Update: Current EarthLink deal with SF looks dead

Following layoffs and a restructuring plan, EarthLink has confirmed that it will not invest any more capital into municipal Wi-Fi efforts

EarthLink Inc.'s current contract to build a municipal Wi-Fi network in San Francisco appears to be dead following a restructuring of the struggling Internet service provider.

[ Video: SF Wi-Fi dead --for now ]

The deal, hammered out in months of negotiations last year and completed in January, calls for EarthLink to build a citywide network at no cost to the city and sell high-speed service to residents while Google Inc. provides a free, slower service over the same network. But after announcing layoffs of nearly half its workforce and a gloomier financial forecast, EarthLink said Wednesday it won't invest any more money in that business model.

"We will not devote any new capital to the old muni Wi-Fi model that has us taking all of the risk by fronting all of the capital, then paying to buy our customers one by one," President and CEO Rolla Huff said on a conference call Wednesday morning.

That includes currently planned networks where the company hasn't yet made capital investments, EarthLink spokesman Jerry Grasso confirmed. In San Francisco and other such cities, networks would have to be built under new arrangements.

"We will approach them to discuss the needed changes to the business model," Grasso said. He declined to comment on the state of discussions with any particular city.

San Francisco's deal with EarthLink has yet to be approved by the city and county's Board of Supervisors, where it faces fierce opponents. The deal is due for a vote in the Board's Budget and Finance Committee next week that could send it on for full board approval. But the changes at EarthLink appear to make the current contract a dead issue.

EarthLink's municipal Wi-Fi woes come as the company struggles across most of its businesses and as the overall climate for municipal Wi-Fi changes. The promise of free networks supported by advertising or residential subscriptions has faded, and EarthLink and other network providers are looking to local government as "anchor tenants" that support the projects by buying services. Chicago, which had been talking with EarthLink and others about a citywide Wi-Fi project, dropped the plan this week, citing high cost and low subscriber interest.

The company forecast municipal Wi-Fi capital investments of US$30 million to $35 million in 2007 as it completes projects already begun in Philadelphia, Corpus Christi, Texas, and Anaheim, California, but is not forecasting any capital spending on municipal networks in 2008, Grasso said.

Aaron Peskin, president of San Francisco's Board of Supervisors, approached EarthLink earlier this year with proposed amendments to the Wi-Fi deal that he hoped would make it more palatable to opponents. However, he rejected the idea of anchor tenancy, saying the city's departments weren't ready to use the Wi-Fi network.

San Franciscans will get a chance to vote for the concept of free citywide Wi-Fi with a ballot measure in November, but the vote will be non-binding. Neither Peskin nor San Francisco city officials were immediately available for comment.

EarthLink wants to spread out the cost of municipal Wi-Fi and believes city governments, network equipment manufacturers, chipmakers and even WiMax providers (which can provide backhaul connections to access points) have a vested interest in seeing the projects built, Huff said on the conference call.

Although vendors have contributed to some projects, such as the budding network in Silicon Valley, they won't do that for long, said Craig Settles, an independent municipal network consultant in Oakland, California. He thinks multiple anchor tenants -- local government plus schools, hospitals and major corporations -- will be the key to success in some cities.

San Francisco was lucky it didn't get drawn into a deal based on an obsolete business model, Settles said. EarthLink's move was logical and good news for municipal Wi-Fi, he said.

"All that hoopla over 'free' basically set that whole trend back from where it would have been if cooler heads had prevailed in 2006," Settles said. He blames Google and network provider Metro-Fi for overhyping the free Wi-Fi idea.

"Cold water needs to be thrown on some faces," Settles said.

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