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A new breed of telecommunications providers is making economical Web access the next small-business perk.
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Leasing office space? You could get high-speed Internet access for a very nice price

Depending on where you lease your office space, a fast Internet connection could cost your company as much as $1,500 a month. And that's if the building is already wired. How does free wiring and access sound instead?

Several telecommunications start-ups are now wiring office buildings for high-speed Internet access at no charge to the building owner or the tenants -- and, in at least one case, they're giving away the service itself. Those companies call themselves on-site service providers, or OSPs, and they make money -- or at least plan to make money -- by selling other data and voice services to the buildings' inhabitants. Their arrival could signify big savings for small companies.

As a business model, the OSP approach may sound screwy, but it's been done before. Retailers call it a loss leader: a product that a store sells below cost in order to attract customers who'll buy much more. Think "Old Navy Item of the Week." Similarly, high-speed Internet access has recently become the performance fleece vest of the information age.

Several of the start-ups that have jumped into the giveaway game are already economic forces to be reckoned with. They include Allied Riser Communications Corp., in Dallas, which went public last October; OnSite Access Inc., in New York City, which filed for an initial public offering earlier this year; Cypress Communications Inc., in Atlanta; and BroadBand Office Inc., in Palo Alto, Calif.

Given the larval stage the market is in, it's difficult to predict which companies will morph into something even bigger. What is clear is that small businesses stand to benefit from the early competition. As many as 85% of small companies lack dedicated Internet-access lines, according to an August 1999 report from Morgan Stanley Dean Witter, and OSPs really want those customers. So they've competitively priced their offerings, which include local and long-distance phone service, E-mail, and Web hosting. And the founders of those start-ups know that in the juicy but choosy small-business market, customer service is clutch. Several have adopted the strategy of stationing a customer-service person at each building for tech support and sales. That's a far cry from the endless androidesque voice-mail menus of the traditional phone companies.

And there's more good news for small businesses: at least one small start-up OSP has taken the idea of a digital loss leader a step further than the rest. Urban Media Communications Corp., which set up shop in Palo Alto in March 1999, not only wires buildings at its own expense but gives the tenants free high-speed Internet access. The company employs 75 people but at press time had only finished wiring one building, a funky 1920s stone edifice in San Francisco. It has lined up 80 additional buildings for wiring in cities across the United States.

In addition to providing superior customer service, OSPs also trump Ma Bell and her babies on flexibility, according to Urban Media customer Mark A. Corrales, vice-president of operations at Fort Point Partners, an Internet-services company in San Francisco. Corrales says his company's traditional PBX phone system worked great for fewer than 100 people. But as new hires joined the company every week, the system simply couldn't handle the voice and data volume.

"Every time we grew by another 10 or 20 people, we had to buy some extra crap," Corrales says. "They'd say, 'Oh, you need a new gizmo number 17, and that'll be another $5,000."

When Fort Point's employee roster was approaching 100, the company moved into the aforementioned funky San Francisco building that Urban Media serves. Although Urban Media's presence had little to do with Fort Point's initial choice of the space, Corrales bought Urban Media's pitch and changed systems. Now when Fort Point adds, changes, or deletes an employee phone connection, Corrales doesn't have to order phones and have them shipped or hire a contractor to do the work. The Urban Media customer-service rep is in the building to take care of business. With Urban Media, Fort Point's phone costs are about the same as they were before, Corrales says, minus the equipment add-ons that the PBX required.

Trade-offs, at least for now, appear to be few. First of all, Urban Media's free Internet connection is faster than the fastest dial-up rate (56K) but slower than a state-of-the-art T1 line. None of these start-ups forces customers to view advertising for the privilege of using free or cut-rate services. But Allied Riser customers connect to the Web through an Allied Riser portal, and Urban Media's free-broadband customers abide an "E-commerce toolbar" -- an innocuous, if ever-present, menu posted on their desktop screens. The toolbar makes money for Urban Media when customers click to and purchase from Web sites selling office supplies and airline tickets. As wired buildings get filled and space becomes a premium, landlords may increase rents, but that doesn't seem to be happening just yet.


As many as 85% of small companies lack lines for high-speed Internet access -- and on-site service providers really want those customers.


Speaking of landlords, they're another group poised to profit from the OSP invasion. Kent Barner, senior vice-president at Prentiss Properties Trust in Dallas, says that last summer a "great flurry" of providers knocked on his door ready to wire Prentiss buildings at no charge. All offered equity in their companies in exchange for a foot in the door. Prentiss wound up purchasing a stake in Urban Media and giving the OSP first crack at wiring the 45 million square feet of office space Prentiss manages. Such deals amount to instant customer acquisition for the providers.

