Time for Free(mium) Wi Fi?

Publicly, the metropolitan broadband story over the past week has been about the marriage of Clearwire and Sprint, about Cablevision getting Wi Fi religion, and about the sad final parting of the ways between EarthLink and the City of Philadelphia. And I've written a lot about all of this over the past week.

It's inevitable that I see these latest public events through the lens of my own private experience. How can we do anything but that, after all? I've been consulting with city governments for two years. Like Greg, I'm privy to the human element of the struggles inside an organization that pains itself to work through these issues, and I understand better than most the constraints and dilemmas that must be worked around and balanced in order for progress to emerge as the finished product of a network project.

Compare that perspective to the very public experience of journalists and commentators who merely skim the waves from the outside looking in, who pronounce judgment on innovative experiments conducted by highly dedicated individuals and groups, often based on regurgitated conventional wisdom about the way things should be - Monday morning quarterbacking, in many cases.

"Where would we be if these same rigorous, unforgiving standards had been applied to some of the big breakthroughs that were achieved in our past?" I wondered this morning over my coffee.

"In fact," I realized on further reflection, "all early pioneers were challenged by the same mindsets, that's just the nature of Progress, the eternal struggle between Change and the Status Quo. But those pioneers soldiered on, driven by some internal source, motivated to prove the doubters wrong, or to make a buck, it doesn't matter; in the end, the pioneers succeeded where everyone before them had failed, made a name for themselves, and we're all better off for their efforts."

Human beings are a strange lot, no doubt. Despite the abundance of experience and wealth and good things we've created to progress out of the muck and sheer desperation that life has been about for most of our existence, most of us continue to look into the dark void that is the future and come away frightened of what awaits us - even those of us, especially those of us who have so much going for us already. Maybe we're afraid because we feel we have so much to lose? I'm afraid that too often we overestimate the downside, and underestimate the upside.

Sure, we all have doubts about the future, but too many allow fear to rule their lives, taking the "safe" (conventional) course when presented with alternatives. "Better the Devil I know, than the one I don't," they too often say. The key problem with that course is that one gets stuck with the Devil...that mindset presupposes that any alternative will be equal to or worse than the status quo (perhaps because the status quo is already so damned good?). But why devalue the chance of success and dramatic improvement so readily? Such is the power of fear: "Better Not to Have Loved and thereby Avoid the Loss," they seem to say.

Greg's blog reflected long on the experience that Netscape ran into when they sought to be paid for their efforts to develop the first internet browser software - imagine that, productizing their successful research in order to recover costs and make a buck! The nerve! But what Netscape discovered as the new market unfolded was that their potential customers didn't yet fully value what they had brought to the table. So they learned by experience that they were better off giving it away. Such is life as an Internet pioneer, I guess. While Netscape ultimately faded away, their impact didn't. To the contrary, I'm using their browser to post this blog - Mozilla Firefox is the descendant of their early work.

That new form of economics has been one of the most astounding things about the bizarre world of the internet. And it sounds to me, like it did to Greg, a lot like access to outdoor Wi Fi in public spaces. But when innovators in wireless access sought to apply these new internet market rules to Wi Fi access, they were criticized as idealists, because conventional wisdom says that internet access is a service that should be paid for - that's what the cable and telecom ISPs do, after all. And capital and operating costs must be recovered for a model to be sustained - not arguing at all with that, I just don't think we were creative enough the first time around.

Of course there are multiple nuances to consider as we analyze what happened - and EarthLink's own corporate motivations clouded these experiments in municipal wireless, after all - but one key take away is that you can't sell something to a market that is not yet ready to buy and that has ready substitutes at an affordable price. To get people to try something new, sometimes you have to give it away, removing that barrier to experimentation. Think of the sample tables at grocery stores...Sometimes, you even have to pay them to take it. It's just not easy breaking in a new product in a new market. Most internet users don't yet understand why they would even need to access broadband when they're not sitting down in front of a computer. Mobile broadband is still too new, but then, not too long ago, cellular phones were for rich businesspeople, I had a pager that worked just fine, thank you very much.

