FREE INTERNET IS DEAD
EXECUTIVE BRIEFING By David W. Garrison, CEO, iBAHN
Free Internet is Dead...Long Live Free Internet! It is generally understood by hoteliers that guests in America expect “free” Internet service. What is less generally understood – though well documented – is that price is only one of the important factors in judging a hotel’s Internet service. In fact, in more than 150,000 surveys of hotel guests in America and Europe, price generally ranks third or fourth behind ease of use, speed and security. Thus, the hotelier who focuses on “free” at the expense of the other qualities -- especially speed of the connection – does so at his own risk. The ability of hoteliers to both control expenses and meet these four criteria is where the challenge lies. From the hotelier’s perspective, the first properties to offer free to guest (FTG) Internet access experienced an increase in business. This “share shift” in occupancy and improved profit for owners was the original intent of the FTG movement. In some cases, just the opposite has happened. What the first movers did not envision was that their action would cause a competitive reaction – more hoteliers deciding to jump on the FTG bandwagon – thus eliminating any real or perceived brand differentiation and increased share. In other words, it was a zero sum game which no hotelier won. Most owners and brands that jumped on the free Internet bandwagon got so caught up in the marketing message that they forgot to set any standard as it relates to the service the guest actually receives. It is common at many properties that the first guest who logs on to the Internet gets the best service, while each additional guest who logs on slows down the service. It’s as
The Ideas In Brief: that cost of Internet access is consistently less important to guests than speed and security
• Studies continue to show
to continue to support “free” Internet continues to climb rapidly
• The cost, to hotels,
a mix of pricing options and strategies for their broadband offering
• Hotels should consider
if the “free breakfast” was offered to all guests but no one paid attention to the quality of the food and beverages being offered.
Free To Guest Internet Costs Increasing Dramatically In a telling interview for a 2009 Hotels Magazine article, Gustaaf Schrils, vice president of global technology at IHG, said that keeping up with
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FREE INTERNET IS DEAD
bandwidth is challenging, and that hoteliers are finding that 60% of the traffic on their hotel networks is being used for social networking, while use of IP-based video streaming services like Hulu, YouTube and SlingBox has skyrocketed. “Bandwidth costs money, and it’s very difficult in a free-delivery model to provide bandwidth that enables guests to do whatever they want, whenever they want, wherever they want,” Schrils says (Hotels Magazine, February 2009). Usage data shows the runaway costs issues will get only worse as guests usage patterns continue to evolve. Based on recent Internet usage statistics, it is clear that bandwidth requirements will not diminish over time – consider that: • Half of all American Internet users have downloaded video in their homes within the past 30 days – and we all know that hotel guests expect to be able to do in their hotel rooms what they can do at home • Nearly 135 million U.S. Internet users spent an average of 204 minutes per person viewing online video in one month in 2009 To further the point about change in Internet use – in a survey of frequent business travelers, YPartnership found that more than two-thirds had downloaded music onto their computers (67%), while nearly 60% had downloaded video. Additionally, more than onehalf had downloaded news (54%) or entertainment (52%) onto their computers. Some 29 billion videos were downloaded in the United States alone in one month in 2009. Many owners think of the FTG practice as a poorly conceived strategy on the parts of the major brands. Owners have not only lost the revenue associated with Internet usage by guests (estimated at $11,000 a month by one limited service owner with whom we have spoken) but caused an increase in expenses
as usage tripled, measured by the number of Internet-using guests. Thus, bandwidth costs that were previously covered by the hotel’s charges for Internet had to be borne by the owner with little commensurate benefit – and because usage increased under the FTG model, the bandwidth costs increased even more. The bottom line, in our opinion, is that the FTG experiment seems to have reached the end of a not terribly useful – not to mention very expensive – life. There is no data to suggest that offering Internet access at no cost to guests has generated any sustained increases in occupancy, rate or profits on an ongoing basis. It has become an expected amenity with runaway costs.
