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Wi-Fi hits the spot – Businesses find wireless Internet connection entices customers to stay and pay a little longer

August 25, 2003 /

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Anthony Azzollini, the owner of Caffe Roma in North Beach, believes in free Wi-Fi.

Ever since he’s allowed his customers to piggy-back wirelessly on his DSL Internet connection, he’s seen a 30 percent jump in foot traffic on weekday afternoons.

By Matthew Yi, Chronicle Staff Writer

"We’re not charging anyone. All we’re asking is to support us. If you’re sitting here more than an hour, buy an extra latte or a sandwich for a friend, " said Azzollini, who installed his Wi-Fi, or wireless fidelity, access point in May.

Some large retail chains like Starbucks have adopted the pay-to-log-on model using the services of large telecom companies. Customers typically pay the service provider for use of that wireless Internet access.

On the flip side, some small business owners are giving it away. They are simply adding an access point to their existing broadband connection so that customers can hop on to the network. They say free Wi-Fi is attracting more customers and sales.

Telecom service providers also see commercial Wi-Fi as a revenue opportunity. However, many consumers insist they won’t pay as long as there are places where they can log on for free.

There is little doubt that momentum is building. The number of users who connect to the Internet wirelessly is definitely on the rise. And there’s a growing number of Wi-Fi hot spots, or wireless networks, in places such as coffee shops, restaurants and hotels.

By 2008, William Clark, an analyst at industry research firm Gartner Dataquest estimates there will be 22.6 million Wi-Fi users logging on to 53, 500 hot spots in the United States. Worldwide, he sees 75 million users tapping into 167,000 hot spots. The research firm IDC projects that 28 million people will be using Wi-Fi connections in the United States by the end of 2003.

But the question remains whether those networks in public places should be free or fee-based.

One of Azzollini’s biggest competitors, coffee house mega-chain Starbucks, has taken the pay-for-service route. Starbucks has joined with T-Mobile to outfit more than 2,300 stores with Wi-Fi networks in the past year.

T-Mobile users can subscribe ($29.99 per month with a one-year agreement) or pay each time they log on: $6 for the first hour of use plus 10 cents for every minute after that.

"We’re seeing tens of thousands of customers using the service hundreds of thousands of times per month," said Nick Davis, Starbucks spokesman.

Neither Starbucks nor T-Mobile would divulge the details of their business partnership.

However, one industry analyst said T-Mobile is paying for all of the startup and maintenance costs.

"Starbucks isn’t paying squat," said Keith Waryas, an analyst at the industry research firm IDC. "It’s got the mother of all deals. T-Mobile is coming in and paying for all this."

The bottom line is that despite growing popularity of Wi-Fi in the past couple of years, the technology hasn’t reached the critical mass to make it a profitable venture, Gartner’s Clark said.

"No one will make money on this until 2005," he said.

Jeanna McGregor, who runs the IT shop for Personality Hotels of Union Square, which operates four boutique hotels in San Francisco, agreed her firm hasn’t quite hit the profit side of the balance sheet even though the company’s hotels have offered fee-based Wi-Fi for its clients for two years.

Personality Hotels uses service provider Deep Blue Wireless, which installed the Wi-Fi network for free. The service provider charges a monthly fee to the hotel operator. McGregor declined to say how much her company pays.

Guests pay $8.95 for 24 hours of service.

"It’s a feature more than a profit center for us, though we are close to breaking even on it," she said.

McGregor said the market is growing slowly, but not as fast as they expected when they first installed the network. However, she said demand for Wi-Fi does spike when there is a high-tech convention in town.

High-tech executives like Intel Corp.’s Julie Coppernoll makes sure her hotel has a Wi-Fi connection — free or paid — whenever they’re on the road.

In fact, some employees at the chipmaker have made it a habit of finding the best Wi-Fi spots and sharing them with co-workers, she said.

"It’s sort of like a little cult," said Coppernoll, director of marketing at Intel’s wireless networking group.

The other business model for Wi-Fi is to offer it for free in the hope of generating business. For small business owners like Caffe Roma’s Azzollini, it has done just that.

