Business Partnership Models of Wireless Broadband Service: Case Studies * Youngsun Kwon Associate Professor, School of IT Business, Information and Communications University, Daejeon, Korea, Email: yskwon@icu.ac.kr Seungmi Yang Doctoral Student, Business Administration Department, Daejeon University, Daejeon, South Korea Email: sm@dupesit.com Abstract Viewing broadband access to the Internet as a key requirement for citizen s basic life of today, governments of the world are trying to spur wired and wireless broadband network deployment. However, free Wi-Fi Internet access, which is not supported by local governments, has been sprouting in the cities of the U.S. and other countries. Therefore, local governments, trying to blanket communities and cities with wireless broadband network, are likely to result in extravagant public spending and dampen private firms incentive to develop a way to use free Wi-Fi access creatively for their businesses. Local governments can attain the goal of bridging digital divide more efficiently by targeting their spending at increasing the poor s income or by reimbursing the poor s basic subscription fee for Internet connection. Keywords: Free Wi-Fi; Municipal Wireless; Digital Divide; Free Wireless Internet Access * This research was supported by the Ministry of Knowledge Economy, Korea, under the ITRC (Information Technology Research Center) support program supervised by the IITA (Institute of Information Technology Advancement, IITA-2008-C1090-0801-0041).
1 Business Partnership Models of Wireless Broadband Service: Case Studies 1. Introduction Viewing broadband access to the Internet as a key requirement for citizen s basic life of today, governments of the world are trying to spur wired and wireless broadband network deployment and devise policies to boost broadband penetration rate in various ways. The government s involvement in facilitating broadband penetration varies widely across countries. It can play a role as a facilitator or a service provider. For example, in the U.S. some local governments own and manage wireless network for internal uses and offer free wireless Internet access service to residents using some amount of bandwidth, whereas others provide free wireless Internet access service in partnership with private network operators like AT&T (Vincent, 2007). Free Internet service by local governments is aimed at lessening digital divide among social classes even though such attempts often turned out to be failures mainly because public funds cannot be supported continuously. Direct public provision of Internet services created a debate that it might deter private investment in broadband Internet networks even though it could reduce digital divide between social classes (Strover & Mun, 2006). Interestingly enough, free wireless Internet access, which is not supported by local governments, has been sprouting in various local areas in the U.S. and other countries. In the U.S. many snack stores like Panera, and Beaners provide free wireless Internet access in partnership with Internet service providers (ISPs). Starbucks also provides wireless Internet access, but it is not free of charge. Starbucks teamed up with AT&T to provide wireless Internet access, so AT&T customers can use wireless Internet at Starbucks. This business
2 model is also implemented in Korea as well as in Canada by Starbucks. Barnes & Noble, the largest bookseller in the world, formed a partnership with SBC Communications (current AT&T) in 2004 to provide wireless Internet access to customers. In short, in spite of local governments efforts to boost broadband penetration, growing free Internet access at stores leads us to think that public involvement in broadband network rollout and service provision might not be necessary for narrowing digital divide. Free Internet access service, without regard to who provides it, has to be sustainable economically in the long run. In other words, free Internet access should be a sustainable business model in terms of providers. The objective of this paper is to investigate various business partnership models for wireless broadband service through case studies. Next section examines the business partnership models used by local governments and ISPs and those used by ISPs and retail stores. Section 3 introduces case studies on private partnership models and discusses their weaknesses and strengths. Section 4 discusses policy implications. 2. Public and private partnership models Municipalities began to establish citywide broadband wireless networks for efficient public service provision and to boost economic growth. Citizens, connected to citywide broadband wireless networks, can file documents for public service and complaints. Public officials can gain real time access to field information. Local governments can foster economic development by allowing residents to use wireless broadband access to the Internet for their businesses and tourists to access to local business and cultural information. In addition, local governments can use citywide broadband
3 wireless networks to solve social problems like digital divide among social classes. 1 Two technological developments also induced municipalities to build actively citywide wireless broadband networks. One is wide diffusion of Wi-Fi devices that enables residents and tourists to get local access to the Internet and the other is mesh network that lowers the cost of rolling out citywide wireless access networks by reducing the number of backhaul access points. 2 Municipalities adopted various partnership models to promote free wireless broadband access to residents. In order for the wireless broadband deployment project led by municipalities to be viable and sustainable in the long run, it is necessary for municipalities to devise a successful business model that can bring benefits to all parties involved in the project. Breitbart (2008), Cisico (2006a), Siemens (2004), and Vincent (2007) introduce various types of business partnership models between municipalities and ISPs. This paper takes up Cisco (2006a) s classification but focuses on the partners involved in municipal wireless broadband access. Three partnership models of this paper is derived based on the criteria who owns and operates municipal wireless broadband networks. These three models are municipality-led model, ISP-led model, and hybrid model. In municipality-led model, municipalities (or non-profit entities established by municipalities) build, own, and operate wireless broadband networks and share some amount of excess bandwidth with citizens or local ISPs. Cisco (2006a) calls this model the wholesale model. In this model, city governments can use some bandwidth for citizen s 1 Breitbart (2008) indicates that one major purpose of building municipal wireless network is to reduce digital divide by providing wireless Internet service at a low price to residents (pp. 3 4). 2 According to Digital Communities (2007), connecting three access points to backhaul access points is enough for constructing a mesh network with 20 access points to users.
