Hotel Broadband Fizzles

Millions of hotel rooms are being left without the broadband connections their owners planned, as service providers close shop or ask hotels to split the costs.

Millions of hotel rooms are being left without the broadband connections their owners planned, as service providers close shop or ask hotels to split the costs.

Most business travelers these days just dont want to pay the typical $10 daily fee for the service. Fewer than 5 percent of business travelers use high-speed Internet access in their hotel rooms, service executives said.

One of the biggest players in the market, CAIS Internet, plans to announce this week its intent to shut down most of its in-room broadband business.

"Its been a disaster," said Michael Lee, CAIS president and CEO. "Beyond the router, its like a [demilitarized zone], with bullets whistling."

Lees pessimism is based on statistics. Only 7 percent of the state-of-the-art backbone that CAIS built with the hospitality business in mind is in use. In-room broadband usage may be 10 times lower than expected. The companys hospitality business had 2,500 percent negative operating cash flow last fall, while its bigger Internet service provider (ISP) business is healthy.

"What most people want to do with their laptops is check their e-mail," Lee said. "For that, most people just dial up."

Such experiences are not uncommon.

Executives at On Command and LodgeNet Entertainment said broadband usage is in single digits, while their businesses of providing on-demand movies and gaming in hotel rooms are thriving.

Less formidable companies are gone: Of a dozen competitors participating in the hotel land-grab of 1999, five are bankrupt.

Hotels know the business is troubled. "We have found our hotels — which is consistent with the industry — are averaging a 3 percent to 5 percent take rate," said Bob Bansfield, Hyatts assistant vice president of management information systems and a CAIS customer. "So for CAIS and their competitors, the numbers are not there."

But unhooking high-speed lines is not an option. For hotels, broadband is the proverbial cat that was let out of the bag.

"We are definitely starting to have guests that expect broadband as a guaranteed amenity," said Tia Gordon, a spokeswoman at the American Hotel and Lodging Association. So like it or not, the business pains of providers like CAIS are now the hospitality industrys business.

The solution proposed by Lee in letters sent to CAIS hotel customers in early May is to split the bill for maintaining in-room customer equipment, hotel connectivity and support calls. Currently, CAIS and other operators have revenue sharing arrangements with hotels. With a standard $10-per-day usage fee and only a few users online, this business model is often a bust. While CAIS negotiations are pending, competitors that also got burned on broadband are skeptical.

"Its tough to charge for something that you used to give out for free," said Thomas DeMeo, senior director of Internet services at On Command.

DeMeo estimated that, with all costs added in, a hotel room wired for broadband costs about $500 per year to maintain, and with an average hotel having 300 rooms, that adds up to $150,000 per year for a service used by fewer than five guests out of 100.

Still, some hotel chains are ready to pay up.

"We would select a company that requires either an initial capital investment with Hyatt, followed with an ongoing monthly operating cost, or in fact taking that additional capital investment and including that into an ongoing operating fee," Bansfield said.

Hyatt has asked for proposals from companies to essentially manage the hotels network. While both CAIS and On Command have bid on the contract, most companies dont believe they could reap big bucks from in-room laptop use.

"I would say this is not where the money is," DeMeo said.

On Command found in a recent study that, while most business travelers said they would prefer to use a laptop to get online, most ended up using an interactive television. Not surprisingly, only 9,000 of On Commands 150,000 interactive rooms have PC broadband connectivity. Similar circumstances are observed at LodgeNet, which has 55,000 out of its 750,000 interactive rooms wired for PC access, according to a spokeswoman.

If adequately compensated by a hotel, however, On Command would eagerly act as a systems integrator, DeMeo said.

One of the first companies in the hospitality space, CAIS plans to go so far as to change its name to erase any memory of its hotel past. The company will stay in the market as an ISP, selling connectivity to hotel meeting rooms and business centers. And it plans to come back to its hospitality customers with its next product, centered on outsourced business applications, and perhaps a voice offering.

But not everyone pitching the in-room broadband business is talking doom and gloom. Wayport, in Austin, Texas, recently closed a $70 million round of financing, touting its wireless and broadband approach to wiring hotels and airports as a model that will make money. Wayport splits its costs with hotels, and runs a concurrent subscription service with 30,000 members.

Wayport execs said they see the broadband cards being bundled into most new laptops, more consumer broadband customers and better-educated customers as pillars of their eventual success.

"The usage is still pretty low, but we expect these numbers to grow," said Michel Dewenter, marketing manager at Wayport.