CASE

Public Wi-Fi hot spots have been popular for about eight years. During that time, companies providing the service have been trying to figure out how to monetize it. The dominant model to date has been just to charge for it. Pay us $20 a month, and you can log in at any of our many locations. Recently, however, a kind of tipping point has been reached; now, instead of being rented for a fee, Wi-Fi will increasingly be given away to motivate customers to buy other goods and services. Now Wi-Fi is just like the free toaster that banks used to hand out for opening a new account. Starbucks is leading a transition from Wi-Fi-for-money to Wi-Fi as a lure to get people to spend money on other things.

It probably has to do with the strong competition Starbucks is facing for the morning breakfast crowd from the likes of McDonald's, which is also being more aggressive with Wi-Fi access. The Starbucks offer may be a stroke of genius. Starbucks and AT&T will give you two hours of free Wi-Fi per day, but only if you use a Starbucks card. If you want more than two hours, you can pay $19.99 per month, which also entitles you to unlimited Wi-Fi offered by AT&T at some 70,000 hot spots in 89 countries. Starbucks not only trumps other sellers of sugar and caffeine by offering free Wi-Fi, but also pushes its lucrative Starbucks card and provides an upgrade path for people eager to hand over money in exchange for unlimited access. Starbucks cards benefit Starbucks in three ways. First, people with Starbucks cards in their pockets are probably more likely to choose Starbucks when there are other nearby alternatives. Second, by getting millions of customers to pay in advance, Starbucks gets more cash upfront (rather than waiting until people actually get their coffee). Last and best is that cards get lost, stolen, or forgotten. When that happens, Starbucks gets to keep the money without supplying anything.

Like many indie cafes, Seattle's Bauhaus Books and Coffee has long relied on free Wi-Fi to help bring in customers. "In the evenings, the whole bar along the window will be lined with people using their computers," says Grace Heinze, a 13-year manager at Bauhaus, located between downtown Seattle and the trendy neighborhood of Capitol Hill. Bauhaus has thrived despite all of the Starbucks shops that have popped up around it: 15 within half a mile and 38 within one mile. So is Heinze worried that the fiercely artsy cafe, named for the 1920s German art movement and replete with memorabilia, might lose customers to Starbucks now that it is dumping its high Wi-Fi rate in favor of two free hours of Wi-Fi a day to any customer? Not really. "People come here because they like our atmosphere and because they like our coffee," Heinze said. "We're not feeling very uptight about this." Wi-Fi hot spots began to emerge around the beginning of the millennium. Propelled by the fast-growing popularity of laptops, Wi-Fi-enabled coffee shops quickly supplanted the older-style cyber cafes, which relied on the expensive purchase and upkeep of PCs. Still, until several years ago, many cafes were granting access to their Wi-Fi hot spots through codes given only to paying customers, according to Jack Kelley, president of Seattle regional chain Caffe Ladro. There was the fear "that if public Wi-Fi was free, you'd fill your place up with ‘campers,'" Kelley said, referring to patrons who linger all day without buying anything. But that didn't happen after Ladro's 12 Seattle-area cafes switched to free Wi-Fi several years ago. Nowadays, "we don't even care if you sit in the parking lot and use it," Kelley said. Asked about the impact of Starbucks's move on his business, Kelley retorted, "Wi-Fi is free everywhere these days. Isn't Starbucks a little behind the times?"

