Cafe.com brings wireless high speed Internet access to four cafes in the Los Angeles area

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1 by James R. Dukart Editor s note: The January and September 2002 issues of Perspectives also feature Wi Fi coverage. On a late Monday evening in early September, the Novel Cafe in Santa Monica, Calif. is doing brisk business. Every table both upstairs and down, inside the shop and on the sidewalk in front is full. Many tables feature laptop computers, where the customers are perhaps pecking out the next blockbuster Hollywood screenplay or great American novel. That, at least, is what Ronan Higgins hopes is happening. Higgins is the founder of Cafe.com, a public access Internet company that is bringing high speed wireless Internet access Wi Fi to restaurants and coffee shops in Southern California. The Novel Cafe, uses unlicensed spectrum, making it relatively inexpensive and easy to install and maintain a Wi Fi network. Wi Fi has taken off in the U.S. corporate world over the past year, while in the public access space, more and more companies including some payphone service providers (PSPs) are adding Wi Fi hot spots in airports, business hotels, coffee shops and other locations. Cafe.com became one of those companies early this year. In addition to the Novel Cafe, the company offers public Wi Fi access at the Bourgeois Pig coffee shop in Hollywood, at Jerry s Famous Deli in Westwood near the UCLA campus and at Mani s Bakery in Santa Monica. The company is actively researching other Southern California locations, and Higgins hopes to add up to 30 or 40 public Wi Fi sites over the next several years. Wi Fi goes Cafe.com brings wireless high speed Internet access to four cafes in the Los Angeles area Cafe.com s first installation, went online in March. Higgins says the spot remains among his top sites, with a growing list of monthly subscribers as well as strong daily-use or per-minute wireless Web surfers. Higgins founded Cafe.com in 1999, but the company did not enter the public Wi Fi space until this year. Prior to Cafe.com, he had worked on online entertainment products for Orion Pictures, MGM Studios and youbet.com, a pioneer in Internet-enabled horse race betting. Cafe.com s initial focus was to build and manage temporary office space cafes, targeted to the needs of freelancers, home office workers and mobile professionals in the Los Angeles area. That venture, however, required too much overhead and did not meet the needs of its target audience, because customers wanted more technologies in one place than Cafe.com could offer at a reasonable price. Until Wi Fi came along, that is. Wi Fi is the trade name for wireless high speed Internet access networks built on the IEEE s b specification (that s the Institute of Electrical and Electronics Engineers). A typical Wi Fi network uses a high speed Internet line (usually DSL) to distribute wireless Internet access to multiple users at speeds of up to 11 megabytes per second (Mbps) within an indoor range of roughly 300 feet and outdoor range of about 800 feet. The technology 22 PERSPECTIVES

2 MobileStar falters Cafe.com is not the first or the only company in the public Wi Fi space. Late last year, the nascent industry s largest, most well-funded company MobileStar of Richardson, Texas filed for bankruptcy, claiming it could not sign on enough users to cover network development and deployment costs. MobileStar has since been purchased by VoiceStream Wireless and is now back in business as T-Mobile Wireless Broadband, but the company s demise in late 2001 seemed at the time to spell doom for the concept of public Wi Fi sites. Rather than be discouraged, Higgins set out to copy what MobileStar had been trying to do install thousands of Wi Fi hot spots in coffee shops throughout the country on a much smaller scale. He was confident that he and his partners could figure out the content and marketing side of the business, but felt Cafe.com would need help with back end software to monitor the system, perform user authentication and process credit card and other online payments. Higgins looked at software solutions from a number of providers before deciding on a system. As one of the provider s initial Wi Fi software customers, Cafe.com spent the month of March testing the software, customizing user log-in screens and preparing for a public launch. That was followed by what Higgins calls a quiet release, near the end of the month. We told the local people in the location that we had it, Higgins says. We did not raise any hoo-hah with the press or anything. Hollywood Jerry s Famous Deli, which is near the UCLA campus, was one of Cafe.com s first locations. PERSPECTIVES 23

