Wrong Business Model

T-Mobile, which has supplied Wi-Fi service for years at Starbucks shops, is now suing the coffee chain over its plan to let AT&T Wireless deliver competing Wi-Fi service for free. T-Mobile alleges harm to its “substantial investment” in its Wi-Fi network.

Let’s stand back a moment and consider the economics of charging money for Wi-Fi access.

Every Starbucks already has a broadband line in the back room. Adding a Wi-Fi hub costs $80 in hardware, plus 30 minutes of installation time by a high school graduate, say another $20, for a total of $100 per store.

So, to provide unsupported free Wi-Fi at 7,000 Starbucks stores would cost a non-recurring onetime $700,000, or less than 0.1% of the operating income of either Starbucks or Deutsche Telekom (the owner of T-Mobile). After that initial expenditure, such a network would be essentially free to operate.

Obviously, then, T-Mobile’s “substantial investment” is not in the actual Wi-Fi service infrastructure. Instead, essentially all effort and expense goes into guarding the gates: building and maintaining a billing infrastructure to charge for, and control access to, all those Wi-Fi hubs from a central location.

A controlled-access Wi-Fi infrastructure of this scale likely costs 100 times more to build, and thousands of times more to operate, than the free version. If over 99% of the recurring operating cost is in guarding the gates, the whole enterprise is perilously exposed to a free competitor. As Wi-Fi becomes ubiquitous, you’ll always be able to poach a connection from the store across the street.

In short, this is a bad bet. Wi-Fi access is not a business, it’s a feature. Uncontrolled access, possibly with advertising, is the most likely outcome.

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