/ MIT Sloan

15.521227B020

Competition in TelecommunicationsManagement Accounting & ControlSpecial Seminar in International Management – India

Economic Analysis of the

Wireless Hot-Spot MarketThe FMCG IndustryBalanced Score cCard

MIT SLOAN SCHOOL OF MANAGMENT

Business Opportunity in

Economic Analysis in Hot-spot Market

Name: Names: Felicia Hu, Karen Kwan, Nhat-So Lam,

Derrick Lay, Myat Hnin Oo, Miguel Ferreira, Dokyun Kim, Eran Penini, Cheng-Soon Wee, Miguel FerreiraCheng-Soon Wee,

Professor: Jerry HausmanT. WeberDr. Gupta

Date: October 28December 3, 2003February 17April 12, 2004

Executive Summary

To:Professor Jerry Hausman

From:Dokyun Kim, Cheng-Soon Wee

Date:10/27/2003

Re:Combination of WiFi and Cellular

Introduction

Although 802.11x standard existsed since the late 90s, the phenomena of Wi-Fi craze only started to pick up huge momentum since at the beginning of late 2001. Currently, Wi-Fi capabilityies areis builtincorporated into has is becomeing a standard feature on most notebooklaptop computers and is making its way into increasingly offered in handhelds and other mobile devices as well. As a result, of this Wireless LAN craze, many players haved begun entering the market, beefing up their respective presence at different stages of the Wireless Hot-Spot value chain. , Many new middleware applications /software haved been created to further add newextendenhance the key capabilities of the Wireless LANWi-Fi such as greater range,so , enhancing tto increasehe availability and ease of use by the public. but its public availability is not meeting expectations for adoption. However, the standard will add new capabilities in the near future, making it suitable for a broader array of applications.

In this paper, we will focus our analysis on the Service Provider level of one specific part of the Wireless-Hot-Spot value chain, namely the Service Provider Level. TheOur analysis will be broken down into four parts:

Overview of the Examine the overall hot-spot market

Identificationy of the variousthree groupstypes of hHot-spot players in the marketat the Service Provider level.

Perform detailed sScenario and financial analysis ofn the three specific grouptypes of Wireless Hot-sSpot SService Pproviders. – Wireless ISP, Wireless Aggregators and telco.

Understanding of the strengtstrength andh, business opportunities of each players and make appropriate recommendation.

Ostensibly, 802.11b, or Wi-Fi, is on a roll. The wireless Ethernet standard, which has all but vanquished its rival specification HomeRF, has focused on diverse applications, such as the following:

• The standard provides a convenient, if still relatively expensive, alternative to wiring homes, particularly those with notebook computers.

• In schools and on campuses, it facilitates mobile student access.

• In the enterprise, it enables both warehouse applications and white-collar corridor cruisers.

• Physical businesses such as coffee shops and airports can offer Internet access to their customers.

Nonetheless, the Wireless Ethernet Compatibility Alliance (WECA), which is responsible for Wi-Fi, now boasts at least 142 members. The number of Wi-Fi products in the marketplace has increased from fewer than 50 in July 2001 to 237 as of November 2001. In 2003, WECA expects the number of Wi-Fi–based units to grow from fewer than three million to more than five million worldwide.

Nowadays, a lot of wireless solutions such as GSM, GPRS, CDMA 1xEV, WCDMA Bluetooth, and WiFi (802.11x) or UltraWideBand that are being deployed or under developmented around the world. Nevertheless, most of these technologies are currently being and deployed as separately solution used to take advantage of their own advanced technological features without much integration. However, at the same time, the benefits needs for integrating the appropriate those different solutions technologies are ever increasing getting bigger as customers continue to demand want greatera flexibilityility,, user-friendliness easy usability, convenience for their wireless service. and richer experience. The phrase of “one device & one solution” well describes the developing needs in the coming future. Here,This executive summary we will describe our belief in the wireless go through a general convergence trend that currently prevails in the wireless industryin the future, , and come up with a new business opportunity that is highly feasible, and identify thea market needs and business opportunity in the convergence area, and finally our proposed productand potentials, and recommend our final solutions that aims at addressing the market need in this growing business segment.

