Cometa - Wi-Fi gold at the end of the rainbow?

Will one of the US industry's biggest public WLAN gambles be copied elsewhere?

The idea of massive, wholesale Wi-Fi networks is gaining popularity, as witnessed by the birth of The Cloud in the UK this year. Cometa, in the US, is the industry's biggest play. Stewart Baines looks at whether it stands a chance and what it may teach the rest of the fledgling industry… When an executive from the ubiquitous coffee chain Starbucks admitted at a recent Wi-Fi conference that usage in outlets was running a little thin, it confirmed to industry skeptics that hotspots are in danger of going cold. It was a boost, then, that three of the tech industry's illuminati announced plans to take the public WLAN (PWLAN) industry by storm. In December 2002, Project Rainbow was unveiled by AT&T, IBM and Intel. With the financial aid of 3i and Apax Ventures, Project Rainbow would build a PWLAN network throughout the US in 20,000 locations. And fast – the target is completion by early 2005. Renamed Cometa Networks, this wholesale play is a major gamble on Starbucks' early experiments in Wi-Fi having failed on pricing issues rather than poor user demand. But will it work? Cometa heralds the age of hotspot version 2.0, if you like – the first large scale wholesale network in the US. But it also is home to a legacy of version 1.0 – excessive cash burn rate. Larry Brilliant, co-founder of Cometa, was running early hotspot operator AerZone when it went wallop in 2000. By trying to run the network and sell direct, it soon spent a large part of its $100m from investors CMGi, Compaq and SoftNet Zone with no sign of establishing a customer base. The industry's verdict on this land grab? Too much, too soon. Cometa, on the other hand, aims to take this experience on board and match supply to demand. "We're trying to tie costs into revenues as much as possible," admits Joe Gensheimer, Cometa CEO and a former Sprint senior veep. "At the moment, there are too many hotspots in the US, these guys [wireless internet service providers or WISPs] are just paying for connectivity when there are not enough users." This is the real cost of running a hotspot. Access points are cheap, and with a new generation of equipment, getting cheaper. Location owners usually share revenues than receive up front 'rent'. Backhaul is the real cash burner in an under-used hotspot, particularly for those that severely overestimated demand. Instead of connecting the hotspot to the internet with relatively cheap DSL, many early hotspots used expensive T1 and T2 leased lines at a cost of thousands of dollars a month per line. Cometa believes the secret to its future success relies in its relationship with its founders. IBM will provide and manage the billing systems and also donate engineers to perform the hotspot fit-outs, while AT&T will provide the last mile and backbone connectivity. Intel, as well as being the senior venture capital partner, boosts demand with its $150m worldwide marketing campaign for its new Centrino wireless chip for laptops. AT&T and IBM will deploy equipment and network services as and when demand emerges. With this foundation, Cometa will steadily build out throughout the US. It will take no responsibility for selling services to end users, or even deciding how they are charged. AT&T will be one of the first resellers. And with a promise that AT&T will not be given access to privileged customer information or unfair discount rates, Cometa hopes that other telcos will join up rather than build out their own network? The IBM-hosted billing platform will reformat rating information into anything that suits the telco reseller. "No telco will change their billing system to suit us," says Gensheimer. "We leave it to them to decide what and how they charge their customers." By hour, by day, by megabyte, prepaid, contract – Cometa is absolving itself of the pricing issue. "To be honest, billing and mediation is pretty simple. I'd like to say it raises huge barriers to entry but it doesn't." Pricing is probably the real make or break dilemma in this nascent market. To cover operating costs while there is little demand, charges have been high - too high to encourage growth. On the other hand, bargain basement pricing may encourage unprofitable but massive uptake. But if hotspot usage is on a different acceptance curve than price alone, cheaper end user connectivity will just mean faster burn rate. In Europe, for instance, the average unmetered access fee is over $100 a month, and that is accessing networks with few locations and little or no roaming. BT Openzone and Megabeam, two leading players, believe that their per hour prepaid pricing is more attractive when their hotspot locations are few and far between. "It'll never work like that," argues Gensheimer. "It'll just encourage more freenet use [free hotspots] or competition." In the US, though, where networks and roaming are more prevalent, the dominant charging scheme is a contract-based unmetered access fee of around $30 per month. To increase interest, T-Mobile, which operates over 2000 hotspots in the US including those at Starbucks outlets, recently slashed its $50 fee to $30 per month for standalone customers, and to $20 to its existing GPRS customers. And it could go further. Cometa, while "pricing agnostic", vehemently believes that operators will find the most success with monthly unmetered fees at roughly $10 a month - and still make a profit. This will be a low margin but high throughput business, it seems. "When you get below $20 per month it will really start to gather pace," says Gensheimer. "You only have to look at what's now happening in South Korea." Pyramid Research's John Yunker, a specialist in the Wi-Fi sector, agrees that pricing will hit the $10-15 per month mark sooner rather than later. "We've already seen price drops of 50 per cent in the last few months," he says. "Once Cometa has a large network and driven usage, it can really push the pricing down." Yunker's greatest fear for Cometa is that it will wildly miss its rollout goals. By year end, it expects to have 1,500 live hotspots, and 20,000 by the first quarter of 2005. "I think they'll really struggle to match their build-out targets. It's simply a matter of logistics. Twenty thousand hotspots is a lot of locations – where're they gonna go?" questions Yunker. If the first, and only announced deal, is anything to go buy, Cometa expects customers will want fast internet access with fast food. It currently is operating in 20 McDonalds restaurants throughout New York. Further location deals have yet to be announced but Gensheimer believes that fast food and budget restaurants, as well as gas stations, are the prime locations – not coffee shops. "If they focus on fast food, they're really going to struggle to build out quickly," warns Yunker. "There won't be much central planning as many of these are individual franchisees who will be difficult and time consuming to deal with." With problems like this, kitting out 20-30 locations a day, every day is going to be an onerous task. Even if Cometa cannot meet its lofty targets, Yunker believes that success is attainable. "Coverage is relative. It's the quality not quantity of locations that counts. I just don't think they'll need to 20,000 hotspots to create a viable business." But maybe, just maybe, Cometa is aware of this. It faces an uphill struggle finding site locations. Many of what are perceived as prime locations – hotels, airports, conference centres, coffee shops – are already snapped up on an exclusive basis by other WISPs. Cometa's well-publicised plan to reach 20,000 hotspots could be a precisely planned shot across the bows of existing operators – get out of this business fast 'cos we're coming through. Picking up locations and equipment by buying distressed WISPs is clearly in Cometa's sights.