HSIA business models

Excerpted from the Viator Networks Whitepaper "High-Speed Internet Access in the Hospitality Market" copyright 1999-2002 Viator Networks, Inc. All Rights Reserved.

DIY | Covering Costs | Service Providers | Revenue-Sharing | Gotcha's | Increasing Use

One of the more difficult decisions a property owner will have to make is whether to install Internet services themselves or use one of the many contracting firms who will do it for them. Service providers, as they are becoming known in the industry, bear the cost and risk in exchange for an exclusive agreement for the properties and a large part of the revenue generated by the service. A different kind of service company provides the installation and support services under contract to the property owner. This model provides the owner the same benefits of doing themselves without the worry of having to find qualified vendors to provide essential services. Viator Network's Endorsed Vendor relationship with Choice Hotels International franchisees is an example of such an arrangement. The solution that works best for you depends completely upon whether you, the property owner, want to assume a significant technological and potentially costly undertaking.

Do-it-yourself

Here are the questions you need to answer to determine whether you want to do it yourself:

These questions are intended to get you to think longer-term about the solution and what levels of hardware and technical support you will have to undertake. It isn't easy to run a high-speed network if you have never done it before and you will need to hire skilled staff that you probably don’t have on-site today. But it is possible and some properties are setting up their own support teams. Just be aware of the extent to which you need to enhance your capabilities and your staff.

Covering Costs

There are two options: charge for it or give it away. The typical model has a per-use fee of $9.95 per-day and up depending on market conditions. Some properties are building a .50 cents or $1 per night fee into their rack rate to cover installation and support costs, and offering the service as a basic amenity to guests and charge for it in their meeting space. Any property using a model.

There are several business models offered to support operation and underwrite costs: ad-based, ad-supported, fee-for-service, and rack-supported.

Ad-based: advertising-based service typically provides all hardware to the property at no charge in exchange for fees generated by page view and clicks on advertising on a required web portal that all users must view. In the early days of hotel Internet services, this was thought to be a workable model. However, reality has shown this model is clearly insufficient to generate the smallest amounts of revenue and has been abandoned.

Fee-for-service: In this model, users are charged a daily fee to use the system. Fees are typically in the range of $9.95 to $19.95 per day. Higher fees have been attempted outside of the United States, but we have no indication that the US market will support such fees. In this model, service providers install the network at no cost to the property, in exchange for a set percentage of the daily fee. Based on professional experience, this model can support basic system installation and system support.

Ad-supported: this is a combination of the previous two models, where advertising and service fees are used to support system implementation and costs. This is the most common model at the time of this writing. Based on professional experience, this model can support basic system installation and system support.

Rack-supported: this simple model uses the addition of 25 cents to $1 per night to the room rate to underwrite system costs. This is the most direct way to pay for the installation and support of Internet services as most properties can reasonably project occupancy rates and can adjust the rates accordingly. This is becoming increasingly popular because it allows the owner to purchase or lease the equipment, taking advantage of several tax benefits, have greater control over who provides the back-end services, and most importantly, allows them to offer the service as an amenity for no cost to the guest or tenant. We believe this will soon be the predominant model in the HSIA industry.

Savings-supported: this model is based on the concept that effective management of other services and the resulting cost savings can underwrite the costs of installing and managing high-speed Internet access services. Several companies are using telephone consulting services to help save the property money by assessing calling patterns and suggesting cost-saving strategies that reduce operating costs and hence increase profits. Other companies are beginning to look at energy management in the same light. For example, one large power company will offer access to their international fiber backbone to those properties who take advantage of their energy management services to reduce energy costs. The fiber backbone can then be used to provide high-speed Internet access and secure VLAN services to corporate offices. These energy savings can be significant and when combined with telephone call management, could yield even more savings that allows property owners to install and operate true broadband networks in their properties for very little if any cost.

Contract Service Provider

Contracting with a service provider is the most common strategy property owners are using today. It’s easy. It’s reliable. And there are fewer headaches involved in managing the service. At this point in the game, most service providers offer effectively the same packages to property owners:

You should also ask about their financial picture and the abilities of their staff to really implement high-speed networks. If you do not have the expertise to quiz the provider on their technical know-how, plenty of firms exist who can provide a few days of consulting services to help you determine whether your provider really knows what they’re doing. The unfortunate reality is many do not.

Revenue-Sharing ("Profit Sharing")

Revenue sharing typically doesn't work out for the hotelier (although it does for apartments and condos). Here's why.

Revenue sharing assumes that a certain and consistent number of users will access the system every day. Most models are based on some percentage between 15 and 20 percent each night (known as the take rate). In a typical hotel of 80 rooms, that means between and 12 and 16 guests are expected to connect per night and pay somewhere between $4.95 and $9.95 for access. These fees are then shared with the service provider with a small percentage going to the hotel, typically 10 percent.

But what happens if the take rate doesn't reach 15-20 percent?

Statistics show that only 40 percent of hotel guests carry laptops into the property. Out of 80 rooms with an average occupancy rate of 65 percent (52 guests per night), that means that only 20 guests will be carrying laptops or other PCs with them into the property. Statistics further show that only 20 percent of those with PCs have the equipment needed to connect to a high-speed network. Subtracting 80 percent from the 20 guests leaves only 4 guests per night with the ability to connect to a high-speed network. Four is one-fourth the number required to generate any revenue for the hotelier. Given this simple math, it shouldn't surprise anyone that no major service provider who bases their model on revenue sharing for hotels is still in business and why hotel chains view revenue-sharing models with great skepticism.

Why does it work for apartments and condos? Because the take rates are consistent. Then the model works.

Look out for “Gotchas!”

If there is one thing you ought to look out for, it’s the service provider’s choice of network solution to install in your property. If you have CAT5 or better cabling, in our view it makes no sense to use a DSL-based solution because you would not be taking advantage of the bandwidth capabilities of the cabling. As we mentioned above, the future is broadband and you do need to think about how to best utilize your existing infrastructure. If you have four-pair CAT5 or better in the walls, use it. If you have four-pair CAT3 in the walls, use it.

Increasing Take Rates

A “take rate” is defined as the number of people who actually use the service. This is the primary statistic used to determine if the service is “successful” or not. Regarding take rates, we have found the following to be true:

Increasing take rates involves education on the part of the staff and the consumer. If you expect your Internet utilization to grow by osmosis (the process plants use to get energy out of the air), your take rates will grow about as quickly. You must familiarize your sales and front desk, housekeeping, and maintenance staff in how the service works and how to promote and support it. You should also include announcements in all of your marketing materials, which include telephone hold messages, tent cards, flyers, e-mail signatures, your web site, radio spots, and any outside promotional activities. You should specifically target corporate clientele with information and demonstrations of the service. There are firms who have developed comprehensive staff training programs who can help you with this critical issue.

For more information, please call +1 480 704 4909 or send an e-mail to: sales@viatornetworks.com.