May 3, 2007 4:00 AM PDT
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."
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