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Archive for: August

and Tim
are engaged in an interesting discussion of business models in
the wifi world. Don kindly makes
a suggestion
to have Access Point hardware vendors subsidise the
price of the wifi Access Point (AP) by bundling it with a services
oriented business model.  It’s like a blast of deja vu to 2001,
back when Sputnik was getting
started, and our original
business model

Don lays out the basic ideas behind Sputnik’s original model pretty

  1. Bob, a store owner, buys Sputnik at 1/4 of the
    plugs it in at his store, and use the installation software to register
    the AP with Sputnik Network.

    • The AP is configured so that only Sputnik Network
      members can use it. 
    • Administration, security, and account management is
      all handled by Sputnik Network.
  2. James, a Wi-Fi user, subscribes to World-wide
    Sputnik Network service for $10 per month, enabling him to use any
    Sputnik Network AP around the world.

    • Sputnik client software running on his laptop
      automatically handles authentication with each AP.
  3. AP usage is metered so Bob might receive a check
    each month if his AP gets a lot of traffic.

In late 2001, Sputnik released its Sputnik Community Gateway to the
world, which would turn any old PC with a wireless card into an AP that
authenticated users onto the Sputnik Network, a centralized
authentication service.  Lots of people downloaded the code, used
the gateway, and people joined the Sputnik Network.  But we
decided that we were pursuing the wrong business model, and changed our plans.
Here’s why:

  1. Revenue split.  Each
    subscriber is paying $10 a month in Don’s
    example.  Some of that money is going to go to Bob, the store
    owner who
    has installed the subsidised AP.  The revenue split needs to be
    compelling enough to make it interesting for Bob.  But there are
    folks in the mix here too – like the ISP, see below, the VAR or SI who installed the AP, the location owner, and possibly the roaming agreement provider (like iPass or Boingo) .  So now that $10/month is split with even more people.  That’s a lot of
    ways to
    split $10, so your service margins get pretty thin, even as it is. Now
    add in the fact that James is calling customer support because he’s
    getting unreliable service (see Customer Service Headaches below), and it becomes nearly impossible to make
  2. Legal issues.  Most
    residential broadband connections come with a pretty strict Terms Of
    Service and Acceptable Use Policy which prohibit the sharing of
    broadband connections.  Of those that do allow sharing, most only
    allow for sharing within a single household, not reselling of
    service.  One way around this is to cut the ISP into the revenue
    split, which would hopefully provide an incentive to them, and cover
    their costs of extra data traffic passing over their backbone as well
    as (potentially) James as a lost customer – why should he buy a new DSL
    or Cable modem if he can surf on his neighbor’s connection?
  3. Customer Service headaches
    If we presuppose that our aforementioned wi-fi user, James, is paying a
    monthly subscription fee, then he’s going to demand some kind of
    service level, otherwise he’s going to feel like he’s wasting his
    money.  The problem is that Sputnik has no control over how James
    is getting his access – for example, what if his neighbor, who is
    providing him with wifi access decides to move?  Or if he unplugs
    his AP when going on vacation?  James doesn’t know about this, and
    the Network provider has no control over James’ neighbor – we can’t go
    over to his house and turn his AP back on.  James’ percieved value
    of the service drops precipitously, and he gets puzzled, or even
    angry.  Then the support calls begin – Since he was getting
    service just fine the day before, he is going to try to figure out why
    the service isn’t working now.  Now James starts calling the
    Sputnik call center, trying to diagnose the problem with “his
  4. The rise of “free” networks
    A significant number of businesses are giving wifi away for free – as
    an incentive to get butts in seats, who then order coffee, or happy
    meals, or whatever.  Other businesses are using an
    advertising-based support model – watch an ad when you log in, and you
    get free access for the day.  Others are using wifi as a customer
    affinity program, or CRM system – why go to the cashier when you can
    order your food and drinks while at your seat – “oh, and can we sell
    you a new CD with that, sir?”  Some businesses just want to get a
    better idea of customer demographic.  The point is that a
    traditional for-fee network isn’t necessarily the right business model
    for all occastions or for all locations.  

Believe me, we looked long and hard at the business model and tried to
find ways to make it work.  What we realized is that wifi is not a
one-size fits all service model.  Sometimes a per-minute or
per-day for fee network is the way to go.  Sometimes it
isn’t.  What we realized, is that by creating an architecture that
supported Don’s idea allowed us to let
our customers figure out the business model that was right for them

In addition, the further commoditization of wifi hardware means that it
is going to become more and more ubiquitous – so the number of
potential wifi customers will increase, but hardware profit margins
will decrease.  So we embarked on a new strategy:

  1. Give AP manufacturers something
    to differentiate themselves
    .  We shrunk our codesize
    so that it now fits onto the standard flash sizes of inexpensive
    APs.  Our core code only takes about 150KB of space, which means
    that there is no need to change hardware designs or increase hardware
    costs.  At the same time, optional components allow for
    manufacturers to add additional value through combinations of hardware
    of software, like VPN accelerators, group policy, bandwidth shaping and
    throttling, and more.  Licensing is very affordable, and it allows
    the AP manufacturers to increase their margins by selling
    differentiated products.
  2. Make money as a software company
    Sputnik’s business model is based on selling the management
    that lets you control and manage all of those inexpensive
    APs in a centralized manner.
  3. Let our customers decide on the
    right business model for them
    .  We built the Sputnik Central Control
    system using a set of open interfaces – so that our customers could use
    different billing systems, settlement systems, and authentication
    systems.  Because their capital expenditure is reduced by using
    inexpensive APs, and their operational expense is reduced by using the
    Sputnik Central Control management system, our customers are free to
    deply wifi in interesting ways, and to experiment with different
    service business models.  At $895 for Sputnik Central Control, it
    is also 1/4 to 1/10th the price of competitive systems.
  4. Be backwards-compatable
    Our products don’t use any proprietary new radio encoding method, or
    even require special client software – all you need at a minimum is an
    SSL-capable web browser.  That means that all the major operating
    systems, all the major handhelds are immediately able to authenticate
    to a Sputnik-powered network.  Of course, client software can make
    things easier and more functional, but it is not a requirement for the
    system.  And IT directors can rest easy knowing that they don’t
    have to add a single new piece of software to their standard builds.
  5. Be forwards-compatable
    Wifi is constantly changing – new speeds, new radios, new encryption
    methods are coming out all the time.  There’s a lot of innovation
    going on in the space.  This is good and bad – you don’t want to
    get locked in to buying a system that will be incompatable with
    tomorrow’s standard. There is one body that everybody looks towards:
    the IEEE.  802.11 is the name
    of the IEEE
    working group
    that covers this whole area – and all the vendors
    work on and respect the standards coming out of the working
    group.  For example, when WEP was
    broken, the IEEE embarked on a new standard for encryption, based on AES, which is being
    hammered out by the 802.11i
    task group
    .  It’s not ready yet.  When it is, Sputnik
    products will support it.  Until then, we’re not getting into the
    crypto debate or muddying the waters with some proprietary crypto
    scheme.  A proprietary scheme ends up locking in a subset of
    customers, but it also ends up fragmenting the market, hurting
    everybody, especially the hapless souls who are now locked in.

I still love the “change the world” aspect of Don’s idea, and ideas like his that
build on network effects can certainly create economies of scale and
competitive advantage.  In fact, I want to encourage Don to go out
and build it and turn it into a gold mine.  Along the way, we’re
happy to sell him the picks and shovels he’ll need to mine that gold.

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