Friday, August 21, 2009

Wifi business

3G and Wifi Current business models/deployment are different

As noted above 3G represents an extension of the mobile service provider model. This is the technology of choice for upgrading existing mobile telephone services to expand capacity and add enhanced services. The basic business model is the telecommunications services model in which service providers own and manage the infrastructure (including the spectrum) and sell service on that infrastructure. Endcustomers typically have a monthly service contract with the 3G provider and view their payments as a recurring operating expense – analogous to regular telephone service. Not surprisingly, the 3G business model is close to the wireline telephone business. The mindset is on long- lived capital assets, ubiquitous coverage, and service integration.
Moreover, telecommunications regulatory oversight, including common carriage and interconnection rules are part of the landscape. The service is conceptualized usually as a mass- market offering to both residential and business customers on a subscription basis. The 3G deployment and serving provisioning model is one of top-down, verticallyintegrated, and centralized planning and operation. It is expected that 3G services will be provided as part of a bundled service offering, to take advantage of opportunities to implement price discrimination strategies and to exploit consumers' preferences for "onestop" shopping/single bill service.

In contrast, WiFi comes out of the data communications industry (LANs) which is
a by-product of the computer industry. The basic business model is one of equipment
makers who sell boxes to consumers. The services provided by the equipment are free to
the equipment owners. For the customers, the equipment represents a capital asset that is
depreciated. While WiFi can be used as an access link, it has not heretofore been thought
of as an end-to-end service. Only recently have WLANs been targeted as a mass market
offering to home users. Previously, these were installed most typically in corporate or
university settings. End-user customers buy the equipment and then self- install it and
interconnect it to their access or enterprise network facilities. Typically, the users of WiFi
networks are not charged directly for access. Service is provided free for the closed usercommunity (i.e., employees of the firm, students at the university), with the costs of providing wireless access subsidized by the firm or university. More recently, we have seen the emergence of the FreeNet movement and several service provider initiatives to offer (semi-) ubiquitous WiFi access services.

Participants in the FreeNet movement are setting up WiFi base stations and allowing open access to any users with the suitable equipment to access the base station (i.e., just an 801.11b PC card in a laptop). Participants in this grass-roots movement do not charge for use of the access service (either to recover the costs of the wireless access infrastructure or the recurring costs of providing connectivity to the Internet). Because data traffic is inherently bursty and many end- users have dedicated facilities for which they pay a flat rate to connect to the Internet and because they have already incurred the cost of the wireless access equipment for their own needs, FreeNet proponents argue that the incremental cost of supporting access is zero, and hence, the price ought to be also. While this may be true on lightly- loaded networks, it will not be the case as FreeNets become more congested and it will not be the case for traffic-variable costs upstream from the FreeNet. Moreover, if migration of consumers from paid access services to FreeNet access is significant, this will cannibalize the access revenues earned by service providers offering wireline or wireless access services. These issues raise questions about the long-term viability of the FreeNet movement. In any case, this movement is playing an important role in raising awareness and helping to develop end-user experience with using wireless broadband access services.

In addition to the FreeNet movement, there are a number of service providers now looking at using WiFi as the basis for wireless access over broad geographic areas. Most recently, the chairman and founder of Earthlink (one of the largest ISPs in the U.S.), Sky Dayton formed a new wireless ISP called Boingo. Boingo's business model will be to act as a clearinghouse and backbone infrastructure provider for local service providers interested in deploying WiFi access networks. Boingo will sell end-users a monthly subscription service that Boingo would then share with the WiFi network owners to compensate them for deploying and providing the service. Boingo would handle the customer billing and marketing, building out its footprint organically, as more and more WiFi local service providers join the Boingo family of networks. Partners may
include smaller ISPs, hotels, airport lounges, and other retail establishments where
potential customers are likely to be interested in getting wireless access.

With respect to deployment, 3G will require substantial investment in new infrastructure to upgrade existing 2G networks, however, when deployed by an existing mobile provider, much of the 2G infrastructure (e.g., towers and backhaul network) will remain useable. For WiFi, it is hoped that deployment can piggy-back on the large existing base of WLAN equipment already in the field. In both cases, end- users will need to buy (or be subsidized) to purchase suitable interface devices (e.g., PC cards for 3G or WiFi access).

In contrast to 3G, WiFi wireless access can emerge in a decentralized, bottom-up fashion (although it is also possible for this to be centrally coordinated and driven by a wireline or mobile service provider). While the prevailing business model for 3G services and infrastructure is vertically integrated, this need not be the case for WiFi. This opens up the possibility of a more heterogeneous and complex industry value chain. One impediment to the growth of paid but decentralized WiFi service offerings is consumer's preference for one-stop shopping/single monthly billing. Boingo's model offers one approach to overcoming this resistance. Alternative approaches that are under research consideration (i.e., not commercially viable today) include using some form of micropayments (e.g., eCash or credit card billing). It is also well-known that consumers have a demonstrated preference for flat rate billing, which may cause problems in a
decentralized WiFi provisioning model. If backhaul costs are traffic variable (e.g., suppose rate for Internet connection from base station to cloud varies with traffic), then offering flat rate service may be perceived as too risky for the base station owner. Once again, Boingo's approach suggests how an intermediary willing to aggregate customers and take advantage of the scale economies associated with serving a larger customer base (e.g., with respect to retail costs and backhaul traffic management costs) can play an important role in facilitating the emergence of decentralized networking infrastructure e.

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