As pressure mounts to make more Wi-Fi hot spots free, some operators are turning to Web advertising to offset costs or make money. Those ads are delivered during log-in or at the user's landing page. JiWire serves up ads to more than 8 million users per month on various Wi-Fi networks, including Boingo, at rates far higher than ones on typical Web pages. That kind of advertising "sounds gross" to Ladro's Kelley, though. "It's just like all of those ads in the movie theatre," he said. "I say, enough is enough." "Many patrons of the smaller coffeehouses will continue to support their local shop due to loyalty, unique surroundings versus corporate giant, community support, convenience of location, etc.," he said. "Any customer losses may also be offset simply because there continues to be so much more demand for Wi-Fi access in general." Bauhaus's Heinze seconds that. "We're close to two colleges, and we are in a neighborhood with a lot of apartment buildings," she said. Although Bauhaus competes in Starbucks's backyard, according to Heinze, Bauhaus has never "done anything reactive. And isn't that the whole point of being an indie coffeehouse, being your own self? If that happens to be similar to what Starbucks does, that's fine." Like television, Wi-Fi is increasingly given away in exchange for ads. It's an unproven model; nobody is making huge profits on this approach yet. JiWire's "Ads for Access" program gives some users free Wi-Fi access at hot spots normally paid for by others in exchange for viewing ads over those connections. The company has recently (and wisely) started to target iPhone users. Wi-Fi is free at some airports. One of the largest is Denver International. In addition to advertising, the Free Fi Networks Wi-Fi access is subsidized by Disney-ABC television show rentals, which users can download over the connection. A company called Hype Wi fi funds its free Wi-Fi access through advertising, but also by doing "market research" for advertisers for a fee. Users logging onto a Hype Wi fi access point may earn their access by answering a question or two, which is aggregated and presented to the sponsor, along with demographic information about the users. There's no industry where all players universally provide free Wi-Fi as a matter of course; for example, some hotels offer free Wi-Fi, and some don't. Some airports have it, and some don't. It's also interesting to note that Wi-Fi works as an incentive even when it's not free. After a few fits and starts, Wi-Fi in the transportation industry is suddenly taking off. A solid majority of major airlines in both the United States and Europe either have or are planning to offer in-flight Wi-Fi. Most will charge for the service.

Within two years, all major carriers will offer inflight Wi-Fi. Airline Wi-Fi, in turn, has triggered a rush to install Wi Fi service in trains across Europe. These rail service companies see the airlines as a competitor for the lucrative business traveler market. Commuter trains and even taxis are getting Wi-Fi; in fact, wherever you find a concentration of businesspeople with expense accounts and time to kill, expect to find Wi-Fi there. Everyone wants these customers because they spend money on other things. Pricing runs the gamut from no-strings-attached free access, to conspicuously overpriced, to creative or selective pricing à la Starbucks or Boingo. Yet the trend is clear: Wi Fi is transitioning gradually to always free everywhere. There's just no downside to these trends. Everybody loves Wi-Fi-the freer the better. Some, however, do not think Wi-Fi has a future. "As mobile broadband takes off, Wi-Fi hot spots will become as irrelevant as telephone booths," says Ericsson Telephone Co. chief marketing officer Johan Bergendahl. "Mobile broadband is growing faster than mobile or fixed telephony ever did." In Austria, they are saying that mobile broadband will pass fixed broadband this year. "It's already growing faster, and in Sweden, the most popular phone is a USB modem," says Bergendahl. As more people start to use mobile broadband, hot spots will no longer be needed. Also, support for high-speed packet access (HSPA), favored by Ericsson, is being built into more and more laptops. Ericsson recently signed a deal to put HSPA technology in some Lenovo notebooks. "In a few years, [HSPA] will be as common as Wi-Fi is today," says Bergendahl. Challenges still remain. Coverage, availability, and price- especially when someone is roaming on other networks-are all key factors for success. "Industry will have to solve the international roaming issue," Bergendahl says. "Carriers need to work together. It can be as simple as paying 10 per day when you are abroad." Not knowing how high the bill will be after a business trip is not acceptable for professional users. Coverage will also have to improve.

CASE STUDY QUESTIONS

1. Do you agree with the plans by Starbucks to offer time limited free Wi-Fi to customers? Do you think free Wi-Fi would be enough to instill that kind of loyalty? Based on the experiences of the other coffee houses reported above, do you think free access was a critical factor in developing a loyal customer base?

2. Part of the reason for Starbucks's move had to do with increased competition from chains like McDonald's for the morning breakfast crowd. Do you think that free wireless access by such a competitor would have moved a significant portion of Starbucks's customers away? Why or why not?

3. The case notes some companies that offer free Wi-Fi in exchange for viewing advertisements or answering questions for market research studies. Would you be willing to do so in order to get free wireless access, say, at an airport? Would your answer change if you were using a corporate laptop versus your own, because of security concerns?