Carrier Channel: Catch Air

By Khali Henderson

Posted: 5/2003

Catch Air
How to Play in the Wi-Fi Game

By Khali Henderson

The
rumors are true. McWi-Fi is on the menu. McDonald’s restaurants in three U.S.
cities will offer one hour of free high-speed wireless access to anyone who buys
a value meal. By year’s end, McDonald’s will extend access to 300 McDonald
restaurants in New York City. After using the hour of free access that comes
with a meal, customers can pay $3 for another hour online. The pilot program
uses wireless LAN (WLAN or Wi-Fi) access technology from wholesaler Cometa
Networks.

If anything says Wi-Fi is mainstream
America, this deal does.

However, at the end of 2002,
research firm In-Stat/MDR counted only 3,800 Wi-Fi hotspots — nodes or access
points enabled to tap into the 802.11 frequency. The analysts predicted this
number will grow to more than 25,000 by the end of 2005.

Another study published in March by
research firm Wirthlin Worldwide quantifies the opportunity another way,
predicting hotspot services will attract about 15 million subscribers within
three to five years.

The Wirthlin Worldwide study, which
was conducted in cooperation with cable/telco consulting firm PDS Consulting and
management and technology consulting firm IP Action Partners, also found that
cable operators, wireless network providers and wireline telephone companies
have an opportunity to bundle Wi-Fi with their existing offerings. Among likely
subscribers, the study showed similar percentages would buy Wi-Fi if it were
bundled with cable modem service (17 percent), with DSL service from a telco (17
percent), with cellular phone service (20 percent) or with telco-provided phone
service (20 percent). Fewer prefer Wi-Fi service from an independent Wi-Fi
provider (13 percent) or bundled with dial-up Internet access from an ISP (10
percent).

Data collected for the Wi-Fi demand
study was completed in early February 2003 via telephone survey of a national
probability sample of 1,001 U.S. households. The survey showed among other
things (see sidebar on page 17) that individuals who already are tightly
connected to the Internet and to e-mail are more prone to adopt Wi-Fi, says Dr.
Barry Goodstadt, senior research executive at Wirthlin Worldwide, who notes they
represent low-hanging fruit for initial Wi-Fi marketing initiatives.

Having broadband Internet access
from the home is a predictor of interest in Wi-Fi for access outside the home or
office, adds Dr. Peter Shapiro, principal at PDS Consulting. Of likely Wi-Fi
subscribers, 21 percent report they have DSL service and 29 percent say they
have home cable modem service, substantially higher than the current overall
household penetrations of these services. As a result, the researchers assert
that providers of cable modem and DSL services have an opportunity to build on
their current base of subscribers.

"They can capitalize on their
infrastructure, billing systems and downstream customer relationships to
incorporate complementary service offerings into their portfolio of services for
revenue opportunities," says Chris Luzine, product manager for Bridgewater
Systems, a provider of dynamic IP and data service fulfillment and assurance
solutions.

Time Warner Cable, as one example,
recently announced a deal whereby it will supplement its cable access network
with high-speed wireless services from wholesaler SkyRiver Communications Inc.
to reach business customers.

Jupiter Research reports significant
demand for Wi-Fi services among businesses. Fifty-seven percent of U.S.
companies already support 802.11 networks and another 22 percent plan to
implement and support this technology in the next 12 months, the research firm
reports. Consumer and small office/home office (SOHO) markets have driven
deployments to date, but that’s changing, notes Jupiter Research Senior Analyst
Julie Ask, who notes larger enterprises will drive growth later this year,
presenting new opportunities to vendors in the space.

Such enterprisewide WLAN deployments
can be quite complex and enterprise IT departments may not have the time or
expertise to deal with issues such as proper antenna placement, channel
selection and security, says Luzine, noting that this creates an opportunity for
carriers to bundle WLAN managed services with their existing connectivity
services, particularly since many carriers already have customer premises
equipment (CPE) in place.

As part of the services offered, the
service provider will manage authentication and access services, and allow
enterprise employees to reach the enterprise’s private network. However, says
Luzine, they can also operate the managed WLAN as a public Wi-Fi hotspot,
allowing visiting business partners such as customers or suppliers to reach the
Internet or tunnel to their home network, through the enterprise WLAN.

The public WLAN market also presents
several opportunities for wireline service providers to become hotspot
operators/wireless ISPs (WISPs), clearinghouses or wholesale providers.

According to Probe Research Inc.,
the most easily understood business mode for the public WLAN is for a carrier to
be responsible for the entire value chain (with the exception of the mobile
device) — from data backhaul and interconnection with the network to
negotiating with location owners to marketing, billing and customer support.
However, the firm also notes that this approach has resulted in several
failures, the most notable being MobileStar, which declared bankruptcy after
building hotspots in 600 Starbucks coffee shops.

As an alternative, service providers
can look into providing pieces of the public WLAN value chain as it suits their
business model.

Carriers and ISPs, for example, can
provide the backhaul component, which is the connection from the public WLAN to
a network PoP and interconnection to the Internet. "No matter how the
hotspot market evolves, backhaul will be an essential part of the
solution," says In-Stat/MDR senior analyst David Schoolar in an early April
analysis. "In the [United States] along, this growing vertical will have an
annual value of over $100 million in just a few years, and this is just the
value of the backhaul service."