3 This Cafe.com location is a coffee shop in Hollywood. Hoo-hah or not, Cafe.com saw slow but steady growth in system use. One week we had one customer, then the next week a second, and the third week a third, Higgins recalls. It was pretty much word of mouth. The company also put up a sign on the shop s front door and one next to the cash register announcing the system, and Higgins office is just around the corner, giving him a perfect opportunity to do a lot of one-on-one marketing. We would go into the location and talk to customers who had laptops, he says. We found out that worked much better than people finding out about it by themselves. Within a month, Higgins had seen enough of an increase in traffic to open Cafe.com s second location, the Bourgeois Pig in Hollywood, a favorite hangout for freelance writers, actors and artists involved in the entertainment industry. As with the Novel Cafe, Cafe.com supplied a DSL line, a wireless router, some signage and a few point-of-sale materials. As with the Novel Cafe, Cafe.com staff spent time at the Bourgeois Pig introducing the service to new users. Both the number of users and revenue continued to grow at a steady pace, but Higgins and his partners waited a few months before opening more locations. When you have been through all the dot-com hype of the past few years, you want to make sure you are OK before going forward, Higgins says. We now have data where we can actually see month-by-month growth of 40 percent in revenue. Locations and users Higgins background is not in the payphone industry, and as such Cafe.com is not installing Wi Fi in locations in which it already has a contractual service agreement with a property owner. The company is finding locations primarily through cold calling on coffee shops, bakeries, delis or other shops that Higgins thinks will benefit from and be open to the service. Getting the attention of location owners is not easy, Higgins says, particularly since many have heard pitches from various vendors that have not worked out as planned. His hope is that pitching public Wi Fi access will get easier as usage spreads and he can present his current locations as success stories. Location owners are offered a percentage of revenue, and that percentage varies depending on the terms of each specific contract. If Cafe.com provides the fixed broadband Internet connectivity to the site (a DSL line, usually), the location gets 20 percent of the first $1,500 and 30 percent thereafter. Locations that already have a DSL connection receive 30 percent of the first $1,500 in revenue, and 40 percent of the next $1,500 and above. At the same time, Higgins says location owners appear to be less concerned about system revenues than on what the service will provide in terms of their core business. This is the coffee business, and these guys really care about coffee and food, he says. We think Wi Fi will increase the number of people who come into the shop, and that in itself is good for their business. 24 PERSPECTIVES

4 Location owners are generally reluctant to sign location agreements, Higgins notes, but that reluctance often vanishes once commission checks start to show up. In the restaurant business, owners don t want to sign anything, he says. In these cases, Cafe.com enters a verbal agreement with the restaurant owner to install the system. Once commission checks come in, the owner is much more willing to sign an agreement. You have to develop the relationship first, prove that the system covers us both. Higgins says further that the importance of location agreements is at least two-fold. One, outside investors will want to see agreements before investing in Cafe.com, and two, any location that proves to be successful will likely be pursued by competitors in the coming months and years. Cafe.com users fall into two general categories. The first group consists of customers who live in the general area and frequent the shop, using Cafe.com service as an alternative to paying for broadband access at home. They will hear about the service and try it on a perminute basis, Higgins says. They will see if they like it and will come back to try it again or log in to a monthly subscription plan. Once they subscribe, they will use it quite often. They are either freelancers or teleworkers, and they don t like working from home all the time. Cafe.com s second general group of users is mobile professionals. They may be in town for a day or a week or perhaps even a month, and have found out about the service through some national directory or our Web site, Higgins explains. They will come in and use it on a daily rate basis and pay a premium rate for that. We will see them on the system for one or two days or three of five days and then never hear from them again. Higgins has set prices to appeal to both general types of users. The company s most popular subscription plan is $15.95 per month, which comes with 200 minutes online. After 200 minutes, the charge is 10 cents per minute. Higgins speculates that this plan is popular because it is similar to many cell phone pricing plans, and users see value in having broadband access for casual use at under $20 per month. Those who want more connect time can pay $34.95 per month for 500 minutes, and a charge of 8 cents per minute after that. That plan, Higgins says, is probably most popular with workers who don t want to pay $50 for broadband access at home, and are using Cafe.com s network as a broadband replacement. Users can also log on at a per-minute rate of 17 cents per minute or $6.95 for an entire day. Per-minute rates are popular with first-time users who are trying out the system, and daily rates are common for mobile professionals who only have a need for access over a short period of time in Los Angeles. Higgins says Cafe.com has looked at unlimited monthly pricing plans, but has not come up with one to date. We try to stay away from unlimited use packages, because you tend to undersell yourself, he says. Mani s Bakery is in Santa Monica, Calif.; Cafe.com is actively researching other Southern California locations. PERSPECTIVES 25

