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T-Mobile HotSpot
Steve admired the view of Mount Rainier, Olympic National Park and the Cascade Mountain Range as his plane made its final approach into SEA-TAC International airport. Steve was a second year student at the University of Virginia’s Darden School of Business and had been flown to Bellevue, Washington to complete his final interviews with executives of T-Mobile USA. Steve was interviewing for a marketing position as a product manager of T-Mobile’s recently launched, “T-Mobile HotSpot” service.
As the plane landed and taxied towards its gate, Steve contemplated whether the new T-Mobile HotSpot service ( was well-positioned to take advantage of consumers’ demand for high-speed, public, wireless broadband internet access. Several questions loomed in his mind: Would customers be willing to pay monthly fees to use such service? Had wireless technology standardized enough to make T-Mobile HotSpot easy to use? Could high-speed, public, wireless broadband replace customers’ reliance on slow, archaic dial-up service? Who were T-Mobile’s competitors? Was T-Mobile’s HotSpot technology too far ahead of the game?
History of T-Mobile[1]
Western Wireless Corp., Based in Bellevue, Washington was formed in 1994 through the merger of General Cellular Corporation and Pacific Northwest Cellular, each co-founded by John Stanton, who is also a co-founder of McCaw Cellular Communications. John Stanton is currently Chairman of T-Mobile USA and Chairman and CEO of Western Wireless.
Voice Stream Wireless was a subsidiary of Western Wireless. VoiceStream launched the first auctioned PCS license in Honolulu, Hawaii on February 29, 1996 and continued to aggressively build out its PCS licenses in the western United States, based on the GSM (Global System for Mobile Communications) technology platform.
On May 3, 1999, VoiceStream Wireless was spun off from its parent company, Western Wireless Corporation.
In February and May 2000, VoiceStream completed merger transactions with two other regional GSM service providers, Omnipoint Communications and Aerial Communications.
On June 1, 2001, Deutsche Telekom AG, based in Bonn, Germany, completed its acquisitions of VoiceStream Wireless Corporation and Powertel, Inc., forming the first transatlantic wireless communications operator utilizing the GSM digital wireless technology standard.
In July 2002, VoiceStream officially becomes T-Mobile (see Exhibit 1 for financials),one of Deutsche Telekom AG's four strategic divisions, and launched its all digital wireless voice, messaging and data services to customers in California and Nevada, marking the debut of the global brand name in the United States.
In 2002, Voicestream (now T-Mobile USA) acquired MobileStar Network Corporation. Mobilestar had planned to provide wireless broadband service throughout the United States via hotels, airports and other public venues. In October 2001, Mobilestar announced that it had failed to obtain the necessary funding to continue with its proposed national expansion. Once acquired, T-Mobile USA continued to provide full network service to new and existing customers through its network of hundreds of domestic broadband wireless locations - now the T-Mobile HotSpot network.[2]
Industry Overview
Although the WI-FI 802.11b technology is still relative young, its standardization and wide adoption has created a shockwave of activity in the wireless industry (see the Technology section for an introduction to 802.11b). Startups and major telecommunications companies are moving quickly to position themselves as market leaders with dominant market share. While the existing telecommunications industry continues to struggle due to undisciplined financing activities and the after-effects of the hi-tech stock market bubble crash, the wireless industry is still attracting significant venture capital funding. In 2001, venture capitalists invested over $1.4 billion into various infrastructure and service provider companies. Additionally, blue chips like AT&T, Sprint and Verizon are investing significant internal funds into further research and development of this technology. As perhaps the heartiest endorsement of all, Microsoft Chairman Bill Gates considers the technology one of the most important innovations of the past 5 years, “If any one technology has emerged the past few years that will be explosive in its impact, it's 802.11.”[3]
As of now, the “last-mile” wireless broadband providers’ segment remains highly fragmented. Virtually every urban area contains several small operatorswho focus on individual locations. These locations are primarily commercial properties such as office buildings, hotels and multi-family dwelling. Alternatively, there is a strong push to create a virtual web that would ensure 802.11b spectrum across entire city blocks, using several pods strategically placed in a specific area that would provide access to the internet anywhere within that area. These movements consist of both profit and non-for-profit business models. Several rogue movements, such as FreeNetworking.org, believe that access to wireless broadband should be free and are trying to establish these zones without charging any connection fees. OpenNewbury.org has established such a network on Boston’s Newbury Street (perhaps the most fashionable street in Boston with high-end retail in brownstone units, fabulous restaurants and frequented night-spots). This free service competes with several Starbuck coffee houses outfitted with T-Mobile’s HotSpot service (on the same street).
