By Joe Brancatelli
January 30, 2014 --Is Internet access now so fundamental to our lives that hotels should bundle it with bedding, heating, air conditioning and water and consider it part of the basic nightly rate?

Or is our insatiable demand for bandwidth so financially disruptive that hotels have no choice but to charge a premium for in-room access so we can stream audio, video and other megabyte-intense items?

The answer is yes.

For those who think the Internet should be free, take heart in the news from Loews Hotels, which last week began offering free access to all guests. It won't be the last luxury hotel group to stop charging Wi-Fi fees, either. In a few weeks, a global lodging chain based in Asia will make a similar announcement.

Yet the rapidly rising appetite for Internet access is forcing many hotels to reconsider their unlimited-access-for-all approach. Sometime in the first quarter, for example, limited-service hotels in the 4,000-property Hilton Worldwide system will adopt a two-tier approach. Basic bandwidth—fast enough for email, social-media and Web surfing—will continue to be part of their nightly rate. But access speedy enough to stream movies or download large files will carry a daily premium of around $5.

Welcome back to the Internet Wars, where hotels and business travelers circle each other warily and search for common ground on connectivity. In less than 20 years, what once was a luxury frill that hotels tried to profit by providing has morphed into a business-sustaining basic and is now transforming again into a budget-breaking expense that hotels are desperate to offset.

And don't be lulled into a false sense of security because you are an elite member of a frequent-guest program and your favorite hotel chain comps your Internet. As the latest Hilton move shows, more and more hotels will implement a tiered access system. Being a lodging elite probably won't excuse us from this wrinkle. Our perks will undoubtedly be good only for the basic level of connectivity.

Let's skip the divisive free-versus-paid Internet discussion because, frankly, it's hardly relevant anymore. Chains that still charge all comers for basic Internet access are now few and far between and they will have to bend sooner or later. Whether they adopt the free-for-all model chosen by tiny Loews or follow gigantic InterContinental—it makes Internet access free so long as you join its frequent stay program—the future of basic Internet in hotels is as a bundled-into-the-rate amenity.

The problem with free? "Free Wi-Fi comes with friction," quips Brian Metzger, head of global-channel marketing for Ipass, an aggregator that sells seamless global access to frequent flyers. "Free Internet actually costs you time, it costs you credentials and it has real performance issues."

Metzger doles out useful statistics, too. On a day when an average iPad is connected to iPass, it consumes 110 megabytes of data over 122 minutes. Connected iPhones use 41 megabytes over 88 minutes. Android devices use 46 megabytes over 118 minutes and laptops connected to Ipass consume 78 megabytes over an average of 97 minutes.

"Business travelers now come to the hotel with three or more devices connecting to the Net," explains Nick Patel, chief financial executive of Naman Hotels, which owns and manages 16 properties with familiar brand names like Holiday Inn Express and Hyatt Place. "Usage is exploding."

Naman adds that business travelers aren't the only heavy users, which is currently free for all guests at all Naman-operated hotels. "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."

Hotels are extremely guarded about what it costs to provide connectivity—Loews, for example, flatly refused to discuss its internals—but I've pieced together a structure based on off-the-record discussions with lodging companies and Internet providers.

Generally speaking, it costs about $1,000 per room to wire an average-sized hotel for Internet. And while bandwidth costs are often bundled with in-room telephone and even television service, the various parties I've spoken with agree current bandwidth costs work out to at least $20 a room a month. But that figure is rising fast as demand increases and hotels buy more bandwidth and do new hardware installations to keep up with consumption.

"The cost of bandwidth has come down over the years and that used to offset the price of expanding capacity," admits one hotelier. "But not any more. And when you consider that 20 percent of guests seem to consume about 80 percent of the bandwidth, well, a premium charge seems like a logical approach to recouping our costs."

If these arguments seem familiar, you are probably old enough to remember the Phone Wars between hotels and business travelers. In the olden days before the Internet and mobile phones, business travelers relied on in-room telephones to keep in touch. Hotels often comped local calls, then charged huge fees whenever we dialed long distance. Hotels made the same arguments about phone fees then as they do about bandwidth costs now: Installation and network charges force them to price access at far about retail to keep their systems current.

But as Robert Mandelbaum, director of research PKF Hospitality Research explains, it's more muddled now. "Back in the day, there were revenue [accounting] lines for telephony. Now, with bandwidth costs bundled, it's hard to get a good read on costs or revenues."

In fact, the only ballpark statistics Mandelbaum could provide are for the broad topic of "telecommunications," which includes both telephone calls and Internet fees. For 2012, PKF numbers show hotels generated about $1 a day in telecom revenue per occupied room.

Back-of-the envelope math would then go something like this: The average hotel room is only occupied about 60 percent of the time or about 18 days a month. At a dollar a day of revenue, that's $18 compared to the $20 a month it already costs hotels to buy access. Factor in the installation costs and the rising amount of bandwidth demanded by guests and it's clear that Internet is quickly turning into a cost center.

"Hotels used to make a lot of money on phone calls--and then on Internet access," Mandelbaum says. "But they're not making great volumes of dollars now."

ABOUT JOE BRANCATELLI Joe Brancatelli is a publication consultant, which means that he helps media companies start, fix and reposition newspapers, magazines and Web sites. He's also the former executive editor of Frequent Flyer and has been a consultant to or columnist for more business-travel and leisure-travel publishing operations than he can remember. He started his career as a business journalist and created JoeSentMe in the dark days after 9/11 while he was stranded in a hotel room in San Francisco. He lives on the Hudson River in the tourist town of Cold Spring.

THE FINE PRINT This column is Copyright © 2014 American City Business Journals. All rights reserved. Reprinted with permission. JoeSentMe.com is Copyright © 2014 by Joe Brancatelli. All rights reserved.