Consider these points then, as an adjunct to Greg's thoughts on the nature of Free in regards to Wi Fi.

1. Not Free, Subsidized. I grew up in the 1960s, watching Free TV - sure, it was only 2-3 channels of content, depending on the market, and we usually got a Native American "Big Chief" test pattern at midnight when TV programming went off for the night, but it was still a relatively new medium - we forget how new Wi Fi still is, much newer than even TV was in 1965. The business model back then was broadcasting advertising-subsidized content to end devices that the consumer bought and owned. The network operator ran the national network, with local franchisees running local operations and buying content from national networks who procured the content from creative talent in NY and LA. Big advertisers paid for the privilege of gaining access to the viewing public through the network. Local advertisers dealt directly with local franchisees. The network operator and the local franchisee made buckets of cash by selling advertising, not unlike the business model for commercial broadcast radio, on which the TV model was based.

We still enjoy "Free" radio broadcasts, in fact, still available in your car or on a nightstand near you. But now you have an option to avoid the commercials by subscribing to satellite radio for a nominal monthly fee, which is gaining traction and growing subscribers, in part by avoiding the commercials, but also by providing more value than you can get with free radio.

For that matter, newspapers and magazine publishers played a variation of this game as well, receiving similar support from advertising revenue, although readers paid a nominal fee for the content, thereby subsidizing the cost of production and distribution.

The key point: Free was never really ever Free, so much as it was Subsidized - we paid for the right to see entertainment content not with dollars and cents, but with our time and attention to commercial content - we had to watch commercials! But it was perceived and marketed as Free, and that's the same way it could be with Wi Fi - subsidized, but perceived as Free.

2. Freemium. The Freemium model on the internet is a Web 2.0 phenomenon where a start up first gives away its product / software / service in order to generate interest and create a user base, then offers a premium version with more features, better quality, etc. for a small fee.

From Wikipedia:

"Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc, then offer premium priced value added services or an enhanced version of your service to your customer base."

This is a modern variation on the Free (ad-subsidized) broadcast TV model above, in so much as its intent is to generate interest and attract a broad user base. It's correlated with the Long Tail analysis by Chris Anderson of Wired magazine. Accepting that search costs on the Internet are near zero and that users can and will find you if you have what they need, it suggests that the logical thing to do is to encourage people to find you by putting out bait. The nature of the new economics is that one can make decent money with a relatively small user base and at a relatively low price, if the payments are repeated monthly, and costs are kept ridiculously low - in essence, that's the Web 2.0 storyline.

3. Commodity Services. Based on costs, IP has turned internet access and VOIP telephony service into a commodity business, but service fees have been kept artificially high for the time being by keeping the number of providers artificially low. This artificial scarcity is consciously engineered by the incumbent service providers with the intent of preserving a very lucrative revenue source - and I frankly can't blame them, I'd no doubt do the same if I were them. When you're on top of the mountain, your job is to kick off others who try to displace you. That's called rational corporate self-interest (which is not, by the way, always the same thing as good public policy).

But Municipal Wi Fi came along and offered an alternative that challenged that old "captive customer" business model, which depends on a limited number of options for consumers. The challenge Wi Fi Mesh-based service faced was that consumers were not yet used to getting mobile broadband anywhere they went, and didn't yet value it enough to pay for it - they didn't and still don't know why they should pay for it, so few of them actually do - I'm not surprised, are you? And marketing Wi Fi as a substitute for fixed wire line access was a BIG mistake, because quality of service is not what they said it would be, certainly not comparable to cable or DSL broadband in many cases, and the inevitably strong market competition that early entrants went up against was deadly.

A key lesson of early experiments (Google in Mountain View, etc.) was that far more users would come try the service if it were free than if there was a fee attached, and many would grow used to the service over time - and free service had the added benefit of having much lower operating costs by avoiding the billing and high levels of customer service that for-fee service would require. Hmmm. that looks a lot like the Freemium model above to me. Give it away at first, then once consumers value it, start charging a small fee, or series of small fees, or make money off the network traffic it generates.