Azzollini estimates he spent about $1,000 to hook up his wireless access point to his already existing DSL line. That hookup allows any of his customers who have laptop computers capable of wireless networking to connect to the Internet.

Andrew Golden was in San Francisco earlier this month for an American Bar Association conference at Moscone Center and ended up spending at least a couple of hours each day at Caffe Roma doing work.

"It was great. It was fast. It was easy," Golden said. "We probably spent about $100 on coffee and food. I’m sure that more than covered for his Internet connection for the month."

Golden, who is the managing director of a marketing firm in Santa Monica, said he refuses to use pay services.

"We pay for our Internet connection for the office. I pay for it at home. I don’t want to pay again to use it," he said. "And that’s too bad, because I like Starbucks coffee."

Adam Carstens, researcher and writer for a think tank in Scottsdale, Ariz., recently made a road trip to Portland, Ore. to visit his family. He didn’t miss a single day of work thanks to his Wi-Fi card he bought last May for his laptop PC.

"I found enough options just by doing a little bit of research on the Internet and found free Wi-Fi options in the cities that I was visiting," he said.

Carstens said he equates hot spots in coffee shops with television sets in sports bars. "You don’t expect to pay to watch the game on the TV," he said.

That’s the attitude at Schlotsky’s Deli, a national chain headquartered in Austin, Texas, said Monica Landers, the company’s spokeswoman.

"We look at this as a service to our customers," she said, referring to the company’s mandate to equip all their restaurants with free Wi-Fi networks.

The company has taken a step even further in that direction, pointing its Wi-Fi signal to a dormitory building at University of Texas from one of its stores in Austin.

An internal survey showed 6 percent of Schlotsky’s customers came into the store because of the free Internet connection, Landers said.

Also, the free service means customers come in during slow hours of the day,

between meal times, she said.

Using existing DSL lines to provide service to customers is a touchy subject for service providers.

At least two major DSL service providers in the Bay Area say sharing broadband is not specifically prohibited as long as the connection is not being resold and the sharing doesn’t go beyond the boundaries of that property.

However, spokespersons at both SBC Yahoo DSL and Covad warned that having a group of users on the network can slow the connection and perhaps more importantly, leave their computers open to attack by hackers.

Also, if there’s any illegal use of the Internet connection, the business owner could be liable, said Fletcher Cook, a spokesman for SBC.

Comcast, a cable company that provides broadband mostly to residential customers, has a firm policy that says customers are not allowed to distribute their connections to anyone, whether it be a neighbor or a coffee shop customer, said spokesman Andrew Johnson.

Despite fledgling efforts to turn Wi-Fi access into a profitable business, some full-service telecom companies like T-Mobile, Verizon and SBC are willing to take the chance because they believe the technology will gain mass adoption,

IDC’s Waryas said.

It’s a powerful argument considering laptop computers are selling faster than their desktop counterparts and Wi-Fi is increasingly accepted as a standard option on notebook PCs, he said.

Also, with the plunging cost of setting up a hot spot, service providers are willing to spend the money to begin building the infrastructure for the future, Waryas said.

"To own and operate a hot spot, it’ll cost you about $2,000 a year," he said.

So for T-Mobile, which has 2,700 hot spots in the United States, the company’s effort would cost about $5.4 million a year, Waryas said.

"That sounds expensive until you consider the fact that T-Mobile is pushing just under 11 million cell phone users paying $40 a month. Five million dollars to $10 million is a drop in the bucket for (large telecom companies)," he said.

Perhaps that’s why others are joining in. Both SBC and Verizon have announced efforts to roll out hot spots in various locations across the country.
Wi-Fi’s growing presence

The number of hot spots, or establishments that offer wireless connections to the Internet, is rising rapidly. The United States accounted for to an estimated 22 percent of the world’s hot spots this year.

Wi-Fi hot spots in the United States

2002: 4,240

2003: 11,000 (IDC forecast)

2008: 53,500 (Gartner forecast)

Wi-Fi hot spots worldwide

2002: 19,800

2003: 49,700 (IDC forecast)

2008: 167,000 (Gartner forecast)

Wi-Fi users in the United States

2002: 13 million

2003: 28 million (IDC forecast)

Wi-Fi users worldwide: