Room Service Providers

Baldwin Louie — Mon, 23 Apr 2001 15:00:00 -0700

Don DePalma is no technology novice. The VP for corporate strategy at software company Idiom in Waltham, Mass., DePalma is enough of a geek that he installed a router in his home so he and his two kids could surf the Net at the same time. In other words, he's exactly the kind of tech-savvy customer San Francisco's Ritz-Carlton Hotel is trying to attract by offering high-speed Internet access in its guest rooms.

Too bad DePalma couldn't get the service to work. When he stayed at the Ritz last summer, he spent 15 minutes tinkering with his laptop and the red Ethernet cable snaking out of the answering-machine-size box on the desk. Losing patience, he shoved the cable aside, connected his laptop to the phone and sat back while his e-mail downloaded at a poky (but familiar) pace. "It was really a frustration," he recalls. "There was so much bandwidth waiting there. Instead it took an hour synching at 42K."

Over the past couple of years, hotels have spent millions of dollars equipping their rooms with high-speed Internet access. According to research firm Cahners In-Stat Group, the market for supplying broadband hardware and services to hotels was $59 million last year; that's expected to grow to $679 million by 2005. As a result, as many as 10 percent of U.S. hotel rooms now have some form of broadband access; Jupiter Research predicts that half the hotel rooms in the United States will be wired for high-speed access by 2002.

But few guests are taking advantage of in-room broadband - either because they don't know it's there or because, like DePalma, they can't get it to work. Most estimates peg the percentage of guests using these services in the low single-digits; by contrast, pay-per-view movies lure about one-third of hotel guests, "adult entertainment" more than half.

Despite the low take-up rates, hoteliers are adamant about adding high-speed access to their menus of amenities. "The demand by the business traveler to have his connection is certainly there," insists Mark Hedley, senior VP and CTO at Wyndham Hotels and Resorts. That's why Wyndham is wiring virtually every room in its 144 properties, which includes luxury resort Carmel Valley Ranch in Carmel, Calif., with T1 lines to offer speeds up to 50 times faster than ordinary phone lines.

WIRED HOTELS Of the major hotel chains that cater to business travelers, Wingate is way ahead
	Rooms	Wired Ethernet	Wireless Ethernet	Web-Enabled Television
Courtyard	73,900	32%	0%	N/A
Hilton	85,243	19%	20%	0%
Hyatt	58,000	5%	0%	5%
Marriott	149,200	43%	0%	7%
Wingate	9,075	100%	0%	100%
Ramada and Days Inn not included because they offer no broadband services of any kind. And because their hotels are independently owned franchises, neither Best Western nor Hampton supply meaningful chainwide data. Sources: companies listed

Yet so far only 6 percent of Wyndham's guests have taken advantage of those high-speed wires. By comparison, 55 percent of the chain's guests watch adult material on TV, and 35 percent watch first-run movies. "It's the early-adoption stage," Hedley says. "As more demands are placed on the business traveler to use the hotel room as an extension of his or her office, that penetration rate is going to go up."

Maybe so, but for that to happen, hotels and travelers will have to overcome some significant technical hurdles. Like the Ritz-Carlton, most hotels that offer broadband access do so in the form of wired Ethernet, with speeds varying from 1Mbps to 100Mbps. That often means running cables to each room and installing wall jacks. Typically, the hotel provides the Ethernet cables; guests without Ethernet cards for their laptops are out of luck. Hotels are also experimenting with wireless access, which at a minimum requires guests to bring a wireless PC card; in some cases, guests must also have a subscription with the hotel's chosen wireless service provider. In that case, hotels need to install wireless transceivers on each floor.

The problem with both wired and wireless access is that guests must supply crucial hardware - specifically, an Ethernet card - themselves. And even if a traveler carries around an Ethernet card, his or her laptop may not be able to use the hotel's broadband connection to do anything useful.

"Right now, with an Ethernet- connected laptop, you can get Web access," says Bruce Rosenberg, Hilton's senior VP of e-business. "But that's not the killer app. Our users need to get back to their corporate network." For that to happen, the guest's company must enable virtual private networking - which would allow guests to access their companies' networks via the Net. VPN technology is spreading, says Rosenberg, but not as fast as hotels are wiring.

Because of these technical hurdles, Hilton is testing alternative technologies, including Internet-enabled television, wireless access and even Internet-enabled telephones with 14-inch monitors. Starwood's W Hotel in San Francisco is doing the same, offering Internet TV (with a wireless keyboard) and a high-speed Ethernet jack in every room; the hotel plans to try out wireless in its "living room" lobby this summer.

Some hotels are hesitant to provide broadband service at all, says Dylan Brooks, an analyst for Jupiter Media Metrix, because more and more guests are carrying their access with them. "The rapid growth in wireless phones - and, looking into the future, Internet-enabled wireless phones - threatens to do to a hotel's broadband services what those same cell phones did to their telephone revenue," Brooks explains.

