When I was in grad school in the early 90s, it was a big deal when the business school installed a mess of new pay phones — directly addressing a bottleneck that frustrated MBA students trying to contact would-be employers. Now, of course, that seems awfully quaint. But there is an interesting point of comparison to be made between pay phones and wireless internet access. Back in the day, no one expected a cafe or bar to have more than one pay phone. Only locations like airports and hotel lobbies had large banks of pay phones. And they were pay phones, i.e., they by definition weren’t free.
So why is there an expectation that a large range of service establishments offer Wi-Fi service gratis? A recent New York Times article doesn’t grapple with that question directly but it does document the difficulty that airlines, airports, and hotels are having in keeping up with the demand for internet access (Craving Wi-Fi, Preferably Free and Really Fast, Apr 30). One of the points the article makes is that it’s hard to get people to pay up for access on planes — only about 5 to 10% of passengers use the service. Now one can imagine several reasons for this. First, it can be relatively pricey to log on in the air (sometimes close to $20). Second, depending on the airline, availability can be spotty. If you are not sure whether you are going to be able to get on-line, you do the important stuff you have to get done before getting onboard. If Wi-Fi turns out to be available, you then have the prospect of having less important things to take care of but facing a stiff fee. Finally, the service on airplanes ain’t exactly blazing fast. It’s OK for sending an email but not so great for watching a movie.
Airlines aren’t the only one’s having a hard time getting customers to pony up for Wi-Fi access.
Airports and hotels are confronting a similar situation. Of the 10 busiest airports in the United States, those in Los Angeles, Dallas/Fort Worth, Denver, San Francisco, Las Vegas, Phoenix and Charlotte, N.C., offer at least some free Wi-Fi service.
But the trade-off can be overloaded networks that frustrate passengers, which is why Hartsfield-Jackson Atlanta International Airport — the busiest in the United States — is upgrading its infrastructure before switching to free Wi-Fi this year.
“Our system wasn’t built to accommodate the number of customers we expect to have with the free Wi-Fi,” said Myrna White, a spokeswoman for the airport, which dropped its Wi-Fi fee to $4.95 a day last fall.
It is the trade-off between price and congestion that I find most interesting. As we have written about before, users in services systems like Wi-Fi networks impose externalities on each others. Hence, if the system is relatively busy, it is efficient (in the sense of balancing the needs of all users) to impose some price on customers even if the cost of providing the service is sunk. An access fee gets customers to recognize the costs they are imposing on others. That is, prices can serve to direct behavior, not recover costs or create a revenue windfall.
There are a couple of points to be made here. First, if that were the intended purpose of prices, they wouldn’t be constant over the day. They should rise as the system becomes more congested and fall as demand slacks off. That obviously gets complicated and could easily create ill will. To really work, we would need prices to vary even for people who are already in the system. Thus, watching a movie could start off being essentially free but ultimately be very expensive simply because the network got more crowded.
Second, if prices were set to maximize profits instead of the overall good of the users, prices would be higher and congestion would be lower than is “socially” optimal. Thus, having only 10% of passengers use in-flight networks may well be what maximizes profits.
Of course, none of this explains why, say, the Atlanta airport feels compelled to offer Wi-Fi service at any price. If you are flying in and out of Atlanta, it’s not like there are a whole lot of choices on which airport to use. That is, I can’t imagine that offering cheaper Wi-Fi or even free Wi-Fi will win them extra business. Now, it may be that it is more efficient for the airport as a whole to offer the service as opposed to having different restaurants or lounges competing to offer internet access. It may also be expedient for the airport to offer Wi-Fi to enable entertainment and possibly some self-service when there are flight delays and other travel disruptions.
A final thing to mention. If you have to pay for Wi-Fi, there is no way of knowing just how good the quality is going to be before logging on. This is particularly true when you are just passing through and don’t regularly use the service. A Slate blogger confronted with an offer to upgrade to a premium service on a flight nicely explains the problem (Airplane Wi-Fi’s Credibility Problem, Apr 10).
Pondering it, it struck me as an intriguing business problem. After all, having used in-flight Wi-Fi in the past I’ve often thought that I would in fact be willing to pay more for higher quality service. But when looking at the option to pay more for faster Internet, I hesitated. There’s a basic credibility problem. If I pay and the Internet still seems sluggish, I have no real redress. The flight attendants aren’t going to fix it. There’d be no real way to prove my experience was sub-par. And obviously even a very good provider is going to be subject to the occasional hiccup while providing access in flight.
So maybe that is another reason to offer free Wi-Fi. If a service provider cannot credibly claim great service, it may have no choice but to low ball the price.