August 29, 2007 4:09 PM PDT

EarthLink pays $5 million to delay Houston Wi-Fi buildout

Posted by Marguerite Reardon

A day after EarthLink said it would lay off nearly half its workforce, the company has agreed to pay the city of Houston a $5 million penalty fee for missing its first deadline in building the city's municipal Wi-Fi network.

Houston Mayor Bill White announced the settlement with EarthLink at a Houston City Council meeting on Wednesday. EarthLink, which had agreed to blanket nearly 640 square miles of Houston with Wi-Fi service, failed to meet its first deadline by not signing an agreement with CenterPoint Energy to lease its utility poles for the Wi-Fi project.

"EarthLink appeared to try to discharge their contract obligations by not signing the agreement with the electric utility," said Richard White, the city's chief information officer. "But now they've decided to settle the dispute."

Once EarthLink signs this contract, a two-year time clock will start ticking for the company to build and complete the construction of the wireless network.

Now EarthLink will have nine months to sign the utility contract and start construction. During this time EarthLink may reconsider how it will fund the project, which is expected to cost somewhere between $40 million and $50 million. EarthLink declined to comment on the deal.

The city of Houston is also free to consider proposals from other vendors during this nine-month period. And it could decide to dump EarthLink as its provider if it gets a better offer from somewhere else. White has indicated that he won't be soliciting new bids, but he will consider unsolicited proposals.

EarthLink's stall tactics come as the company tries to figure out what to do with its municipal Wi-Fi strategy. The company's former CEO Garry Betty saw Wi-Fi as a growth engine for the future, as the company's traditional dial-up business withers. But since Betty's untimely and sudden death in January, the company's priorities have shifted.

Rolla Huff, the new CEO since June, is now focusing on returning shareholder value. And in addition to the massive cuts across the company announced Tuesday, he has also scaled back investment in new citywide Wi-Fi projects until the company comes up with a more viable business model that doesn't require EarthLink to foot the entire bill for building these networks.

Huff has said publicly that the company is committed to fulfilling its existing contract obligations. But this latest skirmish with Houston is an indication that EarthLink may be trying to get out of some of these deals, too.

In the short term, it makes sense for EarthLink to get out of its contract with Houston. The Wi-Fi network in Houston will cost roughly three times more than what it's costing to build a similar network in Philadelphia, and the networks will serve roughly the same number of residents. But unlike Philadelphia, Houston has already agreed to be an anchor tenant and pay about $500,000 a year for Wi-Fi services for the first five years the network is in operation. And Houston will likely increase its spending on Wi-Fi services as it mobilizes more workers, said Lewis.

For now, it looks like EarthLink has nine months to figure out if it wants to continue with the Wi-Fi project or whether it's going to abandon it. As for the city of Houston, regardless of what EarthLink decides, the city will move forward with a wireless network.

"It's hard to say if EarthLink will be the company to build the network," Lewis said. "But wireless is the future. And wired infrastructure is the past. For us it just means that we may not have our wireless infrastructure in place as early as we had hoped."