Starbucks has announced that it has chosen Google and Level 3 to upgrade the Wi-Fi connectivity in 7,000 of its stores over the next 18 months.
Starbucks has been a leader in the public Wi-Fi space and wants to stay on top of Wi-Fi technology improvements so that it can provide higher speeds and a better experience to its customers. While the deal is a setback for AT&T, which was the previous provider of Wi-Fi services to Starbucks, it provides Level 3 with an opportunity to enter a growing market.
However, it is Google’s participation in the deal that is most intriguing. Under the deal, Boingo will remain as Starbucks’ exclusive advertising partner, while Level 3 will provide the infrastructure. This leaves Google to provide a free and undefined customer experience value add in the middle.
With its large base of enterprise advertising customers, Google has the potential to be a major disruptor in the Wi-Fi market, where no clear and definitive value chain has emerged.
Google may be shifting towards a more pragmatic access strategy
Starbucks claims that it is co-developing a “next-generation Starbucks Digital Network” with Google, but Google has not yet released any details about its involvement. Given Google’s influence and reach, merely lending its brand name to such a contract may have been enough to uproot an established service provider such as AT&T.
However, Boingo, whose advertising capabilities exist as a result of its recent acquisition of Cloud 9, may still need to use Google as a search and advertising tool. As a result, Google will benefit from a new, location-based, highly-targeted advertising channel. Eventually, Google may want to target potential new opportunities that leverage its own core advertising, search, and analytics capabilities, which will leave Boingo vulnerable.
Google recently begun connecting its first FTTH customers in Kansas City and it is currently in the network planning stage for FTTH deployments in Provo, Utah and Austin, Texas. While Google continues to announce new FTTH locations, it may be moving towards a more pragmatic access strategy.
As Wi-Fi is a much faster and cheaper way to provide connectivity, it makes sense to have FTTH for the long haul and in limited locations, while Wi-Fi is used to reach the mass market in high-traffic areas and in a shorter period of time.
Service providers cannot afford to have a passive Wi-Fi strategy with enterprise customers
AT&T’s current Wi-Fi hotspot strategy is to provide its customers with Internet access away from home and improve user satisfaction, rather than generate incremental revenues. AT&T’s 32,000 domestic Wi-Fi hotspots make its footprint larger than all of its carrier competitors and second only to the 150,000 hotspots owned by a consortium of cable operators.
AT&T claims that it offered Starbucks the same Wi-Fi speed upgrade as Google and Level 3, but that it was rejected due to other considerations.
Exclusive Wi-Fi network operators such as Boingo make money from Wi-Fi hotspots, while mobile operators use them to offload traffic. In contrast, most fixed players are following AT&T’s “passive” Wi-Fi strategy by using the technology to acquire and retain customers and promote bundle upgrades so as to reduce churn and increase incremental revenues.
Starbucks’ decision to go with Level 3 and Google to upgrade its Wi-Fi network rather than AT&T suggests that enterprise hotspot customers, for whom providing Wi-Fi is an investment with ambiguous returns, may want more from their Wi-Fi provider relationships.
Until recently, the Wi-Fi proposition for enterprise customers that provided venue hotspots and customers who used them was relatively simple – either the user paid the venue for access or the hotspot owner subsidized the user’s access.
However, users and hotspot venue owners are increasingly demanding free Wi-Fi. As a result, there is growing demand for new business models that make Wi-Fi services free to the end user and monetizable (or at least cost neutral) for the venue. As a result, service providers such as AT&T may no longer be able to afford to adopt a passive Wi-Fi business strategy for their enterprise customers.
Advertising is the new frontier for Wi-Fi and will be key to monetization
Despite the expenses related to this upgrade and maintenance thereafter, Starbucks has said that it will continue to offer free Wi-Fi. As a result, Google and Level 3 will need to adopt innovative cost control measures and raise incremental revenues from advertisements.
A sponsorship model, in which third-party advertisers pay for ad placement on the Wi-Fi network, is becoming particularly attractive to venue owners as it allows them to reap the same indirect benefits of being a Wi-Fi provider, while bearing less of the cost.
This shift presents a largely untapped opportunity for Wi-Fi service providers that can bring together advertisers and venues, and also for advertisers that can exploit this new advertising channel to reach customers. With its large network of enterprise advertisers and analytics capabilities, Google holds an advantage in this area.
New business models bring new opportunities and vulnerabilities
The Starbucks deal is a significant one for Level 3. Under the deal, the operator will provide all 7,000 sites with high-speed Internet connectivity, which will also enable it to sell services to other customers in the same and adjacent buildings more easily.
While Level 3 has a large national footprint, if it doesn’t have connections to a Starbucks store, it will purchase capacity on a wholesale basis from local carriers, which could include AT&T. However, as an infrastructure-only player, Level 3 will be as vulnerable in this deal as AT&T was previously should Google decide to go it alone in the future.
The way that Google has positioned itself in the Starbucks deal suggests that it plans to play a significant role in the value chain. The lesson for service providers is that even the most established Wi-Fi operators remain vulnerable to new entrants and new business models.
Kamalini Ganguly and Sara Kaufman are a senior analyst and analyst respectively for industry, communications and broadband at Ovum. For more information, visit www.ovum.com/