Wi-Fi Basics: Hot Spot industry segmentation
A similar segmentation is taking shape in the Wi-Fi hot spot industry, which has four layers. At the bottom of the stack, the venue layer consists of the companies that own the physical locations where hot spots will be deployed. Companies in the hot spot operators layer contract with venues to deploy Wi-Fi gear and operate commercial hot spots. Because of the inherent fragmentation of hot spots, HSOs will partner with companies on the roaming layer to provide roaming, software and settlement services and drive traffic to their networks. Roaming providers in turn enable the brand layer companies to offer Wi-Fi access to end users.
Here is the segmentation map of the hot spot industry with a small sampling of companies competing at each layer:
boingo.com
As in the ISP space, the most successful companies will focus primarily on one industry layer, partner between the layers and compete within their own layer.
A closer look at each layer reveals how they stack, one on top of the other, to complete the Wi-Fi industry value chain.
Venue layer
One of the primary factors contributing to hot spot fragmentation is the inherent fragmentation at the venue layer. Put simply, there are a huge number of locations owned by a huge number of different entities. Even McDonald’s, the world’s largest restaurant chain, has a relatively small share of the total restaurant market.
If we were to compare to the cellular industry, venues would be the equivalent of spectrum licenses – the right to deploy a wireless service in a given area. However, in cellular, there are only a small number of potential licensees per market. In Wi-Fi, there are as many licensees as there are cafes, bars, restaurants, retail stores, airports, gas stations, parks, hotels and scrappy entrepreneurs. Unrestricted fragmentation.
Venue owners make money in Wi-Fi by either vertically integrating and operating their own hot spots, or more commonly by licensing the right to deploy hot spots to an HSO. In general, if the HSO pays for 100% of the cost of deploying and managing the hot spot infrastructure, they will share very little or none of the revenue with the venue owner, at least until the HSO’s costs are recouped. The more of the up-front costs paid by the venue owner, the higher their revenue participation.
However, many venue owners are more interested in providing a hot spot as an amenity and convenience to their customers than in generating direct revenue. Operators of airports, hotels and cafés are quickly realizing that not providing a hot spot in their venues will soon mean lost revenues and even lost customers.
Hot spot operators layer
As noted earlier, the barrier to entry to become a hot spot is low, the range of Wi-Fi networks is short and there are nearly two million existing public venues in the US. This leads to fragmentation at the hot spot operators layer. Anyone with a $500 Hot Spot in a Box™ TM, a DSL line and an “in” with the owner of a small café chain can become an HSO.
With only about four thousand US commercial hot spots today, the HSO layer is almost completely wide open. Ultimately, there will be thousands of HSOs, dozens of which will become very large.
However, even with significant capital to spend on deployment, the fragmenting forces inherent in Wi-Fi mean that ultimately no provider will own more than 10% of the total hot spot footprint.
HSO success is determined by operating the lowest cost networks with the highest network utilization. An HSO’s monthly per location costs are mostly fixed: depreciation of equipment, hot spot maintenance and back-haul costs for a DSL line or T1. Once there’s enough traffic to overcome these fixed costs, all additional revenue is margin. Thus, it becomes essential to sign as many partners as possible to drive demand to the hot spot.
Overcoming fragmentation and driving demand is where the aggregation layer comes in.
Roaming layer
Roaming providers such as Boingo™ strike wholesale access agreements with HSOs and aggregate their hot spots into a single seamless network. They turn around and provide a single network to brands, along with software, technical support and back-office services.
In some cases, brands will have direct relationships with larger HSOs to gain access to their hot spots. However, they will still need a roaming provider to tie those hot spots together into a single network along with thousands of smaller HSOs that the brand is unlikely to want to deal with.
The brand charges their end user and pays the roaming provider fees for network aggregation, settlement, support and client software. The roaming provider in turn settles with each HSO, paying a wholesale connect fee for each of the brand’s user connections.
After the industry shakeout, there are likely to be only one or two major roaming providers. There is immense complexity in negotiating with and aggregating thousands of individual HSO’s, providing systems to manage authentication, network management and reporting.
In addition, to avoid multiple integrations, HSOs are unlikely to want to work with more than one roaming provider, especially if that roaming provider already has partnerships with many brands representing millions of potential users. Likewise, it is operationally infeasible for a brand to work with more than one roaming provider, since aggregating roaming providers would defeat the purpose of working with one in the first place.
Roaming providers like Boingo will drive significant traffic to hot spot operators, helping them cross the line of fixed costs into the territory where incremental revenue is highly profitable. Roaming providers serve as the vital link between individual hot spot operators and the major brands that will drive the mass market into their locations.
Brands layer
Brands include wireless and wireline carriers, ISPs, cable companies, PC manufacturers and enterprise remote access providers – anyone seeking to offer a branded Wi-Fi hot spot service to their customers.
As with anything, there are no absolutes, and some companies will cross the segmentation lines, possibly occupying multiple layers at once. However, as competition heats up, the most successful players will be the ones most focused and who can get economies of scale within a layer. For a company with a multi-layer approach, this may mean running each layer as though it were an independent entity.
For example, several large cellular carriers are now deploying commercial hot spots, at the hot spot operators layer, and are launching branded Wi-Fi services, at the brands layer. Certainly, they have the capital and expertise to deploy networks, and they have relationships with millions of existing customers to whom they can promote a Wi-Fi hot spot service.
However, unlike cellular where there was a limit on competition, the fragmentation of Wi-Fi makes it impractical to build a single exclusive network and then sell exclusively to one’s own end users. If a carrier were to deploy hot spots at three or even thirty airports, that footprint alone would not make a successful service. There is little overlap between the venues a carrier can deploy in and the coverage that its customers will demand. Roaming is essential to a viable service.
At the same time, if a hot spot operator were to prevent other brands’ customers from roaming onto its network (for a fee), it would be under-optimizing its fixed costs. Moreover, venues are increasingly demanding that their HSO allow access by multiple brands, so as not to hold the venue’s customers captive to the HSO’s own “house” brand. This is especially true at airports such as SFO, DFW and others, which look for a single neutral provider to build and operate hot spots. Even without such a requirement, hot spot profitability is inevitably determined by utilization, which means opening up the network for as many brands as possible to drive demand.
Thus, a roaming provider is essential to brands, both to provide coverage and to drive additional demand to their own hot spots.
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