.

Convergence TrendOverall Wireless Hot-spot Market

Ostensibly, 802.11b, or Wi-Fi, hasis experiencing huge growth for the past two years. There are many competitive advantages of Wi-Fi access has many competitive advantages over the traditional wireline standard orand competingother wireless standards like HomeRF or Bluetooth for in a variety of applications. This has created an environment where there is a::

Large adoption by public. This allows for mass production volume of equipment, driving hardware prices down thus lowering the cost of deployment.

Deployment by large infrastructure players such as Telcos. The huge adoption of wireless LAN by the general public had result in mass production volume by various manufacturers, hence driving the price of both the client devices and base station down significantly over other competitive technologies.

The large deployment of Wireless LAN setup by many large telcos and infrastructure players, educational institution encourages the adoption of wireless LAN services by students and general public.

Large push of Wi-Fi by key hardware vendors, like Cisco, to their corporate clients.In the enterprise space, there are substantial vendors like Cisco that are pushing this technologies aggressively to its enterprise customers, causing the adoption by corporate customers to grow sharply over the past two years.

Less restriction and Further driving growth, Wi-Fi benefits from the fact that it is not understrigent controls by the regulators around the world as in comparisoned to with other wireless technologies (2G, 3G). First of all, 802.11x standard leverages the unlicensed spectrum (2.4GHz and 5GHz band).

Growth was also aided by the fact that Furthermore, some of the core standards for interoperablility (such as 802.11b, 802.11a, 802.11g, 802.11h, etc) had been finalized by IEEE at the early stage of deployment. This prevented the situation where manufacturers designed competiting variants of the same technology which would eventually split the strong market. Growth among a few incompatible products. continues strongly. The Wireless Ethernet Compatibility Alliance (WECA), which is responsible for Wi-Fi, now boasts at least 142 members. The number of Wi-Fi products in the marketplace has increased from fewer than 50 in July 2001 to 237 as of November 2001. In 2003, WECA expects the number of Wi-Fi–based units to grow from fewer than three million to more than five million worldwide.

Wi-Fi benefits from a favorable With all these positive factors from the technologicaly, regulatory and demand perspectivesoutlook, giving the characteristics of an important we strongly believe that Wireless LAN is a potential market. Now, tThe big question, however, is whether such advantages can be translated to the success of Wireless Hot-Spot markets.

Industry Trend / Forecast for Wireless Hot-Spot

Public WIFI Hot Spots gained significant momentum over the past twolast year, especially in the US.

According to InfoTech Trend’s latest report:

Estimated Hot Spots locations in US (2002) =

Total estimated number = 3,800

Hot Spots users (US vs. Worldwide):

US hotspot users = 2.7m users (2002), 24.5m users (2007), AGR = 55.4%

Worldwide hotspot users = 3.9m users (2002), 69.8m users (2007), AGR = 74.9%

Figure 1 and Figure 2 below show the public hot-spot locations and users growth forecast for the next five years by Gartner Group (dated Apr 03)

Figure 1

FFigure 2

The estimate shown in Figure 1 and 2 seems to be on the conservative side. Another research firm, In-Stat/MDR (a sister company to Wireless Week) expects about 50% higher growth rate compared to than Gartner’s estimate.

Hot Spot Value Chain

A study by Gartner (Figure 37) breaks down the Hot Spot Value chain into a few major components. Although most of the press coverage concerning Hot-spot has been focusing concentrating in on the “Hot spot Operator” component (the main focus of this report), it is also important to gain deeper understanding in the the oother parts of the value chain as they may be equally important and lucrative components markets to enter as active participants.in this growing market.