The Cost Of Free Internet To Match The Home Experience Guest data and iBAHN-commissioned research both show that the problem of “runaway” Internet costs – or significantly dissatisfied guests when owners elect to not invest in increasing bandwidth – is about to become even more severe and widespread. The current generation of travelers now base their technology expectations on what they are able to do in their homes – and remember that broadband in the home is subscription-based. Among the more than 60 million American households with a broadband connection the average speed experienced at home is 3.9 Mbps according to a recent “State of the Internet” report by Akamai. Hotels, to achieve parity in experience for travelers, will need to drastically increase available bandwidth. In a conservative estimate, for a 150-room property with a typical 25% usage rate, matching the speed of home broadband Internet service for every room would cost the property approximately $13,000 per month in bandwidth charges, or $2.85 per available room per day. A key assumption driving costs in this calculation is the usage rate. When hotels went from
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FREE INTERNET IS DEAD
paid service to free service, usage as measured by take rate doubled and, in some cases, even tripled. Thus, in a paid model, the cost per room per day would fall to about $1.43 per And, the overall growth in Internet usage over time tells us that we can confidently predict that the next generation of travelers will expect even higher levels of technology capability in their hotel rooms
What’s Changed Since Hotels Went Free To Guest? Interestingly, the fastest growing Internet services charge their users and subscribers – take, for example, Gogo. This service provides in-flight wireless Internet access service to travelers and promises to help them “make the most of their time in flight.” How is this service different from the broadband services provided to travelers in hotels, who also are concerned about maintaining their productivity? Delta Air Lines recently joined other major air carriers by introducing WiFi service on many of its flights. The average laptop charge is $9.95 per flight (does the price point sound familiar?) or $29.95 for a month. This airline charges slightly less for mobile devices on the theory they will use less bandwidth. One Delta frequent flyer with a monthly subscription was asked about what she pays in hotels for her Internet access. “Nothing!” she exclaimed, “They shouldn’t charge anything.” When asked about her willingness to pay Delta and not hotels, she said “Most hotels offer it for free. No airline does.” It reinforces the problem hoteliers have created for themselves. Another example is Starbucks, where you can get a cup of coffee and a comfortable spot to work on your computer – but often only if you are willing to pay for service from AT&T. Wireless data cards at an average of $60 US each month are yet another subscriberpaid service to maintain connectivity. And, consider that 79% of Americans who access the Internet at
home are doing so with a high-speed connection– and are quite comfortable with paying a monthly service fee to do so. We are now seeing even traditionally “unlimited usage” plans beginning to charge for bandwidth use past a specific limit – for example, AT&T recently announced plans to find ways to reduce the bandwidth usage of certain subscribers, citing that 3% of its mobile broadband users are using some 40% of the company’s total bandwidth. And, in hospitality, data usage continues to grow at an unprecedented pace. Actual measurement of the traffic on the iBAHN private network shows a 50% growth in data packets from the first to the fourth quarters of 2009 – along with a 60% increase in the average length of Internet sessions on the network. If one assumes that no hotelier pays for idle capacity, this means that either bandwidth costs will go up by this amount or the guest experience will decline significantly! Because of the growth of the FTG model in hotels, there is clear tension between the brand standard (which generally is to provide high speed access), and owners/operators of hotels, who now face the choice to pay runaway costs to provide enough bandwidth or to offer Internet access that creates substandard guest experiences.
So What’s the Future Going To Look Like? There are plenty of examples in the hotel setting where an amenity is free in one location and paid in another – think of the Starbucks coffee set-up in the guestroom, and the Starbucks offerings for which guests pay by the cup in the lobby. Consider the $4 to $8 bottles of water in the guestroom, while running water is free in the sink. This principle of location-
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FREE INTERNET IS DEAD
based pricing is common in other industries. It is generally considered the price of convenience. How does this relate to the internet? Leading hoteliers and brands are starting to have the conversation behind closed doors about how to segment the offering in order to get out of the trap they’ve set for themselves – and it seems apparent that the FTG model should continue only as a part of a mix of broadband services to be offered. The mix of services might be defined in one of several ways, such as by location (free in the guest room/paid in the common areas), or perhaps as a function of time – first hour free for each room night, or tiered service where users decide the level of bandwidth they require. Or, perhaps a focus on the time of day makes sense for certain hotels – just as happy hour is only free at a certain time in the hotel lounge, so might Internet service be free only during the off-peak hours of the day. Essentially, there are a couple of major considerations related to bandwidth planning – the technology aspect of the solution, and the market aspect. First consider the market aspect – what are your competitive position and your STR category? What kinds of technologies do your particular guests expect to use while traveling? What is your longterm technology strategy? Does the hotel want to define its guests’ experience around the ease, speed and security of the Internet or only consider the size of the bandwidth entering the property? Once those questions are answered, hoteliers can begin to address the technology questions that will inevitably arise. Brand managers will have additional considerations based on available technology. Setting a target for the Internet speed guests will experience is made more difficult by the reality that broadband costs in certain resort or non-urban areas are considerably more expensive than in city centers.
There are a variety of options to match the strategies described above: • Cost effective bandwidth delivery options that will help hoteliers to manage rising requirements and costs • Technology solutions that include the ability to limit bandwidth on a per-room basis to a specific level, or that provide the ability to prioritize traffic coming into the hotel • Tiered or segmented bandwidth that will help to maximize service and revenue opportunities, while meeting the needs of hotel guests – for example, pricing plans that offer free to all guests at a specific bandwidth level, with tiered charges above that level • Intelligent bandwidth management methodologies to improve the guest experience while maximizing network performance
To Summarize... Even if the U.S. hospitality industry had not just experienced one of the most challenging economic periods in its history, we believe strongly that the “free/unlimited time and location” strategy for Internet access is economically unsustainable for hoteliers. It is imperative for hoteliers to carefully consider a mix of pricing strategies along with new technology solutions to address both the current reality of Internet usage, along with the all but certain probability of predicted dramatic increases in demand in the relatively near future. And, as economic conditions improve, occupancy will begin to climb – even further exacerbating the problem. To learn more, contact Shannon Michael at iBAHN, +1 801.563.2019, or at smichael@ibahn.com.
TO LEARN MORE ABOUT iBAHN TECHNOLOGY, VISIT WWW.iBAHN.COM OR CALL 1-866-415-2843 TODAY Corporate Headquarters | 10757 S River Front Pkwy, Ste 300 | Salt Lake City, UT 84095 | 1.801.563.2000