For many local governments, the offer was irresistible. EarthLink promised to install a citywide wireless-fidelity network and offer free — or heavily subsidized — Internet access to residents in return for status as the area’s exclusive Wi-Fi provider.
EarthLink’s idea was that it would recoup that investment by signing up subscribers for a higher-speed premium Internet service, competitively priced against broadband plans from cable and phone companies.
Just one problem: That business model doesn’t work, according to EarthLink’s recently installed CEO, Rolla Huff.
“We will not devote any new capital to the old municipal Wi-Fi model that has us taking all of the risk by fronting all of the capital and then paying to get our customers one by one,” Huff said on an Aug. 29 conference call with Wall Street analysts.
HARD TO OUST INCUMBENT
The Internet-service provider has learned a time-tested lesson, according to Sanford C. Bernstein analyst Craig Moffett. “It takes an enormous amount of money and staying power to displace an entrenched incumbent network,” he wrote in a Sept. 7 research note on municipal Wi-Fi ventures.
EarthLink announced the shift in strategy as part of a broader effort to cut costs, including the elimination of 900 jobs, or about half its workforce. EarthLink, suffering from the steady dwindling of its historical dial-up customer base, also lowered third-quarter financial expectations to a range of $290 million to $300 million in revenues and a loss of between $33 million and $43 million, excluding restructuring charges.
The company’s pullback has thrown the Wi-Fi plans of several cities — including San Francisco, Houston and Atlanta — into uncertainty. EarthLink’s Huff, who assumed the leadership role in June, said the company will focus instead on existing Wi-Fi networks in Philadelphia and three other markets with the aim of getting “to a scale that will cover our operating costs.”
As part of future municipal deals, Wi-Fi providers like EarthLink want to secure a guaranteed minimum revenue stream before building a network through an “anchor tenant,” which usually means the city itself.
For St. Petersburg, Fla., which was in contract negotiations with EarthLink, the numbers didn’t work out to support a Wi-Fi network covering the city’s 60 square miles. The city’s chief information officer Muslim Gadiwalla said maybe 50 to 75 municipal employees would use a Wi-Fi network as part of their jobs — not enough to make a deal workable.
“The goal was to facilitate a wireless service to all of our citizens,” he said. “But it’s never been our stance that there’s any huge clamor to make [Wi-Fi Internet access] something the government spends money on.”
Gadiwalla added that the city’s cable provider, Bright House Networks, has already rolled out Wi-Fi hotspots in certain areas. “There are other companies offering wireless data service today,” he said.
In Houston, EarthLink has paid the city $5 million for a nine-month extension before it’s required to begin building a Wi-Fi network. “We expect that over the course of nine months, they’ll come forward with a new plan, or we’ll begin to look elsewhere,” said Frank Michel, director of communications for Houston Mayor Bill White.
PHILLY: STILL ON
Still, the muni Wi-Fi concept is far from withering away. As of early August, more than 400 cities and counties in the United States either had Wi-Fi networks up and running or were in the process of deploying them, according to research firm MuniWireless.com.
And cities that have networks already built by EarthLink or another provider are plowing ahead.
In Comcast’s hometown of Philadelphia, for instance, the EarthLink-operated Wi-Fi network is in service and 65% complete. Greg Goldman, CEO of Wireless Philadelphia, said he believes the service provider’s retrenchment will actually be a boon for the city.
“Oddly, I think it’s going to be OK for us,” Goldman said. “It will allow EarthLink to focus more on our network.” Philadelphia’s Wi-Fi buildout, he added, is still expected to be completed by the end of 2007.
The city created Wireless Philadelphia as a not-for-profit organization, designed to provide affordable high-speed Internet access to low-income households. To date the group has activated “several hundred” users at the discounted monthly rate of $9.95, according to Goldman. EarthLink is signing up customers for $21.95 per month in Philadelphia.
Other cities also remain committed, at least for now. In September 2006, Minneapolis signed a 10-year deal with local service provider USI Wireless to fund, build and manage a Wi-Fi network covering all 59 square miles of the city. Under the terms of the deal, USI Wireless will provide $500,000 to create a “digital-inclusion fund” to promote affordable Internet access.
USI Wireless began offering service in late June, and currently covers about 25% of Minneapolis. The company’s offers include $25 per month for a 6-Megabit-per-second connection. By the end of October, more than 80% of the city will have Wi-Fi access, according to CEO Joe Caldwell.
“We’re getting the customer conversion we had expected,” Caldwell said, declining to provide subscriber numbers. He added that 70% of USI Wireless’ subscribers are former broadband customers of Comcast and Qwest Communications International.
In Caldwell’s view, the potential for municipal Wi-Fi networks is huge. The only thing that’s dead, he said, is EarthLink’s business model. “They paid the cities. In our model, the city pays us for service.”
UNCERTAIN PROSPECTS
Nevertheless, not even EarthLink is fully convinced at this point that there’s a viable long-term business in municipal Wi-Fi.
“No one player will be willing to front all the capital required to make these networks a reality, but I believe there could be an interest in broader sharing of the cost,” CEO Huff said on the call last month, adding: “If I’m wrong, and there’s not an interest, we’ll not have spent a bunch of incremental cash pursuing it.”
Note that EarthLink’s Wi-Fi services cover only 600,000 households, as of the end of June, according to the company’s second-quarter filing with the Securities and Exchange Commission. The provider said it had approximately 150 square miles of wireless broadband networks built out across all markets.
Aside from the economics involved in getting the infrastructure deployed, Wi-Fi is not necessarily the best technology for broadband access over large municipal areas, Current Analysis analyst Brian Washburn said. Wi-Fi, after all, was originally designed for private networks to provide relatively short-range access, like in office buildings.
Municipal Wi-Fi equipment typically operates in the 2.4- and 5-Gigahertz ranges, Washburn noted. “That’s a busy spectrum,” he said. “It’s not amenable to areas where you have water, lots of precipitation [or] dense tree cover.”
There’s also the chance municipal Wi-Fi will be eclipsed by broadband-wireless WiMax technology, which can provide greater coverage using fewer radios. Starting in the spring of 2008, Sprint Nextel and Clearwire expect to start offering a WiMax service, branded Xohm.
St. Petersburg CIO Gadiwalla, for one, is keeping a close eye on WiMax. “We’re looking at what Sprint is going to do. WiMax can work in a broad area like ours.”
