June 29, 2006 4:00 AM PDT

EarthLink christens its first citywide Wi-Fi

As EarthLink launches its first citywide Wi-Fi network in Anaheim, Calif., this week, serious questions arise about whether the company's strategy to build municipal wireless networks across the country will really work.

Over the past year, EarthLink has won bids to blanket eight different cities with Wi-Fi, including high-profile projects in Philadelphia and San Francisco. But the 49-square-mile network in Anaheim, which goes live Thursday, is the company's first commercial launch of the technology, and the country's largest citywide deployment to date.

EarthLink, which has had to rely on cable and DSL (digital subscriber line) networks to deliver broadband service to consumers, is using Wi-Fi, an unlicensed radio frequency technology, as an affordable way to build its own broadband infrastructure.

But citywide Wi-Fi is a nascent market with only a handful of small city deployments as test cases. There are still a lot of issues that need to be worked out. And even getting approvals and building the networks could take years, as EarthLink and its partners navigate the slow process of negotiating city contracts. As a result, some analysts say EarthLink's Wi-Fi gamble will take a long time to pay off, if it's successful at all.

"Even if EarthLink is hugely successful with citywide Wi-Fi, we'll only start to see meaningful results in 2009," said Jim Friedland, a senior Internet equities analyst at Cowen and Co. "EarthLink is essentially running a start-up within a public company, and it's funding this new business with revenue from its traditional dial-up business, which is rapidly shrinking. It's risky."

EarthLink, founded in 1994 as a dial-up Internet service provider, still generates the bulk of its revenue from dial-up customers. But that business is slowly dying. EarthLink alone loses about 700,000 to 800,000 subscribers a year, Friedland said. The company also provides broadband Internet access, but it must sell its service using connections from phone companies or cable operators, which also sell broadband service to consumers.

"Even if EarthLink is hugely successful with citywide Wi-Fi, we'll only start to see meaningful results in 2009."
--Jim Friedland, senior Internet equities analyst, Cowen and Co.

And to make matters worse, the company was dealt a one-two punch last year when the U.S. Supreme Court and then the Federal Communications Commission essentially eliminated any federal protection to keep wholesale rates of cable and DSL networks in check. In June, the U.S. Supreme Court upheld a lower court's ruling that cable providers do not have to share access to their networks. A month later, the FCC followed suit by changing the classification of DSL, which eliminated the requirement that phone companies offer discounted rates to ISPs such as EarthLink.

"EarthLink's dependence on other companies' networks has always been a problem for the company, and more so recently with the regulatory shift," Friedland said. "Telecommunications companies that own their own networks have a huge advantage over those that don't, and EarthLink knows this."

To save its business model and prepare the company for a future without dial-up, EarthLink turned its attention toward citywide Wi-Fi as its best hope for building and owning its own infrastructure.

At the same time that EarthLink was looking for an affordable way to build its own network, cities across the country that were fed up with high broadband prices or a lack of coverage were also considering building their own networks. Not surprisingly, their efforts drew attention from cable and phone companies that didn't like the idea of cities competing with them. As a result, cities looked for partners in the private sector that could build and operate more affordable networks for them.

Enter EarthLink
"We were forced to look at alternative pipes," said Jerry Grasso, director of communications for EarthLink. "And muni Wi-Fi was a fortuitous opportunity because a month or so after all these federal rulings came out, we were named as the finalist in Philadelphia, and then the floodgates opened."

For more than a year, EarthLink has been answering requests for proposals, meeting with city officials to win contracts, and attending city council and community board meetings across the country to build their networks. And so far, it has won bids in eight cities: Anaheim; Arlington, Va.; Long Beach, Calif.; Milpitas, Calif.; New Orleans; Pasadena, Calif.; Philadelphia and San Francisco.

Special coverage
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The cost of building Wi-Fi networks pales in comparison to what other telecommunications companies are spending to build infrastructure. EarthLink has estimated it will spend between $5.5 million, for cities such as Anaheim, to as much as $10 million for a city the size of Philadelphia, which is 135 square miles.

By contrast, Verizon is supposedly spending $20 billion to build its Fios fiber-to-the-home network, according to several analysts. And AT&T is spending $4 billion to upgrade its network. Despite its relative low cost, the EarthLink plan is still risky, some analysts say.

"There is no question EarthLink will lose money initially to build and operate these networks," Friedland said. "And it's really questionable whether they will get the subscriber penetration they need going forward to make this a profitable substitute service to cable or DSL."

Cable operators and phone companies are already in the broadband market with a large customer base. And DSL providers are beating EarthLink on price. EarthLink's Wi-Fi broadband service offers 1Mbps (megabit per second) downloads and 1Mbps uploads for $21.95 per month. A one-year promotional service offered from AT&T, which provides 1.5Mbps of service, costs only $12.99 per month. Verizon also offers a cheap 768Kbps (kilobits per second) service for $14.95 per month.

CONTINUED: Working out Wi-Fi issues…
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CPE for indoor coverage
See video here:
<a class="jive-link-external" href="http://news.cbsi.com/1606-2_3-6088739.html" target="_newWindow">http://news.cbsi.com/1606-2_3-6088739.html</a>

Did you see the CPE device often needed for indoor coverage? - it's an antenna the size of a paperback book and another transmitter/receiver box - imagine carrying that around with your laptop!
Posted by kimocrossman (31 comments )
Reply Link Flag
Free WiFi
The real problem here is that "pay for WiFi" models are going to be hard to get subscribers for.

It's just obvious that WiFi is becoming a free "expected amenity" of retail establishments. Soon you won't go to a coffee shop without free WiFi any more than you'd use one that didn't have air-conditioning or a restroom. People will just naturally expect that establishments "give away" some minimum speed WiFi connection, and if the place doesn't, they'll go elsewhere. The "T-Mobile hotspot at Starbucks" model is doomed. In a few years no one will be willing to pay anything at all.

When you think just how trivial the challenge is to add free WiFi at a place like a coffee shop, it's obvious that they ALL will simply HAVE to in order not to be left out. If you own "The Coffee Shop On The Corner" and you do the math, you realize you'll spend a one-time cost of about fifty bucks for the access point and then monthly costs of about another fifty bucks to give the service away to everyone who is coming in for a latte. It's not even "worth" trying to "meter" or regulate! And if you don't give it away, they'll just drive another couple of blocks down the street to your competitor who does!

In a few years there is going to be so much free WiFi in retail locations you'll have a hard time finding a place without it.
Posted by Yet Another Mark Johnson (66 comments )
Reply Link Flag
AT&T is not an alternative.
"A one-year promotional service offered from AT&#38;T ... costs only $12.99 per month." I think I'll choose just about any alternative to the company claiming ownership of all data that I transmit on its lines...
Posted by commsoft (52 comments )
Reply Link Flag
Same with Verizon
Go to www.verizononline.com and enter a phone number and
you'll see that the $14.95 offer isn't available in many
parts of the country.
Posted by Jackson Cracker (272 comments )
Link Flag

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