How Hot is the “Hot Spot” Business?

Wi-Fi hot spots and the future of broadband were on the minds of attendees at the Bandwidth Explosion colloquium at Harvard Business School.
by Sean Silverthorne & Martha Lagace

Internet pioneers looked at everything from Wi-Fi "hot spots" to the future of broadband at a recent telecommunications conference at Harvard Business School.

The issues were debated at the Bandwidth Explosion colloquium held April 23-25. Professors Robert D. Austin and Stephen P. Bradley hosted the event.

Are Wireless "hot Spots" Potentially Hot Markets?

Hot spots are pockets of wireless access points that increasingly populate airports, coffee shops, corporate campuses, public transportation, and even homes. The underlying technology, called Wi-Fi, can broadcast high-speed Internet access over a short distance of a few hundred feet. A portable computer or PDA equipped with a Wi-Fi card can tap into the hot spot and jump onto the Net for wireless surfing.

Although the hot-spot phenomenon is big enough to warrant a BusinessWeek special report in April, it's still unclear whether there is a business model that can turn Wi-Fi into profit.

A panel of telecommunications industry pioneers came together to talk about the larger issue of the competitive landscape in broadband wireless, but most of the time was spent discussing Wi-Fi.

Wired At Starbucks

Coffee purveyor Starbucks claims the world's largest Wi-Fi network, with some 2,200 stores offering wireless connectivity to latte sippers for a charge. That number will climb to 3,000 by year's end, according to the company.

Darren Hostin, of Starbucks Interactive, told the audience that the company chose Wi-Fi several years ago to connect the back end of its 50,000 stores with company headquarters. But it soon dawned on executives that 90 percent of Starbucks customers use the Web, and many are high-end business travelers. Offering them Web access seemed a natural fit for Wi-Fi, and provided Starbucks a new line of business. (Starbucks partners with hot-spot provider, T-Mobile and Hewlett-Packard to offer users subscription plans that average under $40 per month.)

We are moving to a time when broadband will be totally ubiquitous, part of the air you breathe.
— Sky Dayton,
Boingo Wireless

Since last August, Starbucks Wi-Fi traffic has jumped 450 percent, Hostin said, with most usage in the afternoon and evening. Another benefit: Wi-Fi users stay in the store longer than the non-connected customer, although some people sit in their cars outside the stores, taking advantage of Wi-Fi's ability to broadcast Internet access some 300 feet.

Hostin said the typical user isn't surfing the Web. Instead, he's logging on, downloading e-mail, and synchronizing calendar information, all to be read at a later time. "We call our Wi-Fi network a digital filling station," he said. Future services could include providing updated road maps or allowing a patron to download MP3s before she hops on her next flight. He did not release revenue numbers.

Also optimistic about Wi-Fi's future was Sky Dayton, founder of Internet service provider Earthlink, who in 2001 started up Boingo Wireless. The business certifies independent hot-spot providers and splits with them a $50-per-month user subscription fee. Boingo users are assured that hot spots in the network conform to technical standards, and the software allows them to transfer more easily between hot spots operated by different providers.

Characteristics favoring the technology, Dayton said, are the relatively cheap cost (providers can establish a hot spot for about $2,000; users can equip their laptop with a Wi-Fi card for about $50), relatively good performance (up to 11 million bps), and the fact that Wi-Fi is being built into millions of portable computers and handheld devices.

When the 3,000 or so hot spots that exist today jump to 10,000, a tipping point will be reached that quickly leads to development of some 300,000 hot spots, Dayton predicted, driven primarily by low cost. "We are moving to a time when broadband will be totally ubiquitous, part of the air you breathe," Dayton said.

But he also acknowledged challenges for the technology to overcome. First, the hot spots that exist today are fragmented, nowhere near ubiquitous. Ease of use is an issue as well—Wi-Fi users have to manually program their software when they enter a new network, for example. Another weak spot is that hot-spot carriers can't control the user's experience.

