Subject: [NEXTEL-1] Kerton Wireless Review: EU Hotspot Pricing

From: Marcelrf <[email-masked]>
Date: Mon, 01 Mar 2004 22:15:06 -0500

European Hotspot Access: Priced Out Of Reach
By Derek Kerton
Principal, The Kerton Group
February 2004

In a comparison of European and US hotspot activity a couple of major
differences stand out. Public Wireless LAN (PWLAN) access in the EU is
much higher-priced than access in the US and is also far more influenced
by incumbent telcos than by startups.

The nature of the differences is probably rooted in the fact that the US
PWLAN sector is the product of venture capital-backed startups, like
Wayport, Airpath, and Mobilestar. These companies, active since the turn
of the century, have created a somewhat competitive environment where
price control is difficult for any one provider. With executive
backgrounds in networking and Internet, US providers naturally tended
towards flat rate pricing for either a month, a day, or a short 2-hour
session. 

While startups were building early PWLAN hotspots, carriers worldwide
didn’t know what to think about this Wi-Fi phenomenon. It wasn’t until
2003 that the global telco community finally decided they had better get
involved, and the results were different depending on the region. In the
US, where startups were already active, carriers tended to partner with
existing service providers and aggregators, while announcing their
intentions to build their own hotspots (of which we’ve seen few). In the
EU, where startup activity was minimal, carriers like BT, Swisscom, and
France Telecom decided to build the hotspots themselves, connected to
their copper infrastructure. The results of these different evolutions
are illustrated by a recent Cahners In-Stat report that 64% of EU
hotspots are carrier-provided versus a lowly 19% in North America.

Having the incumbent telcos dominate the PWLAN market has its benefits
and its costs. The benefits will be most visible in roaming, billing,
and quality of service (QoS). With carriers dominating the market, the
EU will have far less complexity to solve in order to develop Wi-Fi
roaming, and also will be better able to leverage the carrier’s
expertise in billing in order to more rapidly move PWLAN billing onto a
mobile or telephone bill. EU hotspots are likely to demonstrate a higher
overall QoS, since carriers will tend to backhaul with T1s or E1s and
will be able to monitor hotspots from their existing Network Operations
Centers, and have thousands of service technicians and trucks to keep
the equipment running. Sounds great, doesn't it? (With the caveat that
it is still early, so these mechanisms aren't yet mature for WiFi.)
Unfortunately, it's not all upside: With telco-style high costs
dominating the market, and without ample competition, pricing at EU
hotspots is simply
 atrocious. According to Wi-FiRates.com, the average daily Wi-Fi access
rate in the US is $7.70, while in France it is €25.50 (US$32.10).
Further creating grief among customers is the fact that the EU
telco-provided hotspots often charge on a per-minute basis strangely
reminiscent of a circuit-switched phone call (with which Wi-Fi has
little in common). Let’s call that ‘telco baggage’. Yet, even though
it's priced "per minute", the EU telcos are forcing minimum 2hr.
concurrent sessions. Perhaps telcos are trying to break-even in the
first 18 months, which would require the early adopters to pay for the
entire capital expenditure!

The Law of Supply and Demand is plain on this: the effect of higher
prices has got to be lower demand. But with rates 317% higher than US
rates, European hotspot providers aren’t just shrinking demand a little,
they’re stifling it! Even for monopolists, the pricing decisions are too
high: they’re not maximizing profit, and they are opening the door to
competitors. EU telcos are in a good position right now, un-threatened
by startup hotspots. But with new regulations limiting broadband
wholesale prices and un-bundling network elements, the more the telcos
gouge users, the more they fertilize the soil for competitors to enter
the market. If instead of suppressing demand with high prices, the
incumbents were to strive to meet demand with reasonable prices,
reasonable margins, and superior service based on high QoS, billing, and
roaming, they would be able to own PWLAN for the foreseeable future, and
increase the size of the overall market a great deal.

The marginal cost of adding a Hotspot customer:
We can be almost certain that the Wi-Fi hotspots charging high rates in
the EU are not at capacity – that is, they could add additional
customers without incurring any additional costs. Could they get more
total revenue if they lowered the price somewhat? Any increase in volume
would have to offset the decrease in margin. The closest analogy is the
US ski resort industry, where daily ticket prices have crept up to $65
per day at some elite mountains. A few years ago, some resorts realized
that they could earn drastically more revenue by dropping their prices
to $35, because the increase in volume more than made up for the
decrease in revenue per user. Season’s passes made a similar drop from
$600 to $300. This industry was on the verge of (stupidly) pricing
themselves out of the reach of their customers. The price drops resulted
in not simply stealing customers from other resorts, but more
importantly an increase in industry-wide skier activity.

EU hotspot providers would do well to follow the example of the ski
resort industry. Just like the ski industry, there are certain hotspots
that are in high demand and can risk charging more (ex: airports) but
the average hotspot stands to gain revenue and profit by pricing its
product somewhere in the neighborhood of what the target customer can
afford. Evidence from the US would suggest the EU hotspots are way out
of that range, and that service providers, customers, equipment vendors
would all benefit from a drastic drop in price.

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--------------------------------------------------------------

--
later,
Derek Kerton,

*Mr. Kerton is a Principal Consultant at The Kerton Group, based in San
Jose, CA.  For more info, visit http://www.kerton.com

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