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For the fourth year now the Wi-Fi race has been unfolding in the economically developed countries of North America, Europe and South East Asia. New wireless Internet zones are appearing in these regions on an almost daily basis. Since these zones are based on technology of the local wireless network standard Wi-Fi (IEEE 802.11), they are usually referred to as “Wi-Fi zones”.

Mobile Internet access in Wi-Fi zones

The Wi-Fi race reached Russia last spring but for a variety of reasons it has lost its momentum. Nonetheless, 32 Wi-Fi zones have appeared in St. Petersburg and Moscow as of mid-September.

In short, a Wi-Fi zone is a general-access wireless network placed in a so-called hot spot, where large numbers of people gather such as airports, hotels, retail centers, etc. The most important feature of these zones is mobile Internet access. An authorized user can move throughout the coverage zone of the wireless network and maintain a continuous Internet connection. As a rule, an authorized user can also access the Internet in any of the other Wi-Fi zones of the same operator. The ideal of blanket coverage, however, has yet to appear in even the most technological advanced countries such as Japan, Norway, Sweden, and the USA. Thus, as soon as one leaves a hot spot, the Internet connection is broken.

Analysis of the developed Wi-Fi markets shows that the first companies to take interest in this sector are large mobile telephone operators. The Wi-Fi zones offer an interesting supplement to the market of mobile information exchange. These companies are confident that increased Internet use outside the home and workplace will increasingly draw clients to these services. Mobile telephone operators have also realized that high-speed Wi-Fi services are an important supplement to their Internet services offered via mobile phone connections, which are slow-speed but offer 100% coverage.

How it all began

The first companies to begin developing in this market were the mobile telephone companies of the Scandinavian operators Telia, Sonera and Telenor. They were followed by almost every large mobile operator in the world. The American branch of T-Mobile International (a daughter company of the telecommunications giant Deutsche Telekom) currently holds the record for the most Wi-Fi zones with around 2500. Many analysts point to the importance of roaming service to the success of any Wi-Fi business. It follows that mobile providers are best able to handle such roaming services and can use their mobile network to bridge the gaps between Wi-Fi zones. They also have extensive client support services and billing systems.

Stationary telephone companies that provide national or regional coverage also have considerable chances in this sector. Such operators could integrate a large number of Wi-Fi zones using their own network and would not be forced to rely on the roaming services of other networks. Deutsche Telekom, British Telecom, Verizon and the South Korean company KT have announced their plans to develop tens of thousands of Wi-Fi zones in the next 2-3 years.

The appearance of larger mobile and stationary telephone operators on this market only began en masse in 2002. When the market first appeared in 2000, except for several Scandinavian countries, Wi-Fi operators were relatively small and unknown companies. Many of them have already gone broke, while others were more successful, like the American company MobileStar, and have been purchased by larger companies. Others, such as Wayport, having chosen the best locations for their Wi-Fi zones, continue to thrive and compete among the leaders of the market.

The experience of the Texas company Wayport has confirmed the prediction of analysts that airports and hotels are prime locations for such services. The founders of Wayport were the first to recognize that Internet access is in high demand in such locations. Having chosen their locations well, Wayport has not only managed to succeed, it has also been able to attract rather large business partners such as AT&T, Intel and IBM.

While location has proven critical to the success of specific companies, the general development of this market on the large scale is closely related to the number of users of portable computers. As with mobile phones, the number of portable computers and the extent of Wi-Fi coverage are not only interrelated, they are also related to the general economic situation in the region.

In search of a business model

The development history of Wi-Fi is repeating itself in Russia three years after it began elsewhere. As large operators are waiting, small Internet providers such as “Takskom”, “Komset” and “Kvantum” as well as companies such as Fastnet Solutions, Moscom Group, Ramax and inter-touch are opening the market. The St. Petersburg company “PeterStar” entered the market a little bit later. It should be pointed out that some of these companies have had previous experience working with the state agencies that regulate use of the radio broadcast spectrum, which undoubtedly makes it easier to sort through the bureaucratic paperwork necessary to create Wi-Fi zones.

So who will follow these pioneers? The mobile phone providers Vimpelkom and MTS are expected to make the first steps. Vimpelkom has already received permission to establish 400 inner-office wireless information exchange systems (according the Communications Ministry, Wi-Fi zones fall under the regulations for “localized radio networks”). One such test system has been operating in Sheremetevo for almost a year now.

The class A office complex Country Park now under construction on the bank of the Moskva-Volga Canal will have several Wi-Fi zones. These zones will support not only high-speed Internet access but telephone services as well. The zones will include the entire complex as well as the riverbank and harbor.

The emerging Wi-Fi market is being closely observed by large alternative operators such as Transtelekom, Golden Telekom and MTU-Intel, as well as the telecommunications investment group Tsnetralny telegraf.

Golden Telekom has created a development strategy for the Wi-Fi market and is currently considering its implementation. By examining the deliberations of Golden Telekom, one can get a good idea of why the major Russian operators continue to delay their entry into this new market.

Golden Telekom studied both foreign markets and the Russian market for Wi-Fi Zones and came to the following conclusions:

1. Effective entry into this market depends on four factors: the rapid creation of a high concentration of Wi-Fi zones (for Moscow, this mean several hundred zones), good zone placement, good partnership agreements with other market players, and a large group of consumers prepared to pay for these services.
2. The potential clientele base for these services consists mainly of foreigners and a small group of Russian businessmen who have adopted western business practices.
3. The start-up cost for such a project would be about $1.5 million. The investment return time for such a project would likely be longer than the 1.5-2 years generally expected for such telecommunication projects.

In short, the research carried out by this company clearly indicates that it is still too early to enter the market with such a massive project.There are three main reasons for this:

• Russian business remains 2-3 years behind the IT revolution taking place in more developed countries.
• There are a relatively small number of portable computers in Russia.
• The portable computers used in Russia are relatively antiquated in terms of wireless support systems.

It would seem that these factors would lead Golden Telekom management to put off development in this sector for another two or three years. However, the importance of having one’s own Wi-Fi devices in the most advantageous locations is also crucial to success in this sector. Practice has shown that only one Wi-Fi provider is likely to obtain the rights for a given zone; i.e., if the most lucrative zones (airports, hotels, retail centers) are seized early in the market’s development, they are not likely to be relinquished or shared with the latecomers.

The importance of early market positioning is not lost on other market players either. At the Ararat Park Hyatt, where Golden Telekom provides almost all the telecommunication services, the management of the hotel has agreed to let the foreign company inter-touch install a Wi-Fi system.

While delaying entry into the Wi-Fi market might not be fatal, latecomers are foregoing the prize pieces. According to IATs Telecommunicatsia, the battle for the finest pieces of this unbaked pie has already begun. For this reason, companies are now occupying positions despite the fact that they will not likely bring in a profit for another several years. Andrey Shishlo, director of marketing and development of Golden Telekom, announced that the holding plans to open four Wi-Fi zones in Moscow by the end of this year.