Wired and Wireless
Starbucks, Others Hope Internet Access Will Draw Customers

By Mike Musgrove
Washington Post Staff Writer
Thursday, April 3, 2003; Page E01

In the Starbucks at 15th and K streets in Northwest Washington yesterday, there was the usual line, stretching to the door, of downtown office workers getting their mid-afternoon caffeine fix. Lattes, espressos and cappuccinos were much in demand, but there appeared to be few takers for the coffee shop's latest offering: wireless Internet access.

The coffee purveyor had hoped that customers, particularly the moneyed, business-traveling type, might be enticed to order a few more iced caramel macchiatos if they could plop down in a comfy chair, fire up the laptop and have instant access to the Internet.

But so far that promise has yet to be realized. In an average week, 22 million customers pass through the front doors of Starbucks stores in North America, but only about 25,000 people are ponying up for the wireless connections, according to the company.

Such is life at the forward edge of a movement to unplug computers from their telephone wires and cable lines, and make computing more mobile. Big technology companies such as Dell Computer Corp. and Intel Corp. are mounting major marketing campaigns to promote "Wi-Fi" gear. Hotels, airports and even some McDonald's locations are setting up networks to cater to the growing number of wireless users.

Yet how the technology translates into new business opportunities is still very much a work in progress. Starbucks and its partner in the venture, the mobile phone company T-Mobile USA Inc., are still experimenting with how much to charge and how to market the service.

T-Mobile recently slashed the price for curious Wi-Fi users from 25 cents to 10 cents per minute; heavier users can purchase "buckets" of minutes or pay $30 a month for unlimited access from any Wi-Fi-connected Starbucks in the country, a plan that requires a yearlong commitment.

T-Mobile frames the ambitious project, which has connected 60 percent of company-owned Starbucks locations to its service so far, as a work in progress. "We haven't been actually marketing it yet," said Kim Thompson, a spokeswoman for the company. "We're getting the network in place."

Analysts have mixed opinions about whether selling wireless Internet access will turn out to be a viable business. After all, T-Mobile is actually the second Wi-Fi provider to install broadcasting locations, known as "hotspots," in Starbucks; the company's original Wi-Fi partner, MobileStar Network Corp., filed for bankruptcy. Another Wi-Fi provider, Joltage Networks, declared bankruptcy last month and cited low demand as a principal culprit.

"I don't see any of the providers being profitable right now," said Amy Craven, an analyst at technology research firm In-Stat/MDR. "That's not to say they won't be."

Interest in Wi-Fi is certainly growing. According to In-Stat/MDR, a total of 3,700 for-pay Wi-Fi hotspots were set up in the United States at the end of last year (2,600 of those were in cafes). The number is likely to jump to about 10,000 by the end of this year. The research firm says the total network of hotspots in place get about 168,000 uses per month.

Wi-Fi networks typically cover a limited area, such as an airport lobby or cluster of hotel rooms. Laptops or other gadgets fitted with special wireless cards are capable of automatically detecting when a wireless signal is available. If the provider charges for access, a user can pay online and be up and running in minutes.

The wireless networks ultimately connect to the Internet through traditional wired conduits. Though Wi-Fi can be offered through cheaper Internet connections such as DSL or cable modem, T-Mobile is fitting each Starbucks in its network with a faster T1 line. T-Mobile and Starbucks would not reveal the details of their Wi-Fi partnership, including the costs involved; T1 service can cost around $1,000 per month.

Critics say the margins for selling wireless Internet access are too thin to ever represent much business opportunity; some speculate the service will eventually become free in many retail areas as a way of attracting more customers.

"They don't really need to bill for what they're doing," said Martin Reynolds, an analyst at Gartner Inc. "The real benefit comes from the increased foot traffic and the increased business."

Eric Fidler, co-founder of Tangerine Unwired, a consultancy in Bethesda that develops security software for secure networks, uses fast-food restaurants as his metaphor of choice for free Wi-Fi: "McDonald's doesn't charge you for the ketchup."

Thanks to Fidler and his business partner, Phil Leas Bjerknes, Wi-Fi users can get online for free along Bethesda Avenue, from Wisconsin Avenue to Arlington Road, in downtown Bethesda. The broadcast antenna, which transmits a signal from a computer in a spare closet at the restaurant, is mounted on the top of the Thyme Square Cafe. The signal reaches about as far as the local Starbucks, Fidler said.

"We thought the concept of having Internet access in public without having to pay for it is pretty cool," he said. "We also want to show that anybody can essentially put it up and contribute to free Internet access around the country."

Apple Computer Inc. also gives away wireless Internet access in all of its retail stores. For the computer maker, it's easy to see the attraction of getting Wi-Fi users in the door: The kind of early adopter who actively uses wireless is likely to be a consumer who regularly spends money on technology. (Non-Mac users are also welcome, a spokeswoman for the company said this week.)

Starbucks ultimately hopes providing wireless access will do more than keep customers around longer. The company is in the process of dreaming up other revenue generators associated with the service. Today, for example, you can buy music CDs with your white chocolate mocha at the register when you go to Starbucks; perhaps tomorrow you'll pay to download that same album onto your laptop.

Despite such ambitious plans, Starbucks maintains the company is still mainly about the coffee beans. "Clearly, we're doing this because we think it'll make people buy another cup of coffee," said Anne Saunders, vice president of Starbucks Interactive.

Once they try the service, many customers turn out to do just that. Douglas N. Arnold, director of the Institute for Mathematics and its Applications at the University of Minnesota, was on his fourth hour and his third cup of cappuccino at a Starbucks at Dupont Circle, the first day he'd ever tried the service.

Arnold gave the quality of the connection a thumbs-up, though he rated the connection as a bit expensive: "I'm a Linux user, so I'm a believer in free stuff," he said.

On the other end of the Wi-Fi-using spectrum, columnist Josh Marshall, editor of TalkingPointsMemo.com, seemed happy to pay for the service, at a Starbucks a few blocks up Connecticut Avenue.

Lately, Marshall has been spending two or three hours a day working from his favorite overstuffed seat by the window -- the seat, not coincidentally, by the power outlet. Since he works from home most of the time, he said he's happy to have the option of a change of scenery.

And Wi-Fi service has turned him into a loyal Starbucks customer. "Having the T-Mobile has completely locked me down here, as opposed to the Cosi across the street," he said.

© 2003 The Washington Post Company