Figure 37

The six component of the value chain are:

Clearing House and Billing – e.g. Aggregator such as iPass, Boingo

Back-haul network and VPN – AT&T, Verizon, Level3

Hot-Spot Operator – WayPort, Cometa Networks, Boingo, T-mobile

Systems Integrator / Outsourcer – IBM, HP

Site Owners – airport, Starbuck

Branding and user awareness – Atheros, Intel, DLink, Proxim

It is important to note that eEach component of the value chain is critical for creating an overall, a large-scale hHot-Sspot system that is attractive tofor both residentialpersonal and business users. With the exception ofExcept Boingo and some Ttelcos, most of the major players in the Hot-Spot business do not have significant involvement in multiple components of the value chain. As a result, a partnership model is generally adopted to fill the gaps along the chain. For instance, T-mobile (a Hot-Spot Operator) partners with Starbuck (a Site-Owner) and Boingo (a Clearing House) to maximize its overall footprint, which is welcomed by most of the hot-spot users. It leverages its own backbone (back-haul network) to support the traffic and IBM’s (systems integrator) expertise to design and build the hotspot network for them. Without such partnership and collaboration, it is almost impossible to roll out a substantial hot-spot network – even by a major global Ttelco – without incurring prohibitively large initial investments. Therefore, in our analysis later on, mMany key drivers ofor the success of wireless hHot-Sspot players depends on their leverage generated by key partnerships with players in on other parts of the wireless value chain.

Challenge of Wireless Hot-Spot Proliferation

Despite all the optimistic opinions and forecasts of the Wireless Hot-Spot market by all the research firms like Gartner, we foresee that the Wi-Fi players will face great challenges in encouraging wireless hot-spot proliferation and sustaining a profitable business in the long term.

Particularly aOnce Wi-Fis it moves beyond its current mainstream applications such as casual use, which isemail access and web surfing shared Web surfing, Wi-Fiit will faces growth challenges fromon at least three of the following fronts:

• Surviving and establishing leadership position in a confusing marketplace that comprises a variety of competing wireless split of the ststandards with similar functionalities.

Competing head-to-end with alternative high end wireless solutions like 3G that offer much greater mobility and relatively high data access rate.

Creating a viable business model for widespread Wi-Fi deployment across US and around the world to encourage massive public adoption and growing revenue stream

• Competing on the high end with 3G

• Creating a viable business model for public availability

Figure 4 below showed that a variety of 802.11x standards have evolved quickly over the past one year in order to address some of the key concerns of the Wi-Fi technology. Besides the range and speed parameters, other key issues include security, interference with Radar, seamless roaming and quality of service. In order to gain market share and make Wi-Fi the prevalent standard in the wireless data access technology, the industry had adopted a high volume, low price strategy from the beginning as its hope to leverage the significant network externality effect as the tool to sustain the momentum of rapid innovation in this area the long run., (I don’t really understand what is meant)

Figure 4

1. Main Hurdles of Hot Spot Proliferation:

There are a few key hurdles acknowledges for Hot-Spot proliferation:

Unclear Business model. High price and limited Hot Spots have deterred mass signups. It is – difficult to have an attractive and sustainable revenue model, especially as a standalone service (i.e. one location).

Lack of Interoperability and collaboration among large number of Wireless ISPs (WISP). Billing, authentication, roaming, provisioning and network management are difficult to coordinate across diverse WISPs.

Security. The main potential customers are enterprise users, for whom security is a high priority. However, not many hot spots are ready to support services such as VPN. (E.g. many APs right now are not able to support VPN tunnels from big players like Nortel Contivity without manual customization on the default configurations)

Technical challenges. – Sscalability, interference and short battery life.

New technologies such as 802.16a (WiMAX) and 802.20 adoption in near future may disrupt the existing business model of WISPs.

2. Opportunities in the Hot-Spot Market:

All is not bleek however as there remain a series of possible opportunities namely:

Aggregator can play a critical role in uniting all the various WISPs so that overall WLAN offerings will be attractive enough for many generic users. It has the vital interface to standardize billing / authentication of users from different WISPs seamlessly.