While the 802.11b technology continues to be adopted as the industry standard, there are several developments in the wireless broadband industry that may threaten 802.11b’s position in the future. AT&T, Cingular, IBM, Intel and Verizon have combined forces to form the Rainbow coalition that would leverage its existing cellular towers for broadband distribution. The technology, referred to as 3G, sounds promising in that it can be easily distributed throughout the existing infrastructure. However, its speed (1Mgbit/Second) is 10 times slower than 802.11b. Furthermore, several small engineering outfits are testing various technologies, ranging from radio antennas (that could become a much cheaper alternative to towers that reach a 1000 meter radius) to high-altitude planes that provide broadband to entire urban areas. Other faster and more sophisticated technologies, such as optical broadband, also continue to make progress. There remains no doubt that wireless broadband technology is here to stay, however, questions about the final format and delivery system still remain.
HotSpot Service
T-Mobile HotSpot provides high-speed wireless Internet access in public locations such as airports, airline clubs and select Starbucks coffeehouses. This network uses a T1 connection at every location. Using either a laptop or PDA that is Wi-Fi 802.11b wirelessly-enabled, customers can surf the internet or check email.
T-Mobile is continuing to build-out the Wi-Fi 802.11b wireless LAN network of public Internet access locations that are convenient to mobile users (see Exhibit 2 for estimated cost structure). Today, T-Mobile HotSpot customers have access to the largest footprint of active broadband wireless sites. The broadband wireless network was built based on extensive research of the travel patterns and Internet access needs of mobile professionals. In order to create a business model that targets potentially high traffic locations and heavy users of the service, the company has identified target business districts throughout the United States in which to build out a selection of airports, airline clubs, coffeehouses, and other public locations. [4]
Steve’s review of T-Mobile’s website identified four benefits of the HotSpot service:
FAST - Connect to the Internet or your corporate intranet at blazing fast speeds -
T-Mobile provides a full T1 connection to every location.
RELIABLE - Get the same high quality service in every location, giving you the peace of mind that no matter where you go, you’ll experience the world class benefits of T-Mobile.
AFFORDABLE - Use it a little, use it a lot. Either way, there’s a plan for you. Sign up for an unlimited monthly plan, pre-pay for a bundle of minutes, or pay as you go - you decide.
CONVENIENT - With T-Mobile HotSpot, there are no busy signals, no searching for phone jacks, and best of all, no waiting. Connect easily, wirelessly, instantly.[5]
To access the service, a customer would enter a HotSpot location, such as a Starbucks (see Exhibit 3). Once inside the store, the customer would find a place to sit, start up his computer and enable the computer’s wireless card. Once enabled, the customer would open a browser window. The browser would automatically be redirected to the HotSpot login page, where a customer could login to access the network, add more time to his prepay card, or register for the first time. Once logged in, the customer could access the internet, email, etc throughout the Starbucks location.
It is important to note that while any person with a wireless enabled laptop within 100-200 feet of the HotSpot could pick up the wireless signal, only registered, paid customers could use the wireless service for internet and email. A non-paying customer would continue to be redirected to the HotSpot login page. This prevented the general public from tapping into the network for free.
HotSpot Pricing[6]
T-Mobile’s HotSpot service provides three types of plans:
Monthly Subscription Plans: These plans were targeted for frequent users of the wireless network. For $29.99, a customer had unlimited access to the HotSpot network within a given region. For $49.99, a customer could extend the unlimited access nationwide. Both monthly plans required a one-year service agreement.
Prepay Plans: These plans were targeted at the occasional use customer, who did not want to enter into a one-year agreement. Customers purchased 2 to 5 hours of online time that could be used at any HotSpot location. Time was deducted at one minute increments. Prepaid time cost $20 for 2 hours and $50 for 5 hours.
Metered Plans: These plans were targeted at the customer who is not a frequent user of the service, but will want to be able to check email from time to time. The metered plan is $2.99 for 15 minutes of use. Each additional minute is $0.15.
Customers
The key target customers of the service are the so called mobile professionals who, as was described by Howard Schultz, “have been waiting for just such an offering: high-speed wireless Internet access in a familiar and widely available location that keeps them connected while on the road, or between the home and office."
The broadband wireless network was built based on extensive research of the travel patterns and Internet access needs of mobile professionals. In order to create a business model that targets potentially high traffic locations and heavy users of the service, the company has identified target business districts throughout the United States in which to build out a selection of airports, airline clubs, coffeehouses, and other public locations.[7]
According to the Yankee Group 2002 Corporate Wireless Survey, almost 25 percent of all enterprise workers are considered mobile, spending more that 20 percent of their time away from their workspace. This equates to approximately 40 million mobile professionals in the U.S. who still want and need access to their e-mail, the Internet, or their corporate intranet. A number of corporate customers in the U.S. are participating in a pilot to extend faster and more affordable remote access options to their mobile workforces. Starbucks customers, including KPMG Consulting Inc., John L. Scott Real Estate, and others, have found that the service keeps them connected while they're away from the office-offering them a familiar, comfortable location, with the benefit of a high-speed Internet connection.[8]
Technology
T-Mobile HotSpot service uses standards based "Wi-Fi" (802.11b) technology and is easily accessible for customers with a wireless-ready notebook computer or Pocket PC. The Institute of Electrical and Electronics Engineers’ wireless-Ethernet specification, known as IEEE 802.11 (see Exhibit 4 for a list of types), designated two ways of communicating between devices. Both communication methods, direct-sequence spread spectrum (DSSS) and frequency-hopping spread spectrum (FHSS), are based on spread-spectrum radio waves in the 2.4-gigahertz (GHz) range.
