Due Diligence: Why Wi-Fi Won't Fly

By Eric Nee  |  Posted 09-02-2002

Due Diligence: Why Wi-Fi Won't Fly

It's estimated that there are a mere 7,000 people in the U.S. who pay a monthly subscription to a public Wi-Fi network—and I am one of them. I guess that makes me an early adopter, having subscribed since May, when I began leasing an office in downtown Palo Alto, Calif. I picked that location because it was in a Wi-Fi "hot zone," a six-block area where I could get wireless broadband access to the Internet.

Compared with the time, hassle and expense of getting a DSL line in the office, Wi-Fi was a breeze. I simply inserted an IEEE 802.11b card in my Macintosh iBook laptop, sniffed out the signal, logged on to WiFi Metro's Web site and signed up for service, all in minutes. Now, for just $19.95 a month, I get unlimited broadband wireless access to the Internet from my office and any of the nearly 50 other WiFi Metro locations around the San Francisco Bay area.

That's all very cool, but unless you frequent places like Palo Alto, San Francisco and New York City, where early adopters congregate, don't expect to find a public Wi-Fi service any time soon. That's because despite all the media hoopla surrounding Wi-Fi, and the eternal optimism of those in the Wi-Fi industry who believe a boom is just around the corner, the establishment of a reliable and ubiquitous national Wi-Fi network is still years away.

That means trouble for the still-nascent public Wi-Fi industry. Until big business is convinced that public Wi-Fi services are readily available everywhere, they will not sign on. And without the heft of the corporate market, Wi-Fi operators will have a difficult time getting enough subscribers, and enough money, to create a viable business.

That isn't to say Wi-Fi is completely dead. The technology is finding a ready market in the home and office, where people and companies install networks for their own use. But in the public sphere—offering broadband Internet connections on the ISP model—Wi-Fi is still a long way from approaching the sort of coverage already available for paging, cellular and other wireless services.

The usual way out of the chicken-and-egg conundrum that confronts companies trying to create a new communications service is for the operators to invest first in the building of a network in hopes of later recouping the money as the customer base grows. The problem now is that speculative money for the creation of a new communications network is tough to come by. The downdraft created by the collapse of the telecommunications industry has sucked in just about every adjacent business, including public Wi-Fi networks.

Investment Worries

Investment Worries

Having watched numerous broadband operators crash and burn, venture capitalists are reluctant to plunk down the money it would take to build these networks. Howard Anderson, senior managing director of YankeeTek Ventures in Cambridge, Mass., has already lost a few million dollars on one Wi-Fi investment and doesn't want to try another. "It's an interesting technology, but I don't think there's a viable business model," he says.

Meanwhile, the public markets are in no mood to fund commercial Wi-Fi services either; not after having seen hundreds of billions of dollars evaporate with the collapse of WorldCom, Global Crossing and the like. And cellular carriers, whom many in the Wi-Fi industry believe will come to their rescue, are too busy holding their own heads above water to spend money creating an entirely new national service any time soon.

Several large companies—including IBM, Intel, AT&T Wireless, Verizon Communications and Cingular—are said to be discussing the possibility of creating a national Wi-Fi service. But the talks, dubbed "Project Rainbow," have not been publicly confirmed by those involved. A spokesman for AT&T Wireless says the company is looking at Wi-Fi, but one of the challenges of creating a national Wi-Fi service is that no one has put together a financial model that's economically feasible.

That hasn't stopped a number of entrepreneurs from trying. Austin, Texas-based WayPort is one of the largest Wi-Fi operators, with sites in the public areas of 450 hotels and four airports. But expansion has slowed considerably in the last nine months. WayPort used to build and operate Wi-Fi networks in hotels at no cost to the hotels, even kicking back a portion of the subscription revenue to the hotel. "Who wouldn't take that deal?" asks Dave Vucina, CEO of WayPort. Turns out that model is no longer viable. Now WayPort will put in a new hot spot only if the hotel pays the cost of the T1 line and base stations. "The capital markets changed, which caused us to revisit our business," says Vucina. Other casualties include MobileStar Network Corp., once one of the fastest growing Wi-Fi operators, which was forced into Chapter 11 bankruptcy last fall after failing to secure additional financing.

Hot Shops

Hot Shops

In the absence of the financing required to build a national Wi-Fi network, many in the industry are relying on the efforts of hundreds of mom-and-pop coffee shops, pizza parlors and cafes to put in their own Wi-Fi hot spots. As the price of 802.11b base stations has come down, that initiative has gained some momentum. Boingo Wireless is offering "Hot Spot in a Box," an $895.99 kit that includes the base station and 10 "Boingo Here" stickers to put in the storefront window. All the retailer has to do is pay for a T1, DSL or cable connection, and it, too, can offer Wi-Fi service as part of the Boingo network. Boingo provides the client software, monitors usage, does the billing and splits the proceeds with the retailer.

As simple as this approach seems, it is fraught with problems. The owners of these shops may know how to make a mean double espresso, but they're typically not as good at installing and managing wireless networks. If they happen to put the base station in the back room on the other side of the wall from their microwave oven, or next to their cordless phone, the service could go down every time they get a call for a pizza delivery, or warm up a can of soup. That's because 802.11b uses the same 2.4 GHz unlicensed spectrum as microwave ovens, cordless phones and other devices, something that can create problems for even the most expert operators.

"Most of the wireless networks I've seen are far from bullet-proof," says Phillip Windley, CIO for the state of Utah. "They are far from what I'd be willing to pay money for. They will have to be at least as reliable as the cellular network, and that isn't very reliable." Windley is just now installing Wi-Fi networks in state buildings. "I'm not 100 percent convinced that any network in the unlicensed spectrum can be reliable for a public network," he says. "I've no doubt we can do it inside our own building, but out in public it is tough."

Today, public Wi-Fi networks are still few and far between. That is why there are only 7,000 subscribers, according to research firm In-Stat MDR of Scottsdale, Ariz. Most of the people using public Wi-Fi networks like WayPort's do so on a pay-per-use basis. WayPort charges between $6.95 and $9.95 per day. Vucina estimates that 38,000 people connect to WayPort this way each month.

The public Wi-Fi market is not going to take off until it becomes ubiquitous, until people know they can easily find a hot spot or hot zone. That means getting into all the major airports and hotels, as well as nationally-known retail establishments—companies like McDonald's, Starbucks, Kinko's, 7-Eleven, Shell and Holiday Inn. And that is going to require large capital investments, either by major carriers or the hotels, airports and retail establishments themselves. Until that happens—and don't expect it to any time soon—the public Wi-Fi market will remain largely a curiosity, and an endangered one at that.

Meanwhile, just as I was completing this column, I heard that hereUare Communications, the company that operates WiFi Metro, announced it had failed to raise additional financing and was up for sale. If the company doesn't raise more money, it will shut down. Turns out my "very cool" service may have been just too good to be true.

Eric Nee, a longtime observer of Silicon Valley, has served in a variety of editorial positions at Forbes, Fortune and Upside magazines. His next column will appear in November.