Why Do Expensive Hotels Charge for Wi-Fi When Cheaper Hotels Don’t?

Check into most relatively inexpensive hotel chains in the U.S. -- think Holiday Inn Express or Hilton Garden Inn -- and you’ll get complimentary Wi-Fi as part of your room rate. Indeed, most travelers expect it, much as they would hot running water or any other basic utility. A Hotels.com survey earlier this year found that free Wi-Fi is the most important in-room amenity to hotel guests. But plan a stay at a more tony hotel, like the W, or even a standard Hilton, and all of a sudden, you’re shelling out fees around $15 to $20 a day to get an Internet connection in your room.

So what gives? Why are at least 64 percent of hotels, according to HotelChatter’s annual Wi-Fi report, offering free in-room Wi-Fi, while the holdouts include well-known, high-end chains like Marriott, Sheraton and InterContinental?

The perhaps too-obvious answer is, “because they can,” said Jan Freitag, senior vice president of hospitality research firm STR. Conventional wisdom suggests that travelers who stay at high-end hotels are less price-sensitive; they will pay for extra fees because they’re either expensing them to their employer or they don’t feel the pain of a $20 surcharge when they’re already paying $300 a night for their room.

But NYU professor Bjorn Hanson, a leading researcher on hospitality industry fees, says while that’s partly true, the full picture is a little more complicated. One reason full-service, luxury hotels charge for Wi-Fi fees while lower average daily-rate hotels do not is because of the differences in how these hotels are managed.

“High-end hotels are mostly operated by brand management companies with fees based on a percentage of total revenue; most less-expensive hotels are franchised, and their fees are based on room revenue only,” said Hanson. “Thus, there is an incentive for brand management companies to maximize their revenue -- for example, by charging for Wi-Fi -- and an incentive for less expensive franchised hotels to have higher room rates -- for example, by including Wi-Fi in the rate.”

In other words, the lower-tier hotels are simply building the price of Wi-Fi into their rates because that’s how the hotel brands make more money.

Still, Hanson’s own research earlier this year indicated that hotels will rake in a record $2.25 billion in hotel fees in 2014, and that most of these fees earn 80 percent to 90 percent in pure profit. And as hotels lose revenue on previously reliable sources of income, such as video-on-demand and telephone charges, it makes sense that they would seek other sources to make up for the shortfall. According to PKF Hospitality Research’s hotel industry report, in-room movie rental revenue was down 42 percent from 2007 to 2013, while telecommunications revenue was down 40 percent for the same period.

But hotel Wi-Fi fees aren’t quite as profitable as the general fee average, said Hanson, and while they do seem to be a big moneymaker, the infrastructure costs hotels must invest in wipe out some of that profit.

“On an income statement basis, meaning revenue minus expenses, Wi-Fi fees are very profitable -- in excess of 50 percent profit margins,” said Hanson. “On the other hand, as a return on investment, they are not profitable. For example, Mode hotels spent more than $40,000 last year increasing bandwidth capacity to meet the needs of guests, but there was no incremental revenue that went with that. In fact, there’s a trend for decrease in revenue.”

Daniel Connolly, senior associate dean at the University of Denver’s business school who specializes in hospitality information technology, agrees.

“I don’t think anybody is really making money on Wi-Fi even if they’re charging for it. A lot of the fees that are being charged are offsetting the technology costs and investments because it can get pretty pricey to light up a hotel,” he said, especially as more travelers now come with multiple devices and put increasing strains on a hotel’s bandwidth.

“Usage is exploding,” said Nick Patel, chief financial executive of Naman Hotels, which offers free Wi-Fi for all guests. "Families come in and Mom, Dad and all the kids have their own devices. It's getting harder and harder to keep up with the demand for fast, quality connections at peak times."

Thus, says Connolly, charging for Wi-Fi may be the only way to ensure high-speed, reliable access. Because let’s face it: While many lower-end hotels promise free Wi-Fi, the service can be spotty, often taking a while to load basic email, much less services that demand greater bandwidth, like video streaming that episode of "Game of Thrones." But many budget-hotel guests don’t complain about the sluggish quality of free Wi-Fi -- after all, you get what you pay for.

"Free Wi-Fi comes with friction," Brian Metzger of Ipass, an aggregator that sells seamless global access to frequent travelers, tells business travel expert Joe Brancatelli. "Free Internet actually costs you time, it costs you credentials and it has real performance issues."

While exact figures are hard to come by, some experts estimate that it costs about $1,000 per room to wire an average-sized hotel, and bandwidth costs can run $20 to $40 a room per month. And some argue that because premium hotels are expected to offer high-quality, reliable Internet, they must charge for the service.

As a result, some premium hotels are turning to a tiered cost structure that offers free basic Wi-Fi to all guests, with the option to pay for a faster connection. Loews Hotels and Resorts implemented such a structure earlier this year, swapping its $15-20-a-day Wi-Fi fee for free service for all guests, while offering a $15 charge for souped-up speeds.

But even such tiered offerings are unlikely to satisfy the majority of travelers, who see Wi-Fi as a basic hotel right. The hotly anticipated chain of Virgin Hotels, which opens its first U.S. outpost in Chicago in January, is taking advantage of this sentiment by including high-speed Wi-Fi in its room rates that start at $209 a night. “No nickel-and-diming, no charging extra for bandwidth -- if you want to download some guilty pleasures, play PC games, or stream some video subscriptions, naughty or otherwise, please, have at it,” the company writes on its website.

As more hotels follow Virgin’s lead, says Hanson, it won’t matter how much it costs them to offer “free” Wi-Fi. They’ll be forced to do it -- because it's what customers have come to expect.