Wi-Fi Basics: Hot spot economics
With enough traffic, hot spots have sound economic fundamentals.
For example, Boingo™ pays its partner hot spot operators a wholesale fee for each connection generated through Boingo’s dozens of distribution channels, which include laptop and Wi-Fi card OEMs, ISPs and major carriers. This wholesale fee typically ranges between $1 and $2 per connect day (up to 24 hours for one user in one location). In addition, Boingo provides a marketing bounty of $20-$50 for new customers who use the Boingo software to sign up in one of the HSO’s locations.
It’s possible to create an economic model for a hot spot using these payments and some assumptions about traffic. Busy locations with thousands of regular visitors can generate hundreds of Wi-Fi connections per day, but even a small hot spot, with only a few connections a day, can make money for a small business owner.
Revenue from connectivity and sign-up bounties can make a hot spot profitable, but hot spots also deliver significant indirect benefits. High speed wireless Internet access is an amenity that makes a customer’s visit more productive and enjoyable. It fosters loyalty, increases the amount of time customers spend in the venue and creates the opportunity to sell more goods and services. It also becomes a platform for future value-added services. For example:
a. Location-based marketing (“Check out the new DVD store in terminal A”);
b. Loyalty programs (“Welcome back, Mr. Jones. Get a free muffin when you buy a cappuccino.”)
c. Content distribution (“Click here to download music to listen to on your flight”)
In many different ways, hot spot service is a profitable benefit to customers.
Small hot spot
Here are sample direct monthly economics of a café hot spot using conservative assumptions:
boingo.com
Note that in this example, a roaming provider like Boingo or its carrier and ISP distribution partners handles all the technical support, software development & distribution, billing, bad debt and all other back-office functions, and provides in-venue marketing materials to promote the service, so the operating profit goes in the pocket of the venue owner.
This model doesn’t reflect the fact that many businesses already have a DSL or other high speed connection installed in their premises, and so the largest monthly cost component to operating a hot spot is often already paid for.
Furthermore, a one percent utilization rate is conservative when one considers the increasing number of visitors who will be carrying Wi-Fi-enabled devices in the coming years, and the rising tide of hot spot usage that will come from ubiquity and universal roaming.
The model above also doesn’t reflect the most important financial aspect of operating a hot spot in a café – the lift to the café’s core business from additional product purchases and greater customer loyalty.
Large hot spot
A higher-volume location such as an airport, hotel or convention center requires more expensive equipment and one or more T1 lines, so monthly fixed costs are higher. However, the profit potential is also much greater in these locations.
Nonetheless, as noted earlier, the indirect benefits to operating a hot spot could easily outweigh the direct profit potential. This is especially applicable for an airport. Today’s business travelers are coming to expect Wi-Fi service in airports just as a previous generation came to expect pay phones. Not providing hot spot service means more than lost revenue. It also means all of the implications of unproductive and dissatisfied visitors.
boingo.com
Since monthly costs are fixed, the key to hot spot profitability is utilization rate -- the percentage of visitors that opt to connect. Many external forces are pushing this number up, including Metcalfe's Law (more hot spots = more value for everyone, so long as there is universal roaming), in-venue marketing (these materials are supplied by Boingo at no cost to member spot operators), Wi-Fi awareness and the proliferation of Wi-Fi devices by enterprises, home users, and by Intel, Dell, Sony and dozens of other OEMs. There has never been a greater movement to push low-cost wireless radios to the masses.
There are still challenges, as outlined earlier, including hot spot scarcity, lack of universal roaming, ease-of-use and the lack of awareness that a hot spot even exists, all of which hold down utilization rates across the industry. In the traffic example for an airport given above, we are making an assumption that these challenges are being overcome.
With universal roaming, ease-of-use and enough in-venue marketing, hot spot economics are quite compelling, something the smart folks at T-Mobile, Wayport, STSN and other HSOs have figured out.
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