4 free access to the Internet or sell excess bandwidth to local ISPs (Internet Service Providers). This model has strengths as well as weaknesses. This model allows city governments to exercise complete latitude in controlling, upgrading, and changing applications. It can also contribute to lowering the price of broadband access service by providing another option for residents to choose for broadband access services which are currently provided by telecommunication and cable companies. Municipalities can use some revenue from wholesale access to local ISPs to provide free Internet access to low income households. As a result, city governments can drive vigorously digital divide policies and open network policies. One critical weakness of this model is that local governments have to fund continuously the budget needed for running the citywide network. Especially when local governments budgets are capped by law, they are unable to adopt this model as Philadelphia couldn t (Breitbart, 2008). Another problem is that public provision of broadband access to residents is likely to undermine private ISPs incentive to expand their network coverage. This can become more serious problem if free wireless Internet access can be widely provided by private partnerships models discussed in next section. In ISP-led model ISPs roll out and operate citywide wireless broadband access networks and local governments lease some amount of bandwidth for their own public uses. 3 Local governments may pay fee for the use of network or use it without fee in return for allowing ISPs to use public buildings, light poles, and so on for mounting wireless access point equipments. ISPs can cover the costs of running network with the revenues 3 This model is also called managed-services model or public-private partnership model.
5 from Internet service fee and value-added services. One advantage of this model is that municipalities do not need to invest a large sum of budget for building networks and to operate IT department for maintaining citywide networks. At most, they need to pay a recurring stable subscription fee for the use of networks. This model can further, rather than dampen, ISPs incentive to expand citywide networks because municipalities as anchor tenants can guarantee a stable revenue stream for ISPs. However, this model has problems too. First, the primary objective of ISPs, private firms, is profit maximization, not coverage maximization, so they may delay the roll out of citywide network if business prospect does not look good. Second, municipalities are not easy to control retail rates and demand ISPs to open their networks. Therefore, public objectives like digital inclusion and network neutrality are likely to be weakened in this model. Hybrid model mixes the above mentioned two models. One example would be that municipalities own citywide wireless broadband networks and ISPs operate them. In other words, various forms of hybrid models can exist between municipality-led and ISP-led models and the level of government involvement can vary with local needs and available resources as Peha (2008) concludes. If municipalities own the network, they face large upfront investment costs but they can control coverage for wireless broadband connection and service provision conditions for residents. On average it would be fair to say that as private involvement increases, efficiency in network roll out and operation rises but it gets difficult to attain social objectives. In conclusion, local governments need to find an optimal mix of efficiency and public objectives given that a hybrid model is financially viable in the long run.