He notes that the backhaul
connection — a T1 or business-class DSL — can support enterprise applications
such as IP VPN or VoIP, which represent additional revenue opportunities.

At the other end of the spectrum,
service providers can become hotspot providers of WISPs, wherein they own the
hotspot equipment or operate it on behalf of a venue owner. Hotspot providers
generate revenue through roaming agreements with other hotspot operators,
clearinghouses, hotspot aggregators or WISPs.

For service providers deploying
their own hot spots, negotiated elements will include responsibility for
backhaul, ownership of equipment, profit-sharing agreements with venue owners
and roaming agreements with other service providers.

"For some carriers, it may be
natural to deploy hotspots themselves. For others, deploying their own hotspots
might be contrary to capital expenditure freezes," says Luzine, adding that
there also are opportunities to acquire startups that already have a footprint.

He says backhaul providers are
naturally positioned to be hotspot providers as they have control over the last
mile, which represents the single largest recurring cost of operating a hotspot.

WISPs also can offer hotspots
through "aggregators," which today are upstart technology companies
that lease hotspot infrastructure for deployment at the WISPs’ customer sites
and handle customer authentication, billing and customer support on a hosted
basis for the WISPs. Such aggregators may operate as a franchise wherein their
brand is marketed or on a white-label basis.

Additional hotspots may be provided
through roaming agreements. According to Probe Research, a key element in
attracting and keeping paying customers will be roaming agreements among WISPs
so subscribers can access their data without having to set up accounts with
WISPs in several locations. Because roaming agreements are not yet standardized,
putting them in place requires a significant commitment, notes Luzine.

Service providers could sign
agreements with many local hotspot providers and make the hotspots available not
only to their own subscriber bases, but also to roaming subscribers belonging to
other carriers.

As a variation, backhaul providers
may choose to offer clearing services for the hotspot providers to which they
provide Internet connectivity, Luzine notes. As a WLAN clearinghouse, a company
brokers the relationships between hotspot operators/WISPs. Clearinghouses also
are positioned to offer mediation, settlement, reconciliation and reporting
functions.

While wholesale models exist for
Wi-Fi as described earlier, telecom service providers could take on the role of
wholesalers. Probe Research analyst David Chamberlain argues that a small number
of companies could own and maintain the hotspot infrastructure and then offer
carriers access to those systems. Therefore, remote access companies such as
America Online Inc. and Earthlink, mobile carriers and others could offer public
WLAN service without building and operating their own hotspots or negotiating
with property owners. In fact, Probe Research expects a shakeout in the public
Wi-Fi market eventually will leave a few strong national players that have
alternative revenue sources and wholesalers leasing their hotspots to other
remote access carriers.

Already, there are signs that this
model could be emerging. Cometa Networks, the company conducting the McDonald’s
pilot, for example, was formed in December 2002 by AT&T Corp. as well as
Intel Corp. and IBM Corp. and investment companies Apax Partners and 3i. Along
with venue owners like McDonald’s, Cometa Networks seeks to enable multiple
carriers and ISPs to integrate wireless access solutions into their service
offerings. Another vendor, Amperion Inc., is betting that electric utilities
using its technology will fill those roles.

802 Dot What?

Wi-Fi , or 802.11, is composed of
several standards operating in different radio frequencies. According to the
Wi-Fi Alliance, 802.11b is a standard for wireless LANs operating in the 2.4GHz
spectrum with a bandwidth of 11 Mbps; 802.11a is a different standard for
wireless LANs, and pertains to systems operating in the 5GHz frequency range
with a bandwidth of 54Mbps. Another standard, 802.11g, is for WLANS operating in
the 2.4GHz frequency but with a bandwidth of 54Mbps.

802.11a is an Institute of
Electrical and Electronic Engineers specification for wireless networking that
operates in the 5GHz frequency range (5.725GHz to 5.850GHz) with a maximum
54Mbps data transfer rate. The 5GHz frequency band is not as crowded as the 2.4
GHz frequency, because the 802.11a specification offers more radio channels than
the 802.11b. These additional channels can help avoid radio and microwave
interference. It has been dubbed Wi-Fi5 by the Wi-Fi Alliance. Like 802.11b, it
is compatible with Ethernet LANs.

802.11b is an international
standard for wireless networking that operates in the 2.4GHz frequency range
(2.4GHz to 2.4835GHz) and provides a throughput of up to 11Mbps. This is a very
commonly used frequency. Microwave ovens, cordless phones, medical and
scientific equipment, as well as Bluetooth devices, all work within the 2.4GHz
frequency band.

802.11g is similar to
802.11b, but this standard provides a throughput of up to 54Mbps. It also
operates in the 2.4 GHz frequency band but uses a different radio technology in
order to boost overall bandwidth. 802.11g is important because 802.11a and
802.11b are incompatible, but 802.11g devices will work with either one.

Research firm In-Stat/MDR says many
new types of hardware shipped in 2002, including 802.11a network interface cards
and access points, dual-mode 2.4/5GHz NICs and access points, and the first
trickle of pre-standard 802.11g products.

In 2003, In-Stat/MDR analyst Gemma
Paulo says the development of the market will be shaped by continued growth and
evolution of dual-mode 2.4/5GHz-capable equipment, Intel’s ability to push out
its Centrino mobile technology, the shift toward 802.11g as the preferred 2.4GHz
WLAN technology and the advent of new enterprise infrastructure technology.