A Capital Idea?

Venture capitalist Geoffrey Moore, who wrote Crossing the Chasm and Inside the Tornado, said that the Wi-Fi business is still in the early-market stage where most players are losing money but capturing the imagination of the industry. But it's unclear how you make money on Wi-Fi. For example, the service-provider model would be difficult, he said, because it would be hard to create barriers to entry.

Jim Balsillie (HBS MBA '89), founder of Blackberry device maker Research in Motion, said he saw niche opportunities for Wi-Fi, but questioned the practicality of extensive wireless Wi-Fi networks. "It would take 10,000 hot spots to cover Waterloo [Ontario]," Balsillie said.

Maybe ubiquity isn't necessary for Wi-Fi to grow, said Moore, a partner at Mohr, Davidow Ventures, and chairman of the Chasm Group. Wi-Fi use is driven by laptop users, he said, a group that prefers to access the Internet while sitting rather than walking. "You'll relocate fifty yards to get it," he said.

But Dayton said ubiquity would be important for future Wi-Fi users, those who access wireless services with their PDAs. For example, imagine a trip to the grocery store where you pull out your PDA to download your shopping list and store coupons, all being delivered via a local wireless network.

"Don't think of Wi-Fi as only a laptop experience," Dayton said.

An audience member asked what role venture capital has to play in the growth of Wi-Fi, noting that almost no VC money has been used to build hot-spot businesses. Moore, the lone VC representative, said he doubted the industry would be interested in backing a "ubiquity now, profits later" pitch. Dayton said venture money would flow once the business opportunities become apparent, but deals will be for hundreds of thousands of dollars, not millions.

Predictions For Broadband: 2008

In another panel session, moderator F. Warren McFarlan, an HBS professor, asked some of the conference's best-known names to offer their predictions for broadband five years down the road. The year 2008 was a "nice near-term number," McFarlan prompted.

The responses from the panel—which included five experts from Google, RealNetworks, Kleiner Perkins Caufield and Byers, IBM Business Consulting Services, and CNBC Ventures—ranged from the humble to the almost-conceivably futuristic.

By 2008, every person at a similar conference would be enjoying a device with a continuous wireless connection, offered Eric Schmidt, CEO and Chairman of Google. While they participated in the conference they'd also be checking their e-mail and navigating the news or their personal life, conducting what he called parallelism.

But a subset of the tech-savvy group would already be miles ahead, he said. They would be sporting a digital device that contained "all of the world's information" issued until that moment, from the Encyclopedia Britannica to audio and video. "I think it will be a radical change toward much, much more information and user empowerment. I believe that business models will emerge to support that," asserted Schmidt.

Robert Meyers, general manager of CNBC Ventures, foresaw nothing radical, however. The technology we have now is already radical and reached its tipping point a long time ago, he stated. People treat broadband the way they treated narrowband, but it allows them to perform activities better, faster, and more conveniently. The same will follow for the next five years, only more so, with more people connected for communication and collaboration.

No one had mentioned financial markets, observed Robert Glaser, founder and CEO of RealNetworks. His view of 2008 markets was straightforward and less open to controversy: "We'll either be in the middle of another bubble or we'll just be coming off of one."

The pace of innovation is one of the most important and exciting questions that tech leaders will need to face, concluded McFarlan. The most influential book on the topic to bear in mind, he suggested, is one with the unsexy title, A Nation Transformed by Information: How Information Has Shaped the United States from Colonial Times to the Present.

Co-edited by HBS professor emeritus Alfred D. Chandler and James W. Cortada, the story starts out in the year 1700 and finds fascinating parallels among the revolutionary adoptions of electricity, railroads, air transport, and telecommunications.

"One of the facts that this books points out is that we have been driven by eighty-year technology cycles," McFarlan said. "The book also points out that for every one of these technologies, the second forty years was more important than the first forty years."

Where do we fit in now? Stay tuned.

About the Author

Martha Lagace is senior editor of Working Knowledge.