What happens when there are 259 people active on a network? Will the hotspots just move to another local IP range? My original thought was it would just start kicking people off, but I see hotspots used in schooling environments all the time where there are 1000s of people accessing the network... If it just kicked people off would make the system virtually useless.

2 Answers
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First, though the theoretical limit of the 802.11 standards is what, 255 clients? In reality, you'll get nowhere near that. In large deployments that I've seen, anything over say 50 clients per AP and performance starts to degrade significantly.

Second, in large deployments, you will have a flock of APs that are managed by a single (or cluster of) wireless controllers. These controllers often have several subnets that they can assign clients to.