Facing economic realities of muni Wi-Fi

Since the municipal Wi-Fi movement started taking shape a couple of years ago, politicians, community organizers and the companies building the networks have touted Wi-Fi as a cheap solution to myriad social and economic problems plaguing cities today. Some cities see it as a way to bridge the digital divide, while others see Wi-Fi as providing a third alternative to a broadband market dominated by the cable and phone companies.

As a technology, Wi-Fi is seen as being able to solve all these problems and more. But the stark reality is that someone still needs to pay for the infrastructure and the cost of running the network.

Up to this point, the financial risk has mostly fallen on the service providers that have put up the capital to build the wireless mesh networks. These companies are spending millions of dollars on their initiatives with mostly no guarantee that they will ever turn a profit.

Now as operators move beyond proof-of-concept networks, they are re-evaluating their business models to ensure they can make money. This means carefully selecting the cities where they want to build networks and demanding more assurances from cities that they can get enough subscribers to make building the network worthwhile.

"The economic realities of building these networks is coming to the forefront," said Craig Settles, an independent wireless consultant and the author of the book Fighting the Good Fight for Municipal Wireless. "What we'll see coming out of the shute is a greater emphasis on selling to businesses and the cities themselves, which together offer the best opportunity for a return on investment."

The biggest sign of a shift came last week when EarthLink, which has won 13 citywide Wi-Fi contracts, said it plans to cut its spending for municipal Wi-Fi and will refocus its strategy to build out networks in cities where it already has contracts. Chief Executive Michael Lunsford said during the company's first-quarter conference call that it would only consider taking on new contracts in larger cities, such as Chicago or Los Angeles, where presumably the chances of turning a profit are higher.

"I would not say that we have pulled away from talking to other cities at this point," Lunsford said during the call. "We are focusing our efforts on some of the larger ones. We have to swallow some of what we have gotten already though. I think we have to build out, focus our efforts there before we go get more markets and then not do a good job of building those out for the cities that we would partner with."

The shift in strategy comes as EarthLink reported that it lost nearly $30 million during the first quarter of 2007 on revenue of $324.4 million. This compares with a year ago when the company earned $16.3 million on revenue of about $308 million. As a result of the loss, the company is cutting back on spending, particularly on its Wi-Fi network construction.

Recently, MetroFi, which has signed contracts for several major cities including Portland, Ore., also shifted its business strategy. The company is now requiring cities in which it provides free, ad-supported Wi-Fi access to commit to being anchor tenants. This means that the city will be contractually obligated to buy an agreed upon level of service from MetroFi in exchange for the company building the network in that city.

"There are still some cities that want the network for free," said Chuck Haas, CEO of MetroFi. "They don't want to have to commit to getting service from us. We built our first networks without anchor tenants in Sunnyvale and Cupertino. But those were proof-of-concept networks. In order to replicate that elsewhere, we need anchor tenants."

Settles said that both EarthLink's and MetroFi's strategy shifts make sense. He believes that for these companies to make money, they need to concentrate on winning contracts with large municipalities that can throw them a significant amount of business in terms of providing emergency services and other wireless and mobility services for city agencies. In addition, he said these companies also need to focus on selling services to local businesses.

"The revenue that will support these networks won't come from the general consumer," Settles said. "There is a lot of churn and pricing pressure in the consumer market. The consumer pitch is great for the political side of the house, but anyone with any kind of financial sense realizes that the city government itself and local businesses will pay more for services and offer a more stable subscriber base."

Up to this point, the hype around citywide Wi-Fi has centered on offering services to consumers. But getting finicky consumers to use a service and stick with it is difficult. For one, competition for broadband customers is fierce. And depending on the promotions offered by cable or telephone operators, consumers can get more bandwidth at a competitive price somewhere else.

Service reliability is another huge issue for Wi-Fi when compared with DSL or cable modem services. Users in some of the early Wi-Fi cities such as Tempe, Ariz., and Chaska, Minn., reported poor indoor coverage and other technical issues. While some of these issues have been addressed with indoor modems to boost signals, some cities still appear to be experiencing issues. For example, Lompoc, Calif., is struggling to sign up subscribers because of poor signal coverage, the Lompoc Record reported recently.

The main thing that differentiates Wi-Fi from other broadband services is mobility, but competition is mounting there, too. In addition to the 3G services offered by cellular operators, which are often expensive, a lot of businesses in downtown areas offer free Wi-Fi hot spots.

And soon some cable operators such as Time Warner will offer mobility with their residential cable modem services, enabling subscribers to take their service on the go. Last week, Time Warner announced it had struck a deal with a company called Fon Wireless that offers a router to enable people to securely share and access Wi-Fi with others. Time Warner and three other cable operators, including Comcast, also have a deal with Sprint that could eventually extend their broadband service outside the home.

Donald Berryman, president of EarthLink municipal networks, said he agrees that the Wi-Fi subscriber base needs to be spread across the municipal, business and consumer sector. He said that about 50 percent of EarthLink's business on its Wi-Fi networks comes from municipal contracts and business customers. But he said that despite the many challenges, he believes the consumer market will be key to EarthLink's success.

"Consumers are absolutely a critical part our strategy," he said. "Our service is ideal for upgrading dial-up customers to broadband. And in some cities, where there is redlining going on, people can't get DSL or cable modem service even if they are willing to pay for it."

Berryman also emphasized that EarthLink's recent announcement is more about taking a pause to digest the many contracts it has won as well as evaluate how best to address the market going forward.

Of the 13 contracts that EarthLink has won thus far, only two have been completed, Milpitas, Calif., and New Orleans. The company has partially built networks in Philadelphia, Anaheim, Calif., and Corpus Christi, Texas. It has completed contracts and is beginning the design phase for four other cities. And it is still negotiating final contracts with four cities. Altogether, the company serves only about 2,000 customers on all of its Wi-Fi networks.

"We aren't really changing strategy," Berryman said. "We're just reassessing where the next markets should be. The only thing that has changed strategically is the allocation of resources. Instead of pursuing 18 to 20 cities, we are building out the 13 we already have and going after a few other targeted cities."