May 3, 2007 4:00 AM PDT
Facing economic realities of muni Wi-Fi
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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."
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