Article

Kiosk companies feeling effects of slowdown

Dot-coms aren't the only victims of hard times. Kiosk companies, particularly those in the gaming and Internet public access business, are in trouble, too.

March 24, 2002

For more than a year, technology companies have been bearing the brunt of the U.S. economic slowdown. During the past 18 months, more than 550 Internet companies have closed their doors, according to San Francisco-based Webmergers.com.

But the bloodletting that began after the Nasdaq index peaked in the spring of 2000 hasn't been limited to pure Internet-based companies. The kiosk industry has seen its share of problems as well.

In some instances, the same ailments that felled high-flying dot-coms-venture capital funding that dried up, or business models that relied solely on advertising revenue-also afflicted kiosk-related companies. As a result, the kiosk industry is learning some of the same hard lessons as the rest of the technology sector.

"In some cases, I'm not surprised because the company either didn't have a good business model or had a great idea but the timing was wrong," said Francie Mendelsohn, head of  Summit Research Associates.

"In other cases it's big corporations that are cutting back and downsizing people and cutting off your kiosk project. It covers the gamut," she said.

Bad signs

Recently, there have been several notable ripples in the industry:

• Last December, Louisville, Ky.-based Agora Interactive Inc. filed for Chapter 11 bankruptcy. Four-year old Agora was developing coin-operated interactive gaming kiosks.
• In January, another Louisville-based company, Darwin Networks Inc. filed for Chapter 11 bankruptcy. The high-speed access provider was installing public Internet access terminals and offering kiosk design services. Darwin ceased all operations in May.
• In February, Minneapolis-based Advants Public Internet Access Inc. became insolvent after failing to complete a venture capital deal with VA Linux worth $8 million, according to Mark Shelton, vice president of operations. H.J. Ventures Inc. bought Advants' assets and continues to operate 50 terminals, he said. That's a far cry from the 30,000 the company predicted it would install.
• In May, video entertainment kiosk provider ObjectSoft Corp., based in Hackensack, N.J., announced it was considering a merger with Golden Screens Interactive Technologies. The move came a month after ObjectSoft was delisted from Nasdaq and its CEO resigned.
• In the same month, CAIS Internet Inc. was also delisted from Nasdaq. In April, shares of the company's stock fell to 24 cents. The Washington-based company planned to provide Internet kiosks to airports, retail centers and cruise ships.

Like many failed dot-com content providers, many kiosk-related businesses and ventures counted on a steady stream of Internet advertising for revenue. While that model may work with a robust economy, it does poorly when businesses cut back on advertising spending.

"This is a different market than it was 19 months ago," said Mike Szimanski, president of Baltimore-based ATM Advertising Inc. "There was a lot more money available for non-traditional, or alternative, advertising."

Another problem was that many kiosk companies were under the false impression that they could generate the same kind of traffic as with Internet advertising. After speaking with dozens of kiosk-based businesses, Szimanski concluded that many built inaccurate advertising revenue projections, factoring unrealistic traffic and deployment figures into their business plans.

For example, the numbers of click-throughs, or times a customer clicks on an ad-a figure important in generating advertising income-is significantly less for kiosks, where customers spend less time browsing, than on home computers. Companies didn't count on the difference between the two platforms.

Advants' Shelton said that his company's business plan counted on ad sale revenue.

"When the advertising dollars started drying up, that's when things got difficult," he admitted.

Without advertising, the user fees Advants charged could not cover costs at most sites.

"The fees do cover the expenses at certain sites," Shelton said. "There are sites that work. Getting sites was not the problem. Getting quality sites is a little more difficult."

Hidden costs

Shelton said that Advants' cost of doing business went beyond the price of the terminals. It included servicing, Internet connection charges and even sales commissions.

"The sales agents got paid (commission) on a per-site basis, not on whether the sites worked," he said.

Poor research

Better research could have led to greater success.

"I was a little saddened at the amount of research that wasn't done," Szimanski said. "These companies tried so hard to develop something technologically important and deploy hundreds, if not thousands, of these things. It was all a good idea until it came down to how it was going to be paid for."

Faced with the same economy that caused some kiosk companies to shut the lights, companies not primarily in the kiosk business are reducing or delaying kiosk projects.

Ace Hardware, for example, had planned on deploying as many as 2,000 kiosks. Instead, the company has deployed fewer than 200 in its stores, Mendelsohn said.

Success helped by failure

One of the businesses that may ride out the economic downturn is Scottsdale, Ariz.-based First Wave Inc., a kiosk software developer. First Wave founder and chief executive officer John Glitsos said that in addition to being in the black for three consecutive quarters, the company is on track to double its revenues this year.

"We've done more in the first half of this year than all of last year," he said. "I hate to say that, but right now our biggest source of new prospects are those that have failed projects."

Among the company clients are Walt Disney Records, Whirlpool Corp., Kinko's Inc., Honeywell International Inc., and recently Kids "R" Us Inc. Glitsos said he expects First Wave to launch 30 new projects this year and quadruple its business in 2002.

Glitsos suggested that the company's success was based on using hardware and software designed specifically for kiosks. First Wave, for example, developed the Kiosk Communicator, a browser designed specifically for kiosk users, and worked more than four years developing a kiosk-specific software platform.

Glitsos says that many kiosk ventures relied on hardware that wasn't "fault tolerant" and didn't learn of recurring problems with, for example, a printer, until tens or hundreds of kiosks were deployed. In other instances, kiosk projects that relied on cutting-edge technology, such as videoconferencing, may have looked impressive, but did little to encourage a customer to buy a product.

"People have been too steeped into jumping on the next whatever," he said. "Videoconferencing was a great technology, but it did nothing in terms of ROI (return on investment)."

Revised plans

One of the problems endemic to kiosks has been the short amount of time that users spend using them. One way of dealing with that problem would be insisting that users pay a minimum fee for services.

For example, a Web phone provider could include a 10-minute minimum charge for service. If customers don't use the entire time, there's more time to generate more revenue, Mendelsohn said. She also suggested that having retailers pay for the kiosk might be an option.

Szimanski, however, saw another option: entertainment. This month, his company launched eGamePreserve, an entertainment-based kiosk network featuring gaming, trivia and sports and also offering users Internet and e-mail access. The goal, Szimanski said, is to give users more reasons to spend time in the kiosk.

"Our goal is to build traffic and build stickiness so that we have something more of value to offer the advertiser," Szimanski said. "We want to get people to use them, and we think this is a fun way to do it."

The company plans to place the eGamePreserve mainly in venues associated with travel and entertainment: hotel lobbies, airports, restaurants, bars and military bases. Three networks- Get2Net, AT&T, and TouchNSurf-have signed up for the service, which consists of about 200 kiosks in Denver, New Orleans, Boston, Las Vegas and other cities, Szimanski said.

By signing up, the companies agreed to run the eGamePreserve service on existing kiosks. Szimanski explained that If the kiosks charge customers, they will still do so. If they are free terminals, they will remain free.

"There's also a bit of exterior branding. Basically the kiosk is given a jungle theme," he said.

Making the cut

Those businesses that emerge from the slowdown will likely do so because of innovation, better technology and the ability to get users into the kiosks and keep them there longer.

"Some of them, they just spent way too much money with nothing to show for it," Mendelsohn said. "But others, if they can hang in there, they'll be okay."