Case Study: Rethinking the WiFi Hotspot Business Model

By Gerry Blackwell

April 05, 2002

Here is a case where the hospitality industry is making WiFi work...with quite a different business model than we've seen to date.

The day we talked to Bob Lunde, CEO of hotel wireless systems integrator RoomLinX Inc. (www.roomlinx.com), he was riding high, feeling vindicated and bold. Things have been going well for RoomLinx lately and they just got better.

The company learned that day that it had all but sewed up a breakthrough new account, a 300-property chain that wants RoomLinX to install wireless Internet access systems in 14 of its hotels right away. That would double the company's installed base of properties.

"We think we'll be in 100 properties by the end of the year," Lunde confidently predicts.

His optimism may be justified. There are signs RoomLinX has finally come up with a business model that actually works - something that has eluded other players in the troubled public access WLAN market, most notably the late lamented MobileStar.

RoomLinX sells turnkey WLAN systems to hotels - "as amenities," is how Lunde puts it. RoomLinX hotels typically don't charge room guests for high-speed Internet access. They do, however, charge corporate customers for access in meeting and convention rooms.

As well as taking a profit on the initial installation of the system, RoomLinX also negotiates a monthly fee from the hotel for providing 24/7 network support and hand-holding for guests. Plus it takes a percentage of the meeting room Internet access revenue - usually 50 percent.

RoomLinX, based in Vancouver, Canada, with sales offices in Sacramento CA, is still fairly low profile, despite being a pioneer and survivor in a business with a high mortality rate. But it's starting to be known.

The company was launched three and a half years ago. Its first success was an installation at the Sheraton Wall Centre in hometown Vancouver, bankrolled by Lunde. The company had some success raising capital in the ensuing dot-com spring and brought in a hot-shot executive management team. But it struggled to generate sufficient revenues.

This was at a time when the market was dominated by companies convinced that the now discredited Mobilestar business model was the only viable approach. RoomLinX was trying it too.

They built the systems themselves, managed them and took a percentage - usually only about 10 percent - of the nightly fees hotels charged guests for high-speed access in their rooms. And that was the only revenue stream for the network provider.

It wasn't working. In 2001, Lunde got back involved in managing the company and, according to his story, effected a turn-around by forcing a new business model on the company's hotel clients. RoomLinX started by going back to its first customer, the Sheraton Wall Centre, and issuing an ultimatum.

The Wall Centre system wasn't generating enough revenue because the hotel wasn't getting the right kind of business traffic, Lunde told hotel management. RoomLinX needed a guaranteed minimum monthly revenue stream to be successful. If it couldn't get it from the hotel, it would take the system out.

The hotel was in the process of repositioning itself to attract more convention traffic and believed the Internet access system was crucial to this effort. It readily agreed to a new deal. It would pay RoomLinX to manage the system and give it a cut of meeting room revenues.

"So we went back to all the hotels and changed the model," Lunde recounts. "As a result, we grew revenue exponentially and turned RoomLinX into a real nice little company."

Then September 11 hit, the stock market tumbled, customers lost confidence. Deals close to completion evaporated. Dark times.

But RoomLinX had key accounts that continued to develop - most notably Montvale NJ-based Dolce International Holdings Inc. (www.dolce.com), which has about 20 properties in the U.S., Canada and Europe. Three so far have RoomLinX wireless systems.

Just surviving the downturn, being one of the only companies in the field left standing, helped. RoomLinX also tinkered with its business model in a way that turned out to be crucial.

"In talking to the hotel general managers, we tried to figure out what it is they wanted to achieve," Lunde says. "Well, they'd like to own [the wireless system] for the most part, but they don't want to write a big check."

So Lunde came up with the simple expedient of arranging lease financing for customers. This meant RoomLinX didn't have to commit capital to a project months before it could expect to see payment. The lease company pays RoomLinX upfront, the hotel makes monthly lease payments.

As a result, RoomLinX was able to reduce its revenue requirements significantly. The company is now talking again to a big Hawaiian property that walked away from a deal just after September 11. RoomLinX has been able to reduce its asking price by about 60 percent since the first round, Lunde says.

The business case for the hotel is now fairly compelling. In a typical 200-room hotel, RoomLinX can install a system for about $150 per room, or $30,000. That works out to lease payments of about $600 to $650 a month. The hotel pays RoomLinX about $1,000 to manage the network and service. So the hotel's monthly costs come to less than $2,000.

The business case is based on the assumption that offering free guest room access and high-speed access in meeting rooms will increase business by one percent 20 days a month. That works out to 40 room nights at a rack rate of $150 each, or $6,000 a month.

"So the hotel is $4,000 to the good and it didn't charge the guest a penny," Lunde points out.

And it doesn't take into account additional high-profit restaurant and bar revenues. Lunde argues that providing free wireless access will encourage guests - especially conventioneers - to meet in the hotel's public areas where they can link to the Internet or back to their corporate networks.

And while they're there, they'll be sharing a bottle of wine or ordering cocktails - as opposed to than sitting in their rooms sipping bottled water. "The hotels get that," he says.

RoomLinX sweetens the deal by helping with marketing to the hotel's corporate clients and also marketing to meeting planners. In its home base of Vancouver, where it has seven properties in all, more than one meeting planner won't book non-RoomLinX properties, Lunde says.

Of course, his business case doesn't include the cost of a business DSL or T-1 link, or access fees charged by a local ISP. Still, if RoomLinX can prove that its customers really are experiencing an upswing in business as a result of having the wireless access system - and Lunde insists all his customers love the company - the message may get through.

A couple of RoomLinX hotels are charging room guests by the night, he concedes. "But the overwhelming consensus in the marketplace is that this is going to be [a] free [service]," Lunde says. "[Wireless remote access aggregator] Boingo [Wireless Inc.] wants us to get our hotels to make guests pay, but we don't think that is a winning idea."

A few minutes later, he puts it even more forcefully. "We think they're [Boingo] wrong. That's the old model. We think they've got it ass-backward."

If you're Boingo or iPass Inc. (www.ipass.com), another company aggregating remote wireless access, you'd better hope the RoomLinX model turns out to be the wrong way. If mobile travellers can be assured of getting free high-speed access just by selecting the right hotel, why would they pay Boingo or iPass a monthly fee?

RoomLinX, meanwhile, is not the only hotspot company to read the writing on the wall and adjust its business model. According to Lunde, both his key competitors, Wayport Inc. (www.wayport.com) of Austin TX and Chicago-based Guest-Tek Interactive Entertainment Ltd. (www.guest-tek.com) are going the same route.

RoomLinX has some competitive advantages, though, he says. For one thing, all its help desk services - a crucial part of the company's operations - are provided from Canada, where employees are paid in devalued Canuck bucks (worth about 60 percent of the U.S. dollar). Most of the company's revenues, meanwhile, are in U.S. dollars. That's a significant saving.

It may not be enough to explain one recent win at a Los Angeles property, though. Lunde claims the customer told him the RoomLinX bid was 100 percent lower than one of his competitors, 150 percent less than the other. He hastens to point out that the company cannot promise to always come in at half the price of its competitors. "But we're very competitive on price."

Is RoomLinX away to the races? Maybe. It certainly has an interesting story to tell and some unequivocal successes - including the prestigious Talbott Hotel in Chicago recently. But we'll wait to see what comes of its big new customer - if the deal in fact goes through - and how quickly others, such as Dolce, roll-out the RoomLinX service.



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