6 According to Cisco (2006a) and Vincent (2007), ISP-led model of the three models are chosen by a majority of municipalities in the U.S. It seems that municipalities are more focused on finding a model free from increasing tax burden. 3. ISP and retail store partnership models Public-private partnership models for citywide wireless broadband access have drawn much attention from academics and municipalities, whereas private partnership models have not. However, as introduced below, proliferating private partnership models for free wireless broadband access is likely to reduce room for government involvement in solving digital divide problem. 3.1 Fee based wireless Internet service model: AT&T and Starbuck case AT&T basically offers its 12 million broadband subscribers free access to its more than 17,000 Wi-Fi hot spots. AT&T hot spots include those installed in Starbucks (about 7,000 hot spots), McDonald's restaurants, airports, and Barnes & Noble bookstores (AT&T, 2008). Starbucks Card holders can use free Wi-Fi service per for two hours, while AT&T broadband and U-verse Internet customers enjoy unlimited access as part of their monthly plan. Non AT&T and Starbucks members are also able to purchase two hours of access for $3.99, a daily session for $7.99, or monthly membership at $19.99 per month, which would include access to any of AT&T's 70,000 hotspots around the world. AT&T Starbucks partnership model is a subscription based model, which means that Internet access service is available only to temporary or regular subscribers. In this model, AT&T intends to increase the value of its wireless broadband access service by partnering with Starbucks. As the number of hot spots increases, it gets easier for
7 subscribers to find a place to use AT&T wireless Internet connection service, so the value of the AT&T s service to subscribers increases with the number of hot spots. This is just an example of network externality effect. As the value to the subscribers rises, new customers join the service and customer lock-in effect increases. Therefore, AT&T s investment cost for installing access points can be recouped from the increased revenue and eventually it can increase its profit. Those who use Starbucks prepaid card at least once a month can use for two hours wireless broadband Internet access service provided by AT&T. This means that some Starbucks customers can use 60 hours of access for the price of one $2 cup of coffee per month. Starbucks stores will also benefit from the partnership with AT&T because wireless Internet users tend to stay longer time at stores and more people will choose Starbucks as a hangout. In addition the partnership with AT&T can work as a device screening high income, well-educated customers out of general customer pool because AT&T subscribers only with a service plan of up to 1.5 Mbps downstream or higher can enjoy free or unlimited access at nationwide hot spots. 4 3.2 Free wireless Internet service model: Panera Bread and Biggby cases Panera Bread is bakery-café offering free wireless Internet access to visitors. Upon running web browser, consumers see Panera Bread s welcome page and without logging in they can surf the web. Users do not have to purchase even a cup of coffee, do not pay fee, and can use Internet without time limit. In addition, Panera Bread does not collect any user information in return for free Wi-Fi service, so it can be said that it offers customers truly 4 According to the analysis of GAO (2006), high income households are 39 percentage points more likely to purchase broadband service than are low-income households (p. 29).
8 free wireless broadband Internet access service. Biggby Coffee is coffee café headquartered in Michigan has been offering free Wi- Fi service, which is similar to Panera Bread s. One difference is that Biggby Coffee teamed up with local ISPs to provide free wireless broadband access to customers, while Panera Bread provides free Internet access by installing by itself wireless access points which are connected wired Internet. The other difference is that, in contrast to Panera Bread, Biggby Coffee requires users to log in on its welcome page that users first encounter upon opening web browser. In other words, customers need to register to create and use ID and password but they are not required to provide much information for registration. Other than the two there is virtually no further difference between Panera Bread s and Biggby Coffee s in offering free Wi-Fi access to customers. 3.3 Ad-supportred free Wi-Fi service model: AnchorFree case AnchorFree was founded in early 2005 and located in Sunnyvale, California. It developed a unique business model, ad-supported Wi-Fi service, which allows retail shops to provide free Internet access to customers. AnchorFree s business model is a new type of platform business model, similar to media service, which draws revenue mainly from advertising. In this business model, advertisers pay Internet access fee for customers and customers have to see banner ads on their screens or short video clips or both before starting to use Internet. Major advertisers include American Express, Circuit City, Clorox, Ford, Kaiser Permanente, McDonald's, Toyota and Major League Baseball. This business model offers advertisers an opportunity to target customers at specific locations or specific retail shops. In other words, advertisers could segment customers based on location as well
