- October 2003 -
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1.0 Hot-Spot Market Snapshot
Independent start-ups and equipment vendors started the hot-spot movement as a means to challenge the dominance of telecom carriers. Companies such as MobileStar, Joltage, and Aerzone pioneered commercial models of hot-spot services, but they went bankrupt because of higher-than-expected capital expenses, overambitious plans, low usage rates, and a hostile capital market. Many practical concerns prevented business travelers from using the service, including poor security, limited coverage, and inconsistent quality of service. Moreover, the early price points were quite high, with an average hourly rate of more than $10 and monthly unlimited plans of as much as $80.
The current hot-spot market is undergoing a transition. The bottom-up movement continues, but top-down approaches from incumbent carriers are also emerging. Since 2002, more and more telecom carriers have been rolling out hot-spot services. Incumbents such as Verizon and SBC have announced several large-scale hot-spot construction projects, with a goal of increasing their hot-spot footprint as quickly as possible. In terms of roaming efforts, two contradictory forces coexist-independent companies are pushing national roaming in order to increase customer traffic and network usage, but telcos prefer to keep their networks proprietary as they view hot-spot services as strategic differentiators, not profit engines. No clear business models have yet surfaced, and various operators and service providers are still trying out different approaches.
Another trend is the focus on service quality. Service providers are looking to increase the reliability of their services, and vendors are pushing out carrier-class equipment and testing new converged platforms that can help users conveniently access both Wi-Fi and cellular networks. Some of the recent supply-side developments can potentially drive the market to the next level.
The next stage may witness industry consolidation when the bottom-up and top-down processes collide with each other. Telecom carriers will start providing true carrier-class services, which are bundled with their existing consumer or enterprise service offerings. Mobile carriers will leverage the synergy between WLAN (wireless local-area network) and WWAN (wireless wide-area network) on both the administrative and service levels. Those independent and entrepreneurial service providers with strong differentiation will survive and create profitable business models. In the meantime, we will see more marketing efforts targeting mass-market consumers.
Media coverage on the Wi-Fi hot-spot service industry is extensive. However, little has been written on the demand aspect of the market. Since most hot-spot service providers prefer not to share their usage data and consumer survey results, speculation and estimates are rampant. In order to dispel the confusion and myths about demand for hot-spot services, Parks Associates recently conducted an Internet survey of 1,345 Internet households and asked several questions regarding usage patterns, preference of service providers, preferred hot-spot locations, preferred price plans, interest in value-added services, and interest in adopting hot-spots services at different price points. Some of the findings reaffirm industry consensus, while others challenge the current way of thinking.
2.0 The Truth about Early Adopters
Figure 2 Majority of People Interested in Hot-Spot Services Travel Nationally for Work
Most hot-spot service providers agree that the majority of this market's early adopters are and will continue to be so-called road warriors. These people travel nationally or internationally for professional purposes, and while on the road, they need Internet connections to access their corporate networks and e-mail. Therefore, the most important strategic venues for hot spots are airports and hotels where these road warriors tend to linger. Wayport, an early pioneer of hot-spot services, targets exactly these venues. Nonetheless, some service providers believe that if cafés and chain restaurants with convenient locations can offer hot-spot services, road warriors may also be interested in dropping by for Internet connectivity. Cometa Networks has a vision of unwiring 20,000 such locations by 2005, and it hopes that the extensive coverage will enable a person to find a hot-spot location within a five-minute walk in urban areas and a five-minute drive in suburban areas.
Parks Associates' consumer data supports the hypothesis that the early market for hot spot services will be national business travelers (however, we did not find strong support for the hypothesis of windshield warriors). Among those who are interested in adopting such services, 90% of them spend part of their work time traveling nationally (Figure 2). Therefore, hot-spot service providers should pay attention to the specific needs of these road warriors by increasing the level of security and quality of service.
3.0 Myth 1: Build it and they will come.
Figure 3 Familiarity with Public Hot Spots Among Internet Households
Currently, the adoption rate for hot-spot services is quite low. Less than 3% of U.S. Internet households have used hot-spot services, and a negligible percentage has converted into subscribers (Figure 3). Frequently quoted explanations include scattered network coverage, lack of marketing and advertising efforts, and poor consumer awareness. Many hot-spot operators have a "build it and they will come" mindset. They believe that once Internet users are aware of hot spots and can find the service in sufficient locations, they will be willing to pay for the service. Contrary to these views, we found that the consumer awareness of hot spots is quite satisfactory considering the limited marketing efforts. Only 34% of Internet users have never heard of hot spots, although another 30% have heard of the idea but are not very familiar with it (Figure 3).
Figure 4 Most People Familiar with Hot Spots Have Not Used the Service
Among the people who are familiar with hot spots, however, only 7.5% of them have tried the service. The limited coverage may partially explain such a low rate; nonetheless, we believe that service providers should also carefully examine whether their value propositions are attractive enough and whether they are providing satisfactory services. Our surveys show that many people who have experienced hot-spot services are not interested in using the service in the future.
The absence of service standards and roaming agreements, low network security, and confusing price plans all further diminish consumer interest. For instance, some service providers put important price details in the fine print, and consumers who do not read the entire agreement will feel hosed. One colleague recently tried out a hot-spot service at an airport. He chose the metered-by-minute plan but did not notice that a minimum session is 60 minutes. He ended up paying $50 for a total of less than two hours of Internet access. Such tactics will ultimately hurt the long-term performance of a company and, by extension, the industry.
4.0 Myth 2: Only broadband Internet users are interested in hot-spot services.
Figure 5 Comparison between Narrowband and Broadband Users in Hot-Spot Familiarity and Interest
In May 2003, Verizon announced that it would offer free hot-spot services for existing broadband and narrowband Internet subscribers. Verizon's intention is to attract new customers and reduce customer churn for its DSL business. It also hopes that many of its existing narrowband users will convert into broadband users once they become addicted to the broadband experience. Some industry pundits question the allure of hot-spot services to narrowband users. They believe that only broadband users are sophisticated enough to be interested in Wi-Fi, and therefore, the free hot-spot services may only help draw customers of other broadband service providers.
Our consumer data disagree with this argument. The percentages of narrowband and broadband households who have used hot-spot services are almost even at 2.8% and 2.6%. In terms of interest in adopting hot-spot services, 6% of broadband households show modest to strong interest, compared with 3.8% of narrowband households (Figure 5). Apparently, narrowband households are not immune to the allure of hot-spot services and represent as viable a target as broadband users in moving this market forward.
About the Data:
About the Author:
Mr. Cai earned his M.B.A. with a 4.0 GPA and an outstanding student award from Baylor University in May 2002. He also holds an M.A. in leadership from Landegg International University, Switzerland, and a B.A. in economics from Shandong University, P. R. China. About Parks Associates: Parks Associates is a market research and consulting firm focused on all product and service segments that are 'digital' or provide connectivity within the home. The company's expertise includes home networks, digital entertainment, consumer electronics, broadband and Internet services, and home systems.
Founded in 1986, Parks Associates creates research capital for companies ranging from Fortune 500 to small start-ups through market reports, multiclient studies, consumer research, workshops, and custom-tailored client solutions. Parks Associates also hosts two executive seminars, both part of the Fall Focus series, and co-hosts CONNECTIONS™ (in partnership with the Consumer Electronics Association) each year. www.parksassociates.com.