Chill Hits Wi-Fi 'Hot Spots'

Tom Montalbano seems like an ideal customer for wireless Internet "hot spots" in hotels, restaurants and airports. The 41-year-old insurance investigator travels four days a week, compiling reports from jewelry robberies on his laptop computer.

But Mr. Montalbano, of Syosset, N.Y., bristles at paying $6 an hour, or $10 a day, to log on using the technology known as Wi-Fi. Monthly plans, available for $25 to $30, are little help, because no one service offers access in enough places, so he'd have to pay multiple monthly fees. And his clients won't pick up the tab. "They say, 'We'll wait the extra day' " for Mr. Montalbano to e-mail his reports from slower, wired Internet connections.

Mr. Montalbano's experience helps explain why fee-based Wi-Fi hot spots have failed, so far, to become tech's next big thing. Connection charges are high. Services don't offer ubiquitous coverage. There are a growing number of free wireless connections, so many users don't feel any need to pay for access. And some laptop users connect to their cellphone or cellphone network to go online.

Market researcher In-Stat/MDR, Scottsdale, Ariz., estimates that service providers world-wide will generate $80 million this year from Wi-Fi access. In the U.S., In-Stat estimates that Wi-Fi providers will take in about $28 million -- roughly as much revenue as Verizon Wireless Inc., the nation's largest cellphone company, generates in 12 hours. Senior analyst Amy Cravens says In-Stat recently lowered its revenue projection to reflect sluggish use.

No Wi-Fi provider "will make any money before the end of 2005," says William Clark, an analyst for market researcher Gartner Inc., Stamford, Conn.

It's a far cry from a year ago, when Wi-Fi burst on the scene with a $300 million marketing campaign from chip titan Intel Corp., which makes chips for wireless connections.

Of course, public hot spots are only a small part of the Wi-Fi market -- 3% of Wi-Fi equipment sales this year, according to market-researcher ABI Research, Oyster Bay, N.Y. Most Wi-Fi equipment is used to extend high-speed Internet access wirelessly inside homes and businesses, and that market remains strong. But hot spots took on outsize importance as cellphone service providers and well-financed start-ups promised seamless Wi-Fi access from every airport and coffee shop in the country.

Many of those plans have been scaled back drastically. Cometa Networks Inc., a start-up backed by Intel, AT&T Corp., and International Business Machines Corp., among others, once boasted of building 20,000 hot spots. Today, it has roughly 220. Chief Executive Gary Weis talks about "rightsizing the network" and declines to estimate how many hot spots Cometa eventually will deploy. Like most other major Wi-Fi providers, Cometa also won't disclose how many users it has. "We're all learning as we go how to build a profitable service," Mr. Weis says.

One lesson from around the world: To attract users, lower the price. In Europe, where access charges are higher than in the U.S., Wi-Fi use is even lower. But Asian operators that offer cheap Wi-Fi service have attracted a following.

In South Korea, for example, KT Corp. charges less than $13 a month for unlimited access to its 12,000 hot spots. Subscribers to KT's residential high-speed Internet service can add Wi-Fi access for less than $1 a month. Through January, KT reported about 364,000 Wi-Fi subscribers, two-thirds of whom are also Internet subscribers. In Hong Kong, PCCW Ltd. has attracted 40,000 Wi-Fi users with similar deals, at even lower prices.

"The uptake in Korea has been dramatic," Mr. Weis says. But he questions whether that experience translates to the U.S., because so many of KT's Wi-Fi subscribers are taking the service along with regular Internet connection.

By contrast, BT Group PLC, the leading hot-spot operator in the U.K., charges nearly $11 an hour, or $153 a month, for Wi-Fi access. European providers believe that "Wi-Fi is really about high-end business travelers who are price insensitive," says Matt Lewis, a senior analyst in London with ARCchart Ltd., a research firm. European systems say their prices are justified because they include security safeguards.

European service providers, like their U.S. counterparts, decline to provide customer numbers. But market researchers say usage lags behind both the U.S. and Asia. Gartner estimates that just 1.7 million Europeans tapped a free or fee-based Wi-Fi hot spot last year, compared with 4.7 million Americans and 2.7 million Asians.

In both Asia and Europe, Wi-Fi services must compete with advanced cellphones, which allow users to exchange e-mail or short text messages without computers, although at connection speeds slower than Wi-Fi. Vodafone Group PLC of the U.K. and some other cellphone operators also are targeting computer users by selling data cards that plug into laptops and can be used to surf the Web wirelessly via cellphone networks. In fact, though European cellphone companies also frequently are big Wi-Fi providers, they are reluctant to push Wi-Fi too hard, for fear of jeopardizing their investments in cellphone-based Internet service.

The upshot: As Robert Cameron sipped his coffee in a London Starbucks one recent morning, he wirelessly downloaded his e-mail to his laptop through his cellphone, rather than the available Wi-Fi connection. The Wi-Fi price of $9.90 an hour is "too dear," the 28-year-old theater director says.

A year or two ago, pundits viewed Wi-Fi as a threat to advanced cellular networks because it offers faster connections and is much cheaper to deploy. Now, Wi-Fi's limited range from a transmitter -- roughly 300 feet -- and the crazy-quilt of network operators appear to be bigger liabilities. As a result, some analysts think Wi-Fi will merely whet users' appetites for more ubiquitous cellular-data networks. "Once you get used to checking e-mail at Starbucks, you want to check it on the bus," says Edward Rerisi, vice president for research at ABI.

Backers say Wi-Fi hot spots are in their infancy, similar to the high-price, brick-size cellphones of two decades ago. Coverage will improve, and more laptops and hand-held computers will come equipped with Wi-Fi capability, eliminating the need for special adapter cards. Moreover, U.S. carriers are beginning to share hot spots, offering more coverage for a single subscription.

But carriers still must contend with sites that offer Wi-Fi free of charge. Tom Keller, general manager of the Hampton Inn in Auburn Hills, Mich., installed Wi-Fi in the hotel's 124 rooms early last year. He doesn't charge for the service, but views it as a way to compete with the 12 other hotels within five miles. Mr. Keller figures he needs to book 10 extra rooms a night, at an average of $100, to defray the $30,000 installation cost and $1,000 monthly fees to provide Wi-Fi. By now, he says, he's recouped the cost "many times over."

Every hotel offering free Wi-Fi makes it less likely that John Dean will pay for the service. Mr. Dean, a 36-year-old technology manager for a high-tech manufacturing company in Milwaukee, is a big Wi-Fi fan. But he hasn't subscribed to a service because he's accustomed to logging on free at restaurants and cafés around town, or at hotels on an occasional business trip.

"There's no question that it's useful," he says. "The big question is at what price does it become useful enough to pay for."

Write to Scott Thurm at scott.thurm@wsj.com¹⁰, David Pringle at david.pringle@wsj.com¹¹ and Evan Ramstad at evan.ramstad@wsj.com¹²