9 as store information, and then tailor their ads to reach those customers visiting or staying at specific stores of specific locations. For example, Lexus advertisement could be shown to customers staying at a four-star hotel, but not to guests at local motels (New York Times, 2007). AnchorFree has currently 7,000 hot spots that are located at airports, hotels, resorts and casinos, coffee houses, cafes, malls, and so on. Those that already have wireless access networks like hotels simply join the collaborative business; and AnchorFree installs routers and location owners arrange their data connection. AnchorFree does not demand location owners to offer customers free Wi-Fi service but only recommends it. It shares up to 50% of advertising revenue with location owners. For example, a hotel with 150 rooms can expect to earn about US$25,000 per year in revenue (Kirby, 2008). 3.4 Comparing three models Three models introduced so fare are compared in Table 1. In the fee-based wireless service model, only AT&T subscribers or those who hold store card can use wireless broadband Internet access. Therefore, the service can be recognized as not a case of free Internet access service. Strictly speaking this is true but Starbucks customers without AT&T membership can use the service at most $3 per month. Even though the fee-based model basically requires users to pay some amount of fee, it provides Internet service model almost for free. The second and third models are actually free wireless Internet access service models in that users are not required to pay any fee or to purchase any products. However, users have to visit stores to use free Internet access services, so it can be said that the service is not completely free in terms of users, especially when users have to provide
10 personal information to register. Then how do the three models differ from with one another in the ways to recoup cost of providing free Internet service? In the fee-based model, telecommunication firms can enjoy increased network effect and lock-in effect and retail stores can expect increased sales. In the second model, retail stores will expect increased sales because free Internet access will entice more customers to visit them. In ad-supported model, hotels or retail stores have one more revenue source, advertising. Watching ads or video clips before using Internet is a cost to users, so if stores using the third model and the second model are mixed in a location, the stores adopting the third model is not likely to be chosen by customers. So, the third model can be confined to hotels or locations where free Internet service providers do not exist. Table 1 Comparison of three partnership models Fee-based Free Ad-supported Free wireless broadband access Almost Yes Yes Yes Ways to recoup cost of service Bigger sales Bigger sales Advertising, bigger sales Cost in terms of consumers Time for visit Time for visit Ad watching time 4. Policy implications According to JiWire, there are 67,875 Wi-Fi hotspots including paid and free wireless access points in the U.S. and the number of hotspots is increasing. 5 Considering that various forms of free Wi-Fi service are sprouting spontaneously, municipalities blanketing communities, towns, and cities with wireless broadband network is likely to end 5 For the data, visit http://www.jiwire.com/search-hotspot-locations.htm.
11 up as extravagant public spending and dampen private firms incentive to develop a way to use free Wi-Fi access creatively for their businesses. 6 Local governments, if needed, can roll out citywide wireless broadband access networks for public purposes and use excess bandwidth, if any, for citizen s free wireless access to Internet. Currently, free wireless Internet access provided by private firms locate mainly at the central areas of cities, where retail stores with free Wi-Fi mainly locate, so public provision of free Internet access can crowd out private spontaneous provision of free Wi-Fi service. In other words, public provision of free Internet service can do more harm than good. It is possible that low income residents without car cannot visit stores with free Wi- Fi hotspots, so free Wi-Fi access provided by retail stores may not contribute much to the reduction of digital divide. However, this does not justify local governments construction of citywide wireless broadband networks either. Local governments can attain the same goal, bridging digital divide, more efficiently by targeting their spending at increasing the poor s income or by reimbursing the poor s basic subscription fee for Internet connection. In large cities like Chicago or New York, low income households tend to live heavily at the center of the city as shown in Figure 1. In Figure 1, white tracts (grids) are those where median income is lower than CMSA median income, while black tracts are those where median income is higher than CMSA median income. Therefore, large city governments can reduce digital divide not by citywide blanketing wireless networks but by encouraging various retail stores at the central area of cities to provide free Wi-Fi hotspots. Furthermore, even when local governments try to provide free Wi-Fi access to citizens directly, they 6 According to Breitbart (2008), many local governments are trying to build vigorously citywide wireless broadband networks.
12 should account for the distribution of low income households rather than simply blanketing a city with wireless networks. Figure 1 Chicago: two income classes (based on median household income) Reference AT&T. (2008). 2007 Annual report. Retrieved April 15, 2008, from http://www.att.com/investor/att_annual/downloads/07_attar_fullfinalar.pdf Breitbart, Joshua. (2008). The Philadelphia story: Learning from a municipal wireless pioneer. New America Foundation. Retrieved April 15, 2008, from http://www.newamerica.net/publications/policy/philadelphia_story Cisco. (2006a). Municipalities adopt successful business models for outdoor wireless networks. White Paper (C11-325079-00). Retrieved April 15, 2008, from http://www.cisco.com/en/us/prod/collateral/wireless/ps5679/ps6548/prod_white_paper 0900aecd80564fa3.pdf Cisco. (2006b). Evolution of municipal wireless networks. White Paper (C11-378713-00).
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