EarthLink's caution reflects shift in muni Wi-Fi

Dark clouds at EarthLink don't spell doom for municipal wireless, but cities may have to look at alternative business models, analysts say

A harder line by EarthLink on its municipal wireless business signals a shift in an industry that has generated both high hopes and skepticism.

After reporting a $16.3 million second-quarter loss last week, the company said it was reassessing its municipal wireless business in search of more revenue.

"Until we're confident that we can build new networks and get an acceptable return, we will delay any further new buildouts," President and CEO Rolla Huff said on a conference call following EarthLink's second-quarter earnings report. EarthLink has been one of the biggest builders of city wireless networks, with projects built or in the works in 13 municipalities around the U.S., according to its Web site.

EarthLink now plans to ask cities that want municipal networks to sign up as anchor tenants, committing themselves to buying services for their own operations, Huff said.

The move is proof of a change some industry observers have been expecting for some time. In the past, EarthLink has offered deals in which it pays for the network and its operation, looking to consumer subscriptions, advertising, or other sources to make money. For example, this is the basis of EarthLink's contract with San Francisco. Supporters of the deal frequently promote the fact that EarthLink's setup means the network won't cost the city anything.

The free model doesn't work, said Monica Paolini, an analyst at Senza Fili Consulting, in Sammamish, Washington. With any technology, companies that don't know how they'll make money tend to build minimal networks and may not be able to maintain them over time, she said. "Usually, you get what you pay for, and Wi-Fi is no exception to that," she said.

She was relieved at EarthLink's change of direction. "It's a sign that things are maturing a bit," Paolini said.

If EarthLink requires anchor-tenant commitments from local governments, fewer cities are likely to get EarthLink Wi-Fi networks, said IDC analyst Godfrey Chua. In most cases, cities would need to invest in new equipment and change the way they work in order to use Wi-Fi services they've committed to buying from the carrier, he said.

Local governments may now wake up and start analyzing how the networks could affect their own operations and those of local companies, schools, and health-care providers that also could be anchor tenants, said Craig Settles, an independent municipal network consultant. "I'm surprised (sort of) by the smaller cities that stomp their feet and pout like petulant kids, refusing to even discuss buying services because they think their cities deserve a free ride," Settles wrote in an e-mail message.

San Francisco city workers, for one, aren't prepared to use an EarthLink Wi-Fi network, according to Aaron Peskin, president of the city's Board of Supervisors. EarthLink declined to comment on whether the strategy shift might affect the San Francisco deal.

The dark clouds at EarthLink don't spell doom for municipal wireless, analysts said. For one thing, there are also other alternative business models, IDC's Chua said. For example, the mainstream cable and DSL (digital subscriber line) providers may sell it as an added service for their wired subscribers.

In the future, the growth is likely to be where the glitz is not, according to Paolini. Network operators can make money in small towns where both residents and government are starved for broadband, she said. Big-city networks have been in the spotlight, but they are expensive to deploy and harder to sell against abundant DSL and cable, Paolini said.

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Copyright © 2007 IDG Communications, Inc.

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