Guests Demand Wireless

In American hotels that offer guests broadband Internet service, the average
usage rate according to most estimates is less than 5 percent. In other words,
on any given night, fewer than 5 percent of guests are actually paying for the
service — which is not many.

Yet demand from hotels for broadband wireless solutions apparently remains
high. How else explain the proliferation of wireless start-ups muscling in on
pioneers like Wayport and targeting this besieged sector?

Josh Friedman, CEO of Portland OR-based Eleven
Wireless
— just such a start-up trying to get into lodging Wi-Fi — puts
it into perspective. "There are 56,000 hotels in America," Friedman
says. "Only 1,500 have high-speed access, and few of those are wireless."

This is no doubt a good statistic to flash at venture capital guys, but probably
not a very accurate calculation of the market universe for companies like Eleven
Wireless, which provides Wi-Fi outsourcing and systems integration services
to hotspot venue owners.

Still, Eleven, incorporated in March 2002, has had some success with its hotels-first
strategy. The company recently announced that it had deployed a Wi-Fi access
system at the 319-room Sheraton Tacoma, a downtown hotel in Tacoma, WA, catering
to business travelers and conventions. It’s the city’s largest inn.

"Our guests demanded high-speed connectivity and we responded by providing
the freedom and convenience of fast, easy-to-use, wireless broadband in and
around our facilities," the hotel’s general manager, Mark Mathews, is quoted
as saying in an Eleven Wireless press release.

Guests demanded it. Matthews doesn’t say how many guests demanded it, but then
according to Friedman, it doesn’t take many. "If a hotel has one client
who wants it and they don’t have it, they’re in trouble," he says. "The
hotels are saying to us, ‘Hurry up, we need you badly!’"

This is perhaps the beauty of the hotel market for Wi-Fi companies like Eleven:
the fear factor — the fear that guests in larger and larger numbers will simply
walk away from your front desk if you can’t offer them high-speed Internet access.

Eleven has helped at least a few smaller hotels in Portland deploy broadband
wireless — including Hotel Lucia, Mallory Hotel and the Mark Spencer Hotel.
For reasons not quite clear to us, Friedman won’t say even approximately how
many installations Eleven has under its belt altogether to this point. Other
than to say it’s a "surprising" number. (Surprisingly large or surprisingly
small?)

Nor will he say how many the company expects to have completed by the end of
this year, though he does confirm it will announce other deployments in the
next few weeks, including some involving major brand names.

Eleven is about to expand outside its Pacific Northwest base. Among the new
clients are properties in California, in the mountain states and some east of
the Mississippi. "That is one of the great things about this business,"
Friedman says. "Within reason, geography is not too much of a barrier."

The company is also considering other verticals — including another seemingly
over-worked market: coffee shops.

"Originally we were going to avoid the coffee shops," Friedman says.
"But Starbucks and T-Mobile have left such a large wake. In Portland and
Seattle especially, all [the coffee shop owners] want to compete with Starbucks.
They’re telling us, ‘Our coffee is cheaper and better, but [Starbucks] has wireless
Internet access.’"

So Eleven will likely wade into the coffee shop hotspot market, though Friedman
is not 100-percent convinced the revenue stream will be there. The company is
also investigating the residential/multi-dwelling-unit (MDU) and convention
center markets and, further down the road, gas stations. Friedman believes that
in the future commuters and travelers stopping for gas will want to take the
opportunity to check their e-mail — a notion that seems plausible enough.

The company’s plan of attack on the hotel sector is not totally original, but
is different in some respects from what competitors are doing. For example,
while Eleven uses mostly off-the-shelf hardware from name-brand vendors, it
developed its own software infrastructure for billing, authentication, marketing,
etc. — and built it so it would be easy to integrate with existing hotel back-office
systems.

It sells the hardware — access points, client cards, servers, switches —
and software to the venue owner. Then it manages the network under a contract
that gives Eleven no guaranteed management fee, but a share — Friedman won’t
say how big — of the revenues from selling service to guests.

Guests at the Sheraton Tacoma pay $9.95 per day for unlimited access and rental
of a Wi-Fi card. Even at five-percent utilization, that works out to a share
in about $65,000 a year, which doesn’t sound like much. But Friedman says, "We’re
doing well, we’re profitable."

The strategy is to build the venues, then switch focus to end customers. Eleven
has ambitions to acquire monthly subscription customers, but its not yet offering
monthly subscriptions. "We believe it’s a little early for that,"
Friedman says.

In other words, there are too few daily customers at its hotel venues to make
it worthwhile trying to convert them to monthly subscribers. In any case, the
company doesn’t have any roaming agreements in place yet. It also seems slightly
ambivalent on how to proceed on the roaming front.

Friedman says aggregators such as Boingo,
iPass and GRIC
present "an interesting [business] model," but adds, "in my opinion,
they’re not really helping the Wi-Fi industry."

He believes Wi-Fi hotspot operators should rather follow the lead of the cellular
industry and establish direct one-to-one roaming agreements. However, Wi-Fi
operators are so far doing "a poor job" of this, Friedman admits.
Of course, it’s a difficult and time-consuming task when there are hundreds
or thousands of tiny Wi-Fi operators to think about.

For now, Eleven is focused on the venue owners. Friedman says his company differentiates
itself in a crowded marketplace by focusing exclusively on wireless — unlike,
for example, Wayport. This is important because "networking, any networking
of computers, is a pain in the ass," he says. "And wireless adds tons
of complexity." It requires considerable expertise.

All of the company’s three founding partners have wireless and/or networking
experience. Josh Blank, head of research, engineering and product development,
owned and operated Pop Art, a Web site development and mobile wireless
application development company in Portland.

Friedman and his other partner, Andrew Yorra, vice president of sales and business
development, met when both worked at Portland-based network security software
developer Tripwire.

Eleven also differentiates itself from many competitors, it says, by building
"business-class" networks. It’s not enough in this environment to
simply have a network that works most of the time. It has to work all the time,
Friedman says. Downtime equals lost revenue, not just mild inconvenience.

The company also aims to provide service above and beyond, which often means
it ends up managing the relationship between its client and whichever supplier
the client is using for broadband Internet access services.

Despite being wireless specialists, Eleven claims superior knowledge of its
target customer’s businesses. "Hotels have concerns and needs that are
much different than other sectors," Friedman says. "Hotel guests,
for example, want to have one payment method. They’re very picky."

Which is why Eleven built its server software to be easily integrated with
existing hotel back office systems. Access fees are added to the guest’s hotel
bill. The Eleven system passes billing information through to the hotel system
in a form it can digest.

Eleven appears, at the very least, to be doing a few things right. But whether
that means it will be the next Wayport — or better, the first company to actually
make money at operating hotel wireless access systems — remains to be seen.

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