WiFi: Not So Fast

Not so long ago the idea of municipal WiFi services delivering wireless broadband to the masses was all the rage. Leading the charge was Internet service provider EarthLink, which partnered with numerous cities to deliver the future. That future is now not nearly as certain as it appeared. At the end of August EarthLink stated it would be laying off 900 workers and was pulling out of the headline-making contract to lay a WiFi blanket over San Francisco. Though EarthLink is not the only municipal WiFi provider to be taking a hit, it is remaining in the spotlight it grabbed when it announced a number of high profile deals, and is representative of the current state of muni WiFi. As Chicago, St. Petersburg, Florida and Alexandria and Arlington, Virginia are added to the list of cities which have put off plans to build WiFi networks many sources say muni WiFi is on the ropes. “Muni WiFi has become a victim of flawed business plans, slow user adoption, technology problems and political delays,” says the Financial Times. Of course some, including the analysts which view now as a time of restructuring and providers of WiFi alternatives, see a light at the end of the tunnel.The August 28th announcement that almost half the company’s employees were being let go, including the position of president of municipal networks, and the one a day later that the San Francisco contract was off was not all the bad news from EarthLink. In Chicago another much touted WiFi network is to be delayed by nine months at a cost to EarthLink of $5 million. All this on the heals of a $16.3 million loss and revenues that have been flat or down for three consecutive quarters. The best synopsis of what happened to EarthLink might be this frank statement from blogger Om Malik, “Fighting the cable and phone company duopoly, it was one of the few companies willing to spend dollars and build out MuniFi networks. But given that it’s been hemorrhaging dial-up customers — while at the same time spending money like a drunken sailor — EarthLink had no option but to scale down its MuniFi efforts.” EarthLink was founded on dial-up, and as that base deteriorated the company sought a way out. Muni WiFi seemed like it might be the answer and the company jumped in. However, while it may have looked good on paper, the page has turned.

By trying to be too much to too many too fast it could be said that EarthLink (and other early movers) was asking for trouble, however, a certain amount of the company’s woes are just due to bad luck. Often first-to-market is a winning ticket, in EarthLink’s case the opposite proved true. Rather than getting there first and showing what works Earthlink got there first only to realize a host of flawed assumptions. (Assumptions widely shared in the industry, not held exclusively by EarthLink.) While Craig Moffett, an analyst at Bernstein Research says that, “All the problems encountered in muni Wi-Fi thus far can be summarized as higher cost, lower performance,” that can be distilled even further to “unrealistic expectations.” Expectations about cost, technology and user adoption just did not pan out, and, as these are the bricks and mortar, it has turned what was seen as the perfect solution into the perfect storm.

For starters the idea that municipal WiFi networks would be a relatively cheap build were off, largely for reasons having to do with the technology involved. Initially the thought was that a network could succeed with 30 or 40 access points per square mile, in reality operators found they might need as many as 100. Furthermore the signal put out by the transmitters is not always powerful enough to penetrate walls and other barriers, leading to the need for expensive equipment inside homes. Misconceptions about low cost led early movers to believe they could shoulder the expense of building the networks themselves; this has proven a fatal flaw. Roberta Wiggins, analyst with Yankee Group said in the Financial Times, “For a while, cities thought they could get everything for free, but somebody has to pay for it. The vendors focused on getting the technology to work and didn’t pay attention to how they were going to pay for it. Now its viability is coming under heavy scrutiny.”

The second brick and mortar assumption proving wrong is that users would be signing on. Glenn Fleishman, editor of the industry blog Wifinetnews.com is quoted by both BusinessWeek and Wired. According to Fleishman only one to two percent of an area’s population have signed up so far; that is a long shot from 10 to 25 percent that were expected by cities and network providers. Furthermore there is competition, not from other wireless providers, but from landline companies. BusinessWeek points out that cities which announce WiFi networks often see phone and cable companies drop access rates to keep their customers on board.

Though the vultures may be circling, not all are proclaiming the death of municipal WiFi. The Register and the Christian Science Monitor have both run stories suggesting that just as the initial praise for WiFi providers was overstated so is the news of their demise. The Monitor refers to Joanne Hovis, president of the Columbia Telecommunications Corporation, a public-interest consulting firm when they write, “But as these cities floundered, analysts swung from being too exuberant about Wi-Fi to being too dismissive.” The Register writes, “But just as the wilder theories that municipal Wi-Fi would sideline the telcos and kill the cellular business case were patently unrealistic, so talk of the death of municipal networking and non-viability of alternative service models is also exaggerated.” Sally Cohen, an analyst with Forrester Research says, “I think muni WiFi is evolving and the various players in the market are rethinking the business model.” Datamonitor predicts that as local governments and ISPs recognize the economic and community benefits of municipal WiFi spending will increase, in their estimation from $900m this year to $6.4bn in 2012. Not quite as optimistic, is In-Stat, “Cities will continue to deploy municipal mesh networks, but the rate of new deployments after 2008 will slow, due to concerns over the business model.”

Despite the news and numbers, some say Earthlink could come back (again). According to BusinessWeek, “The restructuring should help the company generate $135 million to $145 million in cash from operations this year, and $200 million in cash from operations in 2008.” If properly used, this capital could help the company turn around. In the meantime the company will spend time doing some serious thinking about its next steps and will be stepping cautiously. “Until we’re confident that we can build new networks and get an acceptable return, we will delay any further new build-outs,” said Rolla Huff, chief executive.

The impact of delayed build-outs by EarthLink and others will be worth observing.

A more complete version of this post, including links to market research, can be found at the website of Analyst Views Weekly.

More information on this topic can be found in the Wireless Data & Internet section of Northern Light’s Telecommunications & Equipment Market Intelligence Center.

And in the following articles:

Municipal WiFi Continues to Struggle
Vnunet.com, September 13, 2007
Wireless internet provider The Cloud has only signed up an average of 20 users for each of its WiFi hotspots. And with municipal networks across the world struggling to break even, questions about the commercial viability of such schemes remain unanswered.

Muni WiFi Collapse a Boon for WiMAX
Red Herring, September 6, 2007
The apparent collapse of municipally-supported plans to build WiFi networks in several U.S. cities has backers of rival technologies breathing sighs of relief. The prospect of having municipal governments as competitors in the most lucrative urban markets could significantly reduce demand for commercial wireless data services based on rival technologies such as WiMAX and EV-DO, said Joe Nordgaard, director of wireless consulting firm Spectral Advantage.

What Now for Muni WiFi?
Unstrung, August 30, 2007
EarthLink Inc. ‘s long-anticipated pullout from the San Francisco municipal WiFi mesh network project this week is just a signal more tough times to come for this market. Some industry commentators and vendors are now suggesting that a major rethink of the free citywide WiFi dream will have to be undertaken if muni networks are to survive into the future.

Why Wi-Fi Networks Are Floundering
BusinessWeek, August 15, 2007
The static crackling around municipal wireless networks is getting worse. San Francisco Wi-Fi, perhaps the highest-profile project among the hundreds announced over the past few years, is in limbo. Milwaukee is delaying its plan to offer citywide wireless Internet access. The network build-out in Philadelphia, the trailblazer among major cities embracing wireless as a vital new form of municipal infrastructure, is progressing slower than expected.

Costly Errors in the Free Internet Experiment

Finicial Times, August 8, 2007
The sun glints off open laptops on an August day in Union Square. Their users, few in number, are accessing the internet, taking advantage of a free wireless hotspot in the San Francisco public space. Not many of them will be aware of the difficulties the municipal wi-fi service has faced. Getting the business model right for an evolving technology has been a challenge for the companies and authorities behind the scheme.

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