But numbers don't guarantee success. Urban Media CEO Sean Doherty wants to roll out services to a billion square feet of office space this year, which will cost the company about 75¢ a square foot. To start making a profit, Urban Media must sign on 10% to 20% of the tenants in each building for its services. And once the company enlists those tenants as customers, it will have to keep them on the hook. Early customers like Fort Point are satisfied for now, but nothing will prevent them from switching service providers, since such real estate deals typically aren't exclusive. According to Maribel Lopez, a senior analyst at Forrester Research, in Cambridge, Mass., "Most of the landlords have figured out that they can milk this cow a few times."

So if you're currently renting your office space, you might want to give your landlord a heads up about free broadband installation from OSPs. Then you can sit back and watch the companies jump at the chance to serve you. Unlike them, you've got nothing to lose.

Jill Hecht Maxwell is a reporter at Inc. Technology.


THE SITES


Broadband by the Sea

While the competition for wiring office buildings heats up, another market is taking shape: high-speed Internet access for hotel rooms. The idea is that businesspeople accustomed to a fast connection at the office will gladly pay for one on the road. A variety of companies are fiddling with the phone lines in hotels to create a broadband connection for guests. The companies label their enterprise "visitor based" or "nomad" networks.

Ever try downloading your E-mail from the phone line in your hotel? Molasses City. Even if business travelers are using a 56K modem, the best rate they can expect from a clunky hotel connection is 28.8, says Stephen Drake, a senior analyst at IDC in Framingham, Mass., who follows the visitor-based network market. Now, as long as their laptops have network interface cards (NICs), business travelers can plug in their laptops to a special jack and get a high-speed connection from their hotel rooms. The cost: about $10 a day, which is tacked onto their hotel bill. "Those companies are erasing some of the frustrations of business travel without creating a tremendous increase in costs," says Drake.

Visitor-based networking is an arena for companies of all stripes. First there's the hardware. With its EtherLoop technology, Elastic Networks Inc., in Alpharetta, Ga., turns existing copper phone wires into data Ethernet connections without disrupting voice service on the same lines. "It's kind of like two virtual pipes -- a big water pipe for the data with a little straw outside for voice," explains marketing vice-president Phil Griffith. Since providing the service requires no rewiring, hotels don't have to close rooms for the upgrade.

Then there's software. Cais Software Solutions Inc., in San Diego, markets a product called Iport that allows all the guests of a particular hotel to connect to a single T1 line. Cais has contracts to service 10 chains including Hawaii's Outrigger Hotel Resorts, where the company has installed Iport in beachside cabanas so that guests can check those all-important stock tickers during piÑa colada hour. The cost: $2.50 for 10 minutes.

Finally, half a dozen companies have adopted the on-site service provider (OSP) model, upgrading hotels to high-speed access at the provider's own expense -- which can run as high as $400 per room -- and charging hotel guests for time online. Since the providers share the take with the hotels, the business model could be a boon to both sides -- not to mention making molasses-speed E-mail downloading a thing of the past.


SETTING UP YOUR OSP

1. Landlord signs on with an on-site service provider.
2. The OSP installs fiber-optic lines and switches throughout the building.
3. Every desktop can be hooked up for high-speed Internet access through the OSP.
4. Tenants can buy local and long-distance phone service, Internet access, and Web hosting from the OSP.


Q&A

Wired Bricks

Dale Anne Reiss, global industry leader for real estate at Ernst & Young, recently spoke with Inc. Technology about the need for Internet speed and how technology is affecting her business.

Inc.: What has spawned the rush to connect office buildings to the Internet?

Reiss: Five years ago, the ability to deliver those services in a cost-efficient manner wasn't practical. Now it is.

Technology companies need high-speed access to exist, and more traditional companies need it for productivity advantages.

Inc.: Can OSPs really make money by giving away the wires and selling services later?

Reiss: The opportunities are absolutely there. The world has yet to be totally wired. First, these companies have to get a critical mass of buildings. The most important thing over the long term will be the level of satisfactory service provided to the office tenants.

Inc.: But is there room for all of those start-ups?

Reiss: There's probably a consolidation waiting to happen. Then again, we're still waiting for a consolidation in the mainline real estate industry.

Inc.: Is there a downside to the convergence of technology and real estate?

Reiss: That's like asking if there's a downside to progress. This is becoming a true competitive advantage not only for office owners but for apartment owners and even home builders. The issue will be, is some sort of wireless technology going to obviate the need for this kind of service?


Please e-mail your comments to editors@inc.com.

Last updated: Jun 15, 2000




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