Business Report

The Enticement of Free Wireless

Sponsored connectivity can be a strategic marketing tactic—or a way for companies to pour money down a sinkhole.

With consumers looking for some relief from increasingly complex and expensive wireless data plans, Starbucks is obliging. This past summer, the company made its Wi-Fi network free for customers. And in late October, it added something extra: the Starbucks Digital Network, which will deliver exclusive content to anyone who logs on at its 6,800 company-operated coffee shops in the United States.

Free Wi-Fi, Pricey Joe: In an effort to attract more traffic to its stores, Starbucks now serves free Wi-Fi and online content ranging from e-books to music to restaurant reviews.

Consumers can expect to see wireless access used as an enticement more and more—where it makes economic sense. Mobile devices such as new tablets and e-book readers will increasingly come bundled with data services that are free for a certain period, or subsidized and packaged so that the wireless-specific costs are hidden. Amazon’s Kindle was an early example of this trend. Businesses are also pursuing sponsorship models that give users free access while using certain applications or after viewing ads.

At Starbucks, the new network serves entertainment ranging from e-books to music to restaurant reviews—all in an effort to bring more people to its stores. The average customer spends $4 per visit, and even though some people hang around freeloading on the network for hours, the company’s decision to drop Wi-Fi charges has been profitable. In its most recent quarter, earnings leaped 86 percent, largely because of stronger store traffic.

But in some cases, the economics of sponsoring wireless access may not be viable in the long term.

Google, for example, is giving the gift of Wi-Fi for the holidays this year. From late November to early January, wireless Internet access aboard domestic flights from AirTran, Delta, and Virgin America will be sponsored by its Chrome browser brand. The company expects to provide wireless to 15 million passengers on 700 flights. Typically, flights charge between $10 and $15 for Wi-Fi, more than they do for meals.

Google wouldn’t disclose the specifics of its sponsorship deals with the airlines, but company spokesman Eitan Bencuya did note that paying for people’s onboard wireless is too costly to sustain for more than a short while. Users will be able to access the service from any browser but will probably be sent first to a landing page advertising Chrome. (Last year, Google did a similar sponsorship deal and used it to promote its branded phone, the Nexus One.)

Consumers will often pay a lot of attention to a sponsor offering free wireless, but that exclusive focus doesn’t come cheap. The Los Angeles-based company Boingo, the leader in providing paid Wi-Fi at hot spots, charges around $60 per thousand impressions for advertising on the pages that greet customers when they first log on at an airport.

That’s far above the cost of typical Internet display ads, which go for about $10 per thousand impressions. The cost is due partly to airport concession fees and partly to the desirable demographic that the ads reach, according to Christian Gunning, director of corporate communications for Boingo. Most people logging on are business travelers, typically 35-to-50-year-old males who make six-figure salaries and drive luxury cars, he says. Usually, in exchange for 15 to 20 minutes of free access, users have to agree to watch an ad for the brand for one to two minutes before logging in. They will also see images related to the brand at multiple points.

But when an advertiser wants to sponsor entirely free access, Gunning says, it has to cover the usual fees of $7.95 per day that Boingo charges mobile users. He thinks that expense will keep sponsored access a relative rarity at airports. Boingo, which runs Wi-Fi networks in 58 airports, generally offers sponsored access in just two or three of them at a time. (Sponsoring brands have included Diet Coke and Lexus.) This means that people who hope to see Wi-Fi remain free in airports or on airplanes will ultimately be disappointed.

Free Wi-Fi, Gunning says, quickly goes from “a profitable connection to a giant sinkhole of money.” When a network is free, he says, up to 10 times as many people use it, which vastly increases the cost of providing fast, reliable access. He doubts that many brands would be willing to handle that for long.

Companies like Google, however, make short-term sponsorship deals with specific goals in mind. In this case, one object is to counter an objection that Bencuya says is often raised to adopting Web applications like the one Google’s browser is designed for: what do you do when you’re somewhere without Internet access, like an airplane? The sponsorship agreement not only gives Chrome a big boost in visibility but also gets people accustomed to the idea that “access is available in more and more places, more and more of the time,” Bencuya says.

But for now, sponsored connectivity makes sense only for companies that can recoup costs directly—through sales of hardware and content or products that people consume every day, such as pricey cups of joe.

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