematica Instituut in the Netherlands. His research has been funded by private industry and the National Science Foundation, and in 1991, he received a nine-month Fulbright research grant to study information services usage in France.