Is Free Wi-Fi Good Businesss?

Wi-Fi hotspot service inside fast-food restaurants, coffee shops, book stores-and any other establishment with tables and chairs-has become a standard fare these days. But what isn't so standard is whether customers should pay for the wireless connectivity service or businesses should provide it for free-just like napkins and packets of ketchup.

When looking at four businesses' Wi-Fi business models -- Starbucks, McDonald's, Borders and Panera Bread -- one sees a range of connectivity prices, service and payment methods, and underlying customer-relationship strategies.

Wi-Fi, Pay As You Go and Free

Starbucks still charges by the hour via its new provider AT&T, but loyalty-card-toting customers can now get two hours of free service a day. McDonald's charges US$2.95 for two hours of wireless Internet access through provider Wayport. Borders, via T-Mobile, has varying hourly plans as well as day passes for $9.99. And Panera Bread, in contrast to others, charges nothing to use its hotspots. (Naturally, most businesses serving up Wi-Fi these days also offer deals, tied in with service providers such as AT&T and T-Mobile, for monthly subscription plans.)

Wi-Fi hotspots aren't just confined to retail and coffee joints, however. Hospitals, airports and hotels are three other classes of businesses that offer wireless connectivity in and around their facilities.

Stan Schatt, VP and research director of the wireless connectivity practice at ABI Research, notes in a July report that Wi-Fi hotspots are continuing their "torrid growth" in 2008. According to Schatt's Wi-Fi hotspots forecast, by the end of 2008, global hotspots will have grown by 40 percent over 2007, with much of that growth coming outside of the United States. Right now, according to Hotspot Locations, there are more than 33,000 WLAN hotspots worldwide, and more than 10,000 in the United States alone.

The Business Case for WiF-Fi

The more time customers are sitting at your tables, the more money they are going to spend in your stores. And offering wireless access to the Internet for those customers with a Wi-Fi-enabled laptop or smartphone will add even more sales to the bottom line and make customers more loyal to your brand. That's the theory, anyway.

When asked if Wi-Fi brings more people into businesses and improves customer loyalty, Paula Rosenblum, a managing partner with Retail Systems Research (RSR), says: "Absolutely. Yes. Definitely." Her belief is that "anything that brings customers back to a store" is critical, "whether it's the music, the newspapers or the Wi-Fi-if it's a part of the experience, you'll go there," she says. "Wi-Fi is really a customer-centric practice for businesses."

ABI Research's Schatt is certain that those companies that offer Wi-Fi have completed in-house (and proprietary) consumer studies on whether the service offering is successful or not. ("Everyone would love to have those numbers," he says.) "All you have to do is look at the growth of Wi-Fi at companies like McDonald's, which keep adding Wi-Fi," Schatt says. "Obviously if they felt it was detrimental they would have stopped."

In analyzing the Wi-Fi strategies at Starbucks, McDonald's, Borders and Panera Bread, Rosenblum draws out a couple of themes: "Obviously, it's a part of Starbucks' strategy because it builds community. It's clearly a part of Borders proposition: The longer you sit there, the more books you'll buy. It's a part of Panera's value proposition because I think they'd like to increase average transaction value and get loyalty at the same time."

As for McDonald's strategy, Rosenblum doesn't have an answer. "I've never understood why McDonald's would ever want to offer Wi-Fi," she says. "There's an old saying that you paint these fast-food places orange because it makes people move and makes them not want to stay."

An October 2006 profile of McDonald's emerging Wi-Fi efforts, begun in 2003, noted that McDonald's was "trying to morph from a drive-through to a destination-a place where people go to meet and socialize or play, or even get some work-related e-mail done." Tom Gergets, director of technology and infrastructure for McDonald's U.S. operations, said in the Network World article that "people are using restaurants very differently these days as lifestyles have changed. We've really had to contemporize and create modern, relevant in-restaurant experiences." (Gergets wasn't available for an interview with CIO.com.)

Today, McDonald's has Wi-Fi-enabled more than 15,000 of its 30,000 restaurants around the globe. (To read how McDonald's gets the most from its technology vendors, see "How to Evaluate Vendor Performance.")

"They are very interested in how to draw in the consumer who may not normally go to a McDonald's who's now going to go because they can use a high-quality Internet service, for relatively inexpensive price," says Kevin McKeand, VP and general manager the hospitality, healthcare and retail divisions at Wayport, the third-party infrastructure and applications provider of McDonald's Wi-Fi service. "And while they're there, they're going to buy something. That's the objective."

