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By Richard Shim, 19 May 2004 08:37

NEWS Wi-Fi pioneer Cometa Networks will announce today that it is suspending operations following a failure to raise additional capital needed to expand its service nationwide in the US.

Cometa representatives confirmed that the company will be shuttering operations in the coming weeks.

"Obviously this is a disappointment because we felt we had a proven wholesale model," said Kent Hellebust, vice president of marketing at Cometa. "But the investment community has reached the decision that the return on the capital investment wouldn't be high enough."

The San Francisco-based start-up, formed in late 2002 with the backing of technology giants AT&T, IBM and Intel, had said it would build a network of 20,000 hotspots, with 15,000 up and running by 2005. But Cometa never managed to install enough hotspots or strike major alliances with partners, and it quickly fell behind rivals in snapping up the most valuable hotspot locations.

Hotspots are public areas where individuals can wirelessly access resources - such as a broadband internet connection - available on a network established using Wi-Fi gear. They were initially set up haphazardly in a grassroots manner to give communities free access to the internet. Although this continues to happen in some cities, more and more companies have been installing secure networks and charging for the service.

Cometa was planning to have about 800 hotspot locations by September. Major rivals, such as Wayport and T-Mobile USA, have installed at least triple what Cometa installed and have actively been striking new roaming agreements, which helps to increase the size of their network coverage.

"We need to build the scale of usage as quickly as possible," Gary Weis, Cometa CEO , said in a recent interview. The more locations an operator has access to, the greater the amount of traffic on their networks and the more attractive the operator becomes as a potential partner for cellular and cable companies.

Last year, 15 million consumer devices equipped with Wi-Fi were shipped, up 95 per cent compared with 2002, according to research firm Synergy Research Group. And the thinking goes that as more devices are sold with built-in Wi-Fi connections, more device owners will want hotspot service. However, consumers have been slow to pay to log onto networks.

Hellebust said that the company has built a profitable business in Seattle. But without the cash to fund a nationwide network, which is key to the company's cost savings and service coverage efforts, the company doesn't have the ability continue its operations.

Cometa is the latest hotspot company to be closing its doors. Wi-Fi start-up Joltage shut down its operations last year after it failed to raise additional capital needed to expand its service. Earlier this year, Cometa acquired Toshiba's SurfHere hotspots.

In many cases, start-ups have either been too early to market or had weak business plans, said Keith Waryas, an analyst at research firm IDC.

"The value of hotspots by the vast majority of people with Wi-Fi devices isn't clear," Waryas said. "One of Cometa's biggest problems was being too far ahead of the curve... dying before the mainstream mass markets formed."

Unlike other network operators, Cometa was a wholesale low-cost provider of hotspot access for service companies. The upstart had been focusing on providing network operations to outside service providers. The advantage of this wholesale model was that it allowed multiple service providers to use the same hotspot. That spread out the cost of maintaining the network, which can lead to lower prices for consumers.

The biggest cost for a hotspot company is the back-haul operations, which includes the broadband connection. Cometa's model, in which multiple providers could use the hotspots, helped to cut the cost of operations and lower the cost of the service to consumers. One of Cometa's service providers in Seattle offered monthly access for $11.95 per month. Other hotspot providers charge as much as $40 per month.

But a significant element to that strategy is having enough hotspots to attract carriers and service providers. Service providers look for a large number of locations so their subscribers can access a wide network. Cometa had difficulty in striking some of those large-scale alliances.

The company was recently overlooked by restaurant chain McDonald's as a hotspot operator in favour of rival Wayport.

Waryas said he believes hotspot services will survive only as part of a bundle from service providers.

"As a pure ISP business, hotspots don't have legs," he said. "Where it will work is with providers that can offer it as part of a package and where providers can off load some traffic."

Cometa's 40 employees will be let go during the next few weeks.

Richard Shim writes for CNET News.com.