If one understands that one has to create a user base with a new product before charging for it - no value, no revenue - then that's where early models went wrong (among other things!) - they were compelled by investors to monetize private sector investment with aggressive subscriber acquisition models whose subscriber revenues would pay off the network capital AND operating costs in an acceptably short time period. Not. Gonna. Happen.

4. Public Subsidization. And if one accepts that the Freemium model makes sense, then, "How the hell," one may ask, "are you going to pay for the damn network? With Pixie Dust?" So goes the frustration of those who pride themselves on having their feet placed firmly on the ground. The problem is that this Freemium model is an operating model, it still requires some cash to launch a network, and it leaves nobody there to pay for the initial capital costs - after all, it arose as a Web 2.0 model, where a Network exists to start with, and that's not the case when it comes to outdoor Wi Fi.

That's where municipalities come in as a natural fit, because they have an opportunity to save budget spending by implementing mobile IP applications, but they need a network on which to run those budget saving applications. With sufficient business planning, they will see that they can either own these networks themselves or act as anchor tenants for a private provider, with acceptable risk. Either model will work, but the city has to do the heavy lifting in order to see the light. No avoiding the sit-ups, I'm afraid. When a city acts as a catalyst to bring a network in, they make a Freemium business model possible as well.

5. Private Subsidization. There's yet another alternative. A smart cable (Cablevision) has caught on to all of this and has realized that they can add a 4th leg to their triple play with mobile broadband via Wi Fi Mesh, giving it away to their own customer base as a means of locking in customers. That move changes the customers' value perception on cable service ("now you can take it with you when you leave the house!") and hopefully lowers or mitigates churn, the bane of network subscriber operations. Going on the offensive this way by changing the value proposition for their service is smart.

What else is a small cable to do to stay competitive? Here then is an open door, if companies will just walk through it. It will be hard to do at first, I admit. But if the telecom and cable incumbents in any of these markets where there is a municipal wireless network would just seek to buy access and then give it away as a reward for their customers, as Cablevision plans to do, they'd find that it's a relatively low marketing cost. It's especially low when compared to some other ways that providers currently spend their money (lobbying for protection from market forces, for instance?). When compared to the cost of losing an existing customer, the real threat that incumbent providers face, giving away Wi Fi access is pretty cheap insurance. There are legs with this strategy, we'll see more of it, but it requires a motivated ISP to go there. This would put incumbents in the position of stimulating more broadband usage in a local area, which is commensurate with their grand strategy, after all.

The Bottom Line

We are all to some extent still trapped in conventional paradigms of internet access as a service that we buy, just like telephone or cable service. We have a ways to go to reach the point where the market accepts that internet access can be a gateway service that opens up the consumer to an array of other services that they can buy over the internet. It's a two-tier problem, in fact: 1) we need a last mile wireless broadband infrastructure and a way to pay for it; and 2) we need a new user paradigm and business model that is more expansive than our current way of using the internet and doing business.

When all that happens, Free(mium) Wi Fi should gain traction. And, the aggressive provider that chooses to be bold, to give away both Internet Access and VOIP in exchange for long-term lock in on some other type service? My bet is that they will kill the competition over time. But I think we still have a long way to go before we see that, as there are too many players right now who see free access or free VOIP as anathema, a non-starter, like preaching "socialist" health care to a conservative. They won't listen. If the choice is between cannibalizing their existing revenues and staying with the status quo, after all, they have a point.

The elephant in the room is that current providers haven't figured out a new way of providing value, competing, and making money - their current model is still way too lucrative, after all, for them to be all that creative. And cities are not yet truly pressed to be really innovative, not that many of them. They are waiting on a few to go forward and succeed, then the rest will follow. "The line forms at the right - the timid need not apply....Next!"

I wish there were better news, but it looks to me like this will all just take time to sort out...Sigh...