The Business Case for Free Wi-Fi

So for all those business execs who now see Wi-Fi as a critical piece of the "enriching the customer experience," as is so often said, the next question becomes: Who should pay for it? At McDonald's, for instance, customers pay $2.95 for two hours of service. And many other restaurants, hotels and airports still charge for Wi-Fi connectivity today.

But that may soon have to change. A recent In-Stat report on global hotspots found that Wi-Fi service has become commonplace and customer "resistance to paying for access remains high. Over the last 12 months hotspot operators have gone through some profound changes to survive in a market where demand increases while willingness to pay for the service decreases," notes the report.

At Panera Bread, CIO Tom Kish says via e-mail that Panera has offered free Wi-Fi in all its bakery-cafes since 2003. "We were the first major concept to offer it free," he says, "and have established one of the largest free Wi-Fi networks in the U.S. with approximately 1,200 cafes providing the service."

To Kish, free Wi-Fi ties into Panera's strategy of enriching the customer experience. "We see it as another amenity for our customers," he says. "Free internet access is one of a series of Panera's innovations designed to engage, connect and support our customers."

"We believe we raised the bar in customer service by offering free Wi-Fi," he adds.

One of the more well-known studies on free Wi-Fi's effect on consumer behavior is from Free-Hotspot.com, an operator of 3,000 free hotspots in 18 European countries. The 2006 survey of more than 1,000 Wi-Fi users in six European countries found that: 84 percent of respondents said they were more willing to purchase goods and services from businesses that offered a free Wi-Fi service; almost all (96 percent) said they would return to the hotspot location because of the free Wi-Fi; and half of the Wi-Fi users surveyed came to the hotspot location specifically for the free Wi-Fi. (Due to Free-Hotspot.com's business model, the results should be taken with several grains of salt.)

To many businesses, notes Schatt, free Wi-Fi is already or will soon become seen "as just another cost of doing business and an operational expense, rather than as a profit center."

Complimentary Wi-Fi, With a Catch

One of business owners' main arguments against offering free Wi-Fi service is simple: "You charge something so that you don't have people camping out all day and essentially taking up table space," says Schatt.

The Borders bookstore chain charges for Wi-Fi through T-Mobile, which takes care of the backend IT and network management. The amount that customers pay varies according to the length of service they want, notes spokeswoman Mary Davis. Borders customers can pay $9.99 for a day pass, which offers 24-hour, unlimited access from all T-Mobile hotspots. Hourly rates are also available.

Starbucks offers a number of payment options for its Wi-Fi service. At the base level, two hours will cost customers $3.99. However, the coffee purveyor has recently announced ways to get "complimentary" Wi-Fi service, taking great pains to not use the word "free."

The most notable method is that customers who registered their Starbucks Rewards card and agreed to receive four marketing e-mails per year from service provider AT&T can receive 2 free consecutive hours of free Wi-Fi access per day. Customers must use their rewards card-to make a purchase or load more money on it-at least once a month. Also, AT&T's more than 12 million DSL customers can get free Wi-Fi at Starbucks. (To read how IT can help Starbucks' companywide transformation, see "How IT Systems Can Help Starbucks Fix Itself.")

Schatt says that Starbucks' move from a paid Wi-Fi hotspot business model to a "virtually free" one is a bellwether event for the industry. Most significant is that Starbucks' change is emblematic of a phased approach that businesses will mostly likely take in the near future, he says, from charging for Wi-Fi, to almost free with ties to a loyalty program, and then eventually to free for everybody. (Interestingly, McDonald's recently announced a partnership with Free-Hotspot.com to offer free Wi-Fi hotspot service in Belgium, which stands in stark contrast to its U.S. strategy right now.)

A big reason hotspot owners will be willing to move toward this business model, Schatt contends, is the recognition that "charging for service is counter-productive in the long run because the real money will be in value-add content downloads." Again, one can see evidence of that at Starbucks: Customers can wirelessly buy and download music to their laptops or iPhones via the iTunes Music Store at Starbucks.

And the accumulated CRM data will prove to be a boon to businesses. "If they know something about their customers," Schatt says, "then [the business] can build up a database on people and offer very targeted and customized offerings, and probably have a much higher hit rate." In contrast, Borders, for example, does not have a Wi-Fi tie in with the more than 27 million members of its Borders Rewards loyalty program.

Wayport's McKeand says that when he begins working with a new partner, the executives always ask whether their company should charge customers for the Wi-Fi service. "If the [business] can create some other form of value, we just don't see the need to give it away unnecessarily, but we're also saying they don't necessarily need to charge for it," McKeand says. "We're just saying: Don't give it away for free without trading off some kind of value because it's not free to the property. We think they should get something in return for it."

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