5 Wi Fi hot spots typically include airports, business hotels, coffee shops, cafes, and other similar locations. Another concern he has is that not all location owners want heavy, recurrent use of the networks by the same people day after day. In his Jerry s Famous Deli location, for instance, Higgins knows his customer would like to see faster table turnover, particularly during the busy lunch hour. Users are getting a free virtual office for the price of the connection, Higgins says. We need to make sure the location owners are getting compensated for that. Growth spurt? It is still too early to tell whether Cafe.com is at the forefront of a rising tide of Wi Fi users or simply out ahead of another promising technology destined to be over-hyped and underutilized. Higgins himself describes the public Wi Fi market as very juvenile. Though the company s four Los Angeles-area hot spots are all at least breaking even, Higgins notes that he and his partners have had to work hard to promote the network and gain customers. It has taken a lot of man hours which are not included in my calculations, he says. The actual owners [of Cafe.com] are not taking any money out right now in salary, but if things continue this way we can grow to make good money. The next stage is to grow aggressively. Bolstering his confidence are numerous market surveys that say the public appetite for high speed bandwidth is set to boom over the next three to five years. Cahners In-Stat predicts that Wi Fi users will grow from fewer than 2 million in 2002 to just under 20 million by Gartner Dataquest says that by that time there will be nearly 50 million Wi Fienabled notebook computers worldwide, and that 43 percent of the owners of those notebooks will be frequent Wi Fi users. Gartner also sees nearly 25,000 public Wi Fi locations in North America by A recent report by Kagan Associates pegs global wireless ISP revenue from Wi Fi at $312 million by 2006 and $642 million by Total annual public Wi Fi connections, Kagan says, will be 384 million in 2006 up from 36 million in 2002 and more than a billion in Kagan sees more than 70,000 global Wi Fi access points by 2011, with more than half of those (58 percent) being in hotels. Skeptics counter that market studies for Internet technologies consistently overestimate future sales and revenues, and point to the dot-com boom and then bust as an example of what could happen to public Wi Fi. Higgins accepts that, but at the same time urges PSPs who already have payphone routes in potential Wi Fi hot spots to talk to their location owners about the service. They [PSPs] already have the attention of the location owners, he says. I would say here is your commission check from payphone operations, and I have a very interesting new technology for you here. Higgins also admits that he is a proponent of public Wi Fi out of self-interest. The value of the network is directly related to the number of nodes on it, he says, noting that multiple public Wi Fi locations in Los Angeles and nationwide would serve to both spread the Wi Fi gospel and develop the concept of roaming agreements between the providers. I am quite happy so far, Higgins sums up. The market isn t exploding, but it is growing, and if it keeps growing we can see a point where it is profitable. That is better than any other Internet business I have seen. P James R. Dukart is a telecom industry analyst and writer based in Minneapolis, Minn., and president of the writing and editorial services firm The Write Planet. He can be reached at or via his Web site at He visited three of Cafe.com s Los Angeles-area Wi Fi locations but, sadly, was not discovered by Hollywood during his trip. 26 PERSPECTIVES

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