EarthLink christens its first citywide Wi-Fi

Will company's strategy of building wireless networks in U.S. cities fill a void left by exiting dial-up users?

As EarthLink launches its first citywide Wi-Fi network in Anaheim, Calif., this week, serious questions arise about whether the company's strategy to build municipal wireless networks across the country will really work.

Over the past year, EarthLink has won bids to blanket eight different cities with Wi-Fi, including high-profile projects in Philadelphia and San Francisco. But the 49-square-mile network in Anaheim, which goes live Thursday, is the company's first commercial launch of the technology, and the country's largest citywide deployment to date.

EarthLink, which has had to rely on cable and DSL (digital subscriber line) networks to deliver broadband service to consumers, is using Wi-Fi, an unlicensed radio frequency technology, as an affordable way to build its own broadband infrastructure.

But citywide Wi-Fi is a nascent market with only a handful of small city deployments as test cases. There are still a lot of issues that need to be worked out. And even getting approvals and building the networks could take years, as EarthLink and its partners navigate the slow process of negotiating city contracts. As a result, some analysts say EarthLink's Wi-Fi gamble will take a long time to pay off, if it's successful at all.

"Even if EarthLink is hugely successful with citywide Wi-Fi, we'll only start to see meaningful results in 2009," said Jim Friedland, a senior Internet equities analyst at Cowen and Co. "EarthLink is essentially running a start-up within a public company, and it's funding this new business with revenue from its traditional dial-up business, which is rapidly shrinking. It's risky."

EarthLink, founded in 1994 as a dial-up Internet service provider, still generates the bulk of its revenue from dial-up customers. But that business is slowly dying. EarthLink alone loses about 700,000 to 800,000 subscribers a year, Friedland said. The company also provides broadband Internet access, but it must sell its service using connections from phone companies or cable operators, which also sell broadband service to consumers.

"Even if EarthLink is hugely successful with citywide Wi-Fi, we'll only start to see meaningful results in 2009."
--Jim Friedland, senior Internet equities analyst, Cowen and Co.

And to make matters worse, the company was dealt a one-two punch last year when the U.S. Supreme Court and then the Federal Communications Commission essentially eliminated any federal protection to keep wholesale rates of cable and DSL networks in check. In June, the U.S. Supreme Court upheld a lower court's ruling that cable providers do not have to share access to their networks. A month later, the FCC followed suit by changing the classification of DSL, which eliminated the requirement that phone companies offer discounted rates to ISPs such as EarthLink.

"EarthLink's dependence on other companies' networks has always been a problem for the company, and more so recently with the regulatory shift," Friedland said. "Telecommunications companies that own their own networks have a huge advantage over those that don't, and EarthLink knows this."

To save its business model and prepare the company for a future without dial-up, EarthLink turned its attention toward citywide Wi-Fi as its best hope for building and owning its own infrastructure.

At the same time that EarthLink was looking for an affordable way to build its own network, cities across the country that were fed up with high broadband prices or a lack of coverage were also considering building their own networks. Not surprisingly, their efforts drew attention from cable and phone companies that didn't like the idea of cities competing with them. As a result, cities looked for partners in the private sector that could build and operate more affordable networks for them.

Enter EarthLink
"We were forced to look at alternative pipes," said Jerry Grasso, director of communications for EarthLink. "And muni Wi-Fi was a fortuitous opportunity because a month or so after all these federal rulings came out, we were named as the finalist in Philadelphia, and then the floodgates opened."

For more than a year, EarthLink has been answering requests for proposals, meeting with city officials to win contracts, and attending city council and community board meetings across the country to build their networks. And so far, it has won bids in eight cities: Anaheim; Arlington, Va.; Long Beach, Calif.; Milpitas, Calif.; New Orleans; Pasadena, Calif.; Philadelphia and San Francisco.

The cost of building Wi-Fi networks pales in comparison to what other telecommunications companies are spending to build infrastructure. EarthLink has estimated it will spend between $5.5 million, for cities such as Anaheim, to as much as $10 million for a city the size of Philadelphia, which is 135 square miles.

By contrast, Verizon is supposedly spending $20 billion to build its Fios fiber-to-the-home network, according to several analysts. And AT&T is spending $4 billion to upgrade its network. Despite its relative low cost, the EarthLink plan is still risky, some analysts say.

"There is no question EarthLink will lose money initially to build and operate these networks," Friedland said. "And it's really questionable whether they will get the subscriber penetration they need going forward to make this a profitable substitute service to cable or DSL."

Cable operators and phone companies are already in the broadband market with a large customer base. And DSL providers are beating EarthLink on price. EarthLink's Wi-Fi broadband service offers 1Mbps (megabit per second) downloads and 1Mbps uploads for $21.95 per month. A one-year promotional service offered from AT&T, which provides 1.5Mbps of service, costs only $12.99 per month. Verizon also offers a cheap 768Kbps (kilobits per second) service for $14.95 per month.

Featured Video

Common battery myths that need to die

Sharon Profis busts a few overplayed battery myths on "You're Doing it All Wrong."

by Sharon Profis