Don
Park and Tim
Oren 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
succinctly:
- Bob, a store owner, buys Sputnik at 1/4 of the
price,
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.
- The AP is configured so that only Sputnik Network
- 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.
- Sputnik client software running on his laptop
- 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
Here’s why:
- 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
other
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
money. - 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? - 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
computer”. - 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:
- Give AP manufacturers something
to differentiate themselves. We
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. - Make money as a software company.
Sputnik’s business model is based on
system that lets you control and manage all of those inexpensive
APs in a centralized manner. - Let our customers decide on the
right business model for them. We built the
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. - 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. - 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
broken, the IEEE embarked on a new standard for encryption, based on
hammered out by the
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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