RealTime IT News

Consilnet Unwires the East

Pioneering companies in North America have discovered that the hotel WLAN service market is a tough row to hoe. Finding a business model that works and convincing hoteliers to buy in have not been easy.

Which is why San Jose, CA-based Consilnet decided not to even bother with the North American market for now. Instead, it went east in search of more fertile ground.

Consilnet has a handful of hotel properties with WLANs up and running in the Far East and the Middle East, including some in Chennai (formerly Madras) and Mumbai (formerly Bombay) in India, Singapore, and Dubai in the United Arab Emirates.

It expects to be in five or six more properties before the end of the year and is eyeing expansion in the short term to Kuala Lumpur in Malaysia, Bangkok in Thailand and Hong Kong. The company is also talking to properties in Germany and the UK.

"We are not discounting entry into the North American market," adds Consilnet CEO S.K. Vinod. "But there are many different reasons why we are not there now."

The company wanted to keep development costs low so it hired its technological expertise in India where there is a base of highly trained but relatively low-paid programmers and engineers. That made India a logical place to begin operations.

It also saw North America as an unforgiving place to test market hotel broadband wireless services -- or any technology innovation for that matter.

"The cost of test marketing here is phenomenally high," Vinod says. "We know of cases of Internet companies that raised a few hundred million and lost it all [trying to introduce new services.]"

Prominent failures specifically in the hotel broadband wireless field -- MobileStar and Darwin Networks, for example -- also suggested that the North American market for these services was not ripe yet. "Even companies like WayPort are struggling to be profitable," Vinod claims. Another hotspot company, hereUare, went up for sale just last week.

There are reasons for that, he says. Because most North American business travelers already have dial-up Internet accounts and because making local or toll-free calls from hotels here is relatively cheap or in some cases free, there is not as much incentive for them to use broadband wireless services, even where they do exist.

According to Vinod, the usage rates for existing broadband Internet services in hotels in North America are running between 2 and 2.5 percent. That means that in a 100-room hotel, only 2 to 2.5 people per day on average are using the service.

"That's not sufficient," he says. "It would take two to three years to recover your costs at that rate. We need to push usage rates up to 5 percent at least."

In many parts of Asia, where Vinod says just as many business travelers tote laptops, usage rates reported by hotel wireless pioneers are running as high as 8 percent. It's as high as 7 percent at one of Consilnet's properties, he says.

The reasons are not hard to find. Many Asian -- and European -- hotels still charge exorbitantly for local calls, as much as $1 a minute. At those rates, even doing e-mail at modem speeds -- never mind downloading PowerPoint presentations -- becomes an expensive proposition. Where broadband services are available, business travelers are much more likely to use them.

Even still, Consilnet, like many other companies in the field, recently changed its business model to give itself a fighting chance.

The company owns and operates the networks, including access points, NICs, switches, routers, RADIUS servers and billing systems tied into the hotel's system. The hotels market the service to guests, selling it for $15 a day.

The company has cut a deal with Redwood Shores, CA-based roaming aggregator iPass under which iPass subscribers use the service at Consilnet hotels. It has also had talks with Milpitas CA-based aggregator GRIC Communications.

"Our approach with companies like GRIC and iPass is that they're bringing more users into our network," Vinod says. "If we can sign an agreement with them, we're more than happy to do so."

Consilnet has no subscribers of its own and won't attempt to build a subscriber base until it has a larger footprint -- at least 20 or 25 properties, he says.

The company manages a two- or three-tiered support structure. Hotel IT staff, trained by Consilnet, provide the first level. Consilnet provides a toll-free number customers can call. In markets with multiple properties, it has an office with technical staff on site.

The change in the model is that hotels must now guarantee a minimum 5-percent usage rate. Consilnet gets 100 percent of that revenue -- whether the hotel actually sells the service or not. It shares any additional revenue above the 5 percent 50:50 with the hotel.

"The risk for them is not that great," Vinod says. "And the upside is quite good."

The hotels don't expect the Consilnet service to be a big money maker on its own. They're mainly interested in filling more rooms, he says, and value added services like broadband Internet access will do that. Still, hotels that can keep their usage rate above 5 percent will see some additional revenue.

Consilnet made the change in its pitch to hotels because it "wanted the hotels to put some skin in the game," Vinod says. One other reason usage rates in the U.S. have not been higher, he argues, is that the hotels often did not have any stake in the broadband service or network. "It was like somebody else put in a new pool and it didn't cost the hotel anything, so they didn't care if it was used or not."

General managers in Consilnet properties have a strong incentive to push the service. They're constantly reminding front-desk staff to upsell new guests, Vinod says.

Consilnet treats each property as a separate profit center. With the 5 percent minimum guarantee, each can theoretically be profitable on an operating basis. "Our return on capital is within nine to a maximum of 12 months," Vinod says. "In three years, we make five times what we invested."

Of course, this doesn't cover development or executive management costs. While the company can continue to operate at its current level on revenues, Vinod admits it needs new capital to move forward. Consilnet was initially launched with angel funding. Now it's looking for somewhere between $2 and $5 million in venture capital.

"There are some timing issues," Vinod says. "We need this kind of money in the next couple of months to continue our growth."

Consilnet's funding requirements are comparatively modest, he argues. WayPort, according to Vinod, has burned through $30 to $40 million. "With that kind of money we could probably be number one in the world," he says.

Or at least make a determined bid at conquering the daunting North American market. It's something the company will start to look at seriously in early 2003, he says -- assuming it finds the funding.

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