Alternative solutions (GPRS or 3G) are expensive to deploy. The pricing is expected to remain high in the near future in order to recoup the high investment cost. According to Gartner, less than 1% of mobile enterprise users will use GPRS for laptop connectivity (70% probability) by 2007. As a result, WLAN hot-spots may be a more favorable solution for Ttelcos in the near term than committing a large amount of capital to roll out a 3G network.

Demand from new broadband market. Wi-Fi hot-spot deployment may incur lower capital expenditures than laying copper for DSL or offering cable services for last mile access and back-haul network. E.g.For example, rRegional and rrural ISPs such as Independence Network and MHO Network in Colorado and Prairie iNet in Iowa and Illinois are using Wi-Fi based solutions to reach into neighborhoods that they cannot serve with DSL. BeamReach is one equipment vendor to work in this direction. The 802.11x standard is also robust to serve longer distance (in multiple of miles) with the use of directional antennas.

Gartner predicts that Asia/Pacific will have 38,000 hot spots by

2007, with 40 percent located in cafes and restaurants, 32 percent community-based (in parks, libraries

and public buildings), 10 percent in hotels, and less than 0.2 percent in airports (see "Public Wireless

LAN Hot Spots: Worldwide Trends and Forecasts"). Thus Xone's "e-mail over coffee" hot spot location

strategy makes more sense than the airport lounge model that Telstra inherited from SkyNetGlobal.

WLAN hot spots will only be compelling for enterprises when they are located where enterprises conduct most of their business. It's not the numberThe total number of hot spots is not the only winning factor in this market. that is important — Instead, it's their the location of the wireless hot-spot that is equally important. pivotal. No one operator is likely to dominate due to these factors. Therefore, , so, in the interests of all parties, hot-spot operators will probably need need tto cooperate and interoperate in order to create widespread awareness and build a profitablethe public WLAN hot-spot market. In the following section, we will examine the two major business model in the wireless hot-spot market and how the wireless aggregator model is trying to exploit these fundamental market factors in this capital intensive market and create a potential lucrative business strategy.

Generally speaking, “Convergence” refers to the trend thatintegration of various wireless technologies and the ability to offer various wireless services supported under these different technologies as one seamless service. For example, it may refer to service convergence across different industries like the e with any other types of services such as financial services, broadcasting services, and even medical services, previously supported using different wireless technologies as one service to end-users eventually.. This means that anyone can easily access to a specific type of service using the different wireless technologies /devicesnetwork, wireless solution, and wireless devices or vice versa. Some examples of The followings are a few of major examples of convergence include: trend.

Home application: Remote security, Integration of home appliance and etc.

Business application: Mobile payment, Mobile broadcasting, Mobile health care and etc. seamless wireless data access using 3G and WiFi

Among many possible opportunities of convergence trend described above, however, we limited our analysis to intra-convergence trend that may create potential business impact within the wireless and consumer electronic industry in order to choose more specific and tangible subject that must occur within the next fivethree years.

Overview of New Business Opportunity in the Wireless industryThreewo Main Contrasting Business Models in Wireless Hot-spot Market

The four main groups of Wireless Hot-spot players:

Wireless Aggregator

Wireless Internet Service Providers (WISP)

Telco

Our analysis will focus on the Wireless Aggregator and WISP, their distinct features, business strategies and competitive advantages to try capturing the Wireless Hot-Spot Market. We believe that the remaining players like the Telco and Equipment vendors will play a pivotal role in collaborating with either Wireless Aggregator or WISP to further encourage the mass adoption of wireless hot-spot initiative.

1. Description of new product/service and target customerPure WISP Model

The main WISPs in the US are WayPort, Surf&Sip, NetNearU, Boingo, Cometa Networks. The main strategies of these WISPs are:

Generally, WISPs Oown the wireless network infrastructure. The WISP typically will incur huge upfront investment cost to install and deploy the entire wireless infrastructure either within specific geographical regions, in specific hotel chains, etc. The WISP will also own the backend infrastructure that handle account provisioning and billing.