Spread spectrum simply means that data is sent in small pieces over a number of the discrete frequencies available for use at any time in the specified range. Devices using direct-sequence spread spectrum (DSSS) communicate by splitting each byte of data into several parts and sending them concurrently on different frequencies. DSSS uses a lot of the available bandwidth, about 22 megahertz (MHz).
Devices using frequency-hopping spread spectrum (FHSS) send a short burst of data, shift frequencies (hop) and then send another short burst. Since the FHSS devices that are communicating agree on which frequencies to hop to, and use each frequency for a brief period of time (less than 400 milliseconds) before moving on, several independent FHSS networks can exist in the same physical area without interfering with each other. Because they use any given frequency for such a short time, FHSS devices are less prone to interference than DSSS devices. But DSSS is capable of much greater speed than FHSS since these devices can send a lot more data at the same time.
Wi-Fi (for "wireless fidelity", like Hi-Fi for "high fidelity" in audio equipment) is essentially a seal of approval that says the manufacturer's product is compliant with a variation of the IEEE 802.11 specification known as IEEE 802.11b. This specification drops FHSS and focuses on DSSS because of the higher data rate it can attain. Under 802.11b, devices communicate at a speed of 11 Mbps whenever possible. If signal strength or interference is disrupting data, the devices will drop back to 5.5 Mbps, then 2 Mbps and finally down to 1 Mbps. Though it may occasionally slow down, this keeps the network stable and very reliable. In addition, 802.11b has a long range (,000 ft / 305 m in open areas, 250 to 400 ft / 76 to 122 m in closed areas).[9]
Competition
The industry is peppered with small, locally focused providers of wireless broadband access, with only five companies, including T-Mobile, that employ a nationwide model.
Boingo (
Boingo, founded by Steve Dayton who earlier started Earthlink, is using a similar formula to provide wireless broadband access (as he did with Earthlink). Boasting the largest network of locations in the US so far (over 650 locations) established in less than a year, Boingo offers free software downloads to operate its system and competitive rates for its services. Focusing on highly-traveled areas such as hotels in New York and convention arenas, Daytonuses a simple “franchising” model. Individuals purchase the hardware from Boingo and capture a revenue stream from anyone who uses their “Hot-spot”. Boingo has seen great success in capturing major airports such as Seattle/Tacoma, Dallas/Fort Worth, San Jose, BWI, Chicago Midway, Washington Dulles, Atlanta and Boston. Boingo secured agreements with top-tier hotels, such as Four Seasons, Hilton, Marriott and Wyndham hotels, that allow access to Boingo wireless in hundreds of locations.
Wayport (
Founded in 1996, Wayport has been serving the wireless broadband community longer than anybody else. Based in Austin, Texas, Wayport has focused on locations where corporate travelers need it the most – hotels and airports. Its list of locations closely matches Boingo’s, enjoying a presence in 8 major airports and over 80 cities. On several airport projects, Wayport has joined forces with Boingo to equip the airport with wireless access. Wayport charges a monthly rate or single use rates, as well as offering prepaid services available anywhere on their network. To date, Wayport has enjoyed funding from venture capital and private equity funds such as Invesco and Lucent Venture Funds. As of August of 2002, Wayport boasted a customer base of over 1 million members.
Jalipco (
Utilizing a similar franchising strategy as Boingo, Jalipco has secured approximately 85 locations throughout the US. Its pricing strategy of 24.99 per month for anywhere on its network remains one of the most attractive rate structures in the industry. Started in May of 2002 by an MIT professor, Mr. Negroponte, Jalipco has spread by establishing mini-providers within its framework that participate in the revenue sharing/generation of the network.
Surf and Sip Network (
Surf and Sip, based in San Francisco, has focused on coffee shops throughout the west coast. Recently they have spread to the east as far as Florida and Massachussetts. With over 100 locations in 18 states, Surf and Sip offers similar technology as T-Mobile. Surf and Sip lacks the continuous national chain penetration that some of the other competitors have.
It is anticipated that the spread of the WI-FI network, often compared to waterlillies taking over a pond, is going to be fast. However, it will take a few more years due to geographical vastness and lingering regulatoryconcerns. The industry is young, with no clear winner. At this stage, companies are focusing on establishing new turf by creating new locations. But just as it was the case with cable and cellular companies, the industry will soon turn to a consolidation mode. Will Boingo or Jalipco win the race with their franchising model, or will T-Mobile be able to gain a larger market share with their focus on partners with nationwide localities? Or will a new disruptive technology make the 802.11b standard obsolete before the industry fully develops itself? These are risk questions that only time will answer.