Not that the hotels are in this for the money: Guests typically pay just $10 a day for high-speed access. Hotels insist that the primary motivation in wiring rooms is to attract and retain business travelers, not to produce incremental revenue. But hotels still have to rationalize the cost. Depending on the age and architecture of the building, retrofitting for broadband can run as high as $850 per room. It's cheaper to build it in from scratch. Wingate equipped all of its hotels with high-speed cable and then spent $100 to $170 per room on additional equipment to offer broadband service.

One way around these costs is to have a service provider do the wiring for you. Some early broadband suppliers - startups like Marriott-backed STSN and CAIS Internet - offered to wire hotels for free. In return, they'd keep most of the fees charged to guests by the hotels. That led to a land grab as startups competed to wire as many rooms as possible. That arrangement meant chains like Wyndham didn't have to invest much (if anything) to add the service.

But as venture capital evaporated, the install-it-for-free model became less and less viable. Service providers began charging for installation and either taking a smaller cut of the guest fees or charging hotels a monthly fee. Not surprisingly, orders fell. "If for the last two years you're getting something for free, and now they say it's not, you're going to say, 'Let me think,'" says Mark Allen, director of multidwelling units markets at broadband provider Tut Systems. A slowdown in sales of equipment to hotel service providers contributed to a 44 percent drop in Tut's fourth-quarter revenues.

Some broadband providers simply checked out of the hotel business altogether. CAIS Internet, which wired Hilton's rooms, sold part of its business to Cisco Systems. OnCommand, used at the W Hotel in San Francisco, is no longer accepting orders for high-speed Internet access and is concentrating on more-lucrative and established businesses such as pay-per-view movies and online gaming. MobileStar Network has abandoned hotel rooms to focus on retrofitting hotel lobbies, airports and even Starbucks coffee shops for wireless Net access.

Perhaps no company has retrenched more than Darwin Networks. Based in Louisville, Ky., Darwin filed for Chapter 11 bankruptcy in January after laying off more than 300 employees. Last fall, the company, which landed $120 million in venture capital in just over a year, announced it would get out of the hospitality industry and instead wire apartment buildings and commercial property. Why? The company figures it gets about $400 per month from commercial customers and $40 a month from an apartment tenant, compared with trying to make money from hotel customers at $9.95 a shot, says Russ Maney, Darwin's senior VP of marketing and customer service. "We just saw a quicker return on investment" from apartments and offices.

As hotels pick up at least part of the bill for installation and start receiving more revenues, customer awareness - and usage - should rise. "There's going to be a lot more interest on the part of hotels to market the service," says Amy Helland, a research analyst with Cahners In-Stat, "because they're going to be taking some of the risk."

Meanwhile, now that they can charge for installation, some larger players are joining the fray. In March, Cisco Systems announced a partnership with Starwood Hotels & Resorts to launch Cisco's new long-reach Ethernet technology and other products, starting with a pilot installation in the Sheraton New York Hotel and Towers. In the past year and a half, Sprint has unveiled two high-speed Internet products in Las Vegas, at the Treasure Island and the Aladdin Resort & Casino. The company hopes to finish wiring all 2,567 rooms in the Aladdin by the end of this year. Sprint has one big advantage over its smaller competitors: It can offer a full suite of telecom services - hotel phone systems, pay phones and kiosks - along with high-speed Internet access. "Pretty much every telecom service we offer is at the Aladdin," says Sprint product marketing manager Kyle Murdoch.

Still, only 2 percent to 5 percent of Treasure Island guests are using the service. Murdoch says that's "pretty good," considering many guests are leisure travelers who are less likely to bring their laptops on vacation. High-speed Internet access is actually becoming increasingly common in hotels catering to leisure travelers. The upscale Four Seasons resort in Santa Barbara, Calif., for example, just finished wiring its 217 guest rooms, suites and cottages. According to Ed Galsterer, director of marketing, high-speed access is just another core amenity, like the terry cloth robe, color TV, VCR and hair dryer, offered to every guest.

What will it take for high-speed Internet access to become as common as televisions in the nation's hotel rooms? Some argue that, like TV, it will have to be free. That's still a few years away. Cahners In-Stat's Helland predicts the average price for a high-speed connection will drop to $2 per day by 2004 as budget hotels begin to bring their own rooms up to speed and offer the service at lower prices.

But for DePalma and other road warriors, cost is not the obstacle. "My company has no problem paying $10," he says. "It all comes down to a productivity question." The Ritz-Carlton acknowledges that there were some early kinks in the hotel's high-speed service. "People were not reading the instructions on the box. And some people like to be shown more than to read," says hotel spokeswoman Angela Jackson. That's why the hotel now offers a complimentary technology-butler service to help guests with everything from high-speed Internet connections to handhelds that are on the fritz.

Since his Ritz-Carlton flop, DePalma notes that he has upgraded his laptop to a much more "flexible" machine. "I think that was just teething pain," he says of the earlier experience. For high-speed to work at the Ritz and elsewhere, guests and hotels alike will have to do some growing.

The Industry Standard - Room Service Providers - Comments

Room Service Providers