EarthLink said late Wednesday that it is bailing out of a contract to build San Francisco's free Wi-Fi service.
EarthLink backed out of the deal a day after the company announced it was laying off 900 employees--nearly half of its staff. EarthLink, which is trying to get its finances in order, announced earlier this summer that it would not invest in any new citywide Wi-Fi deployments until it came up with a better business model.
But it was assumed the company would fulfill obligations with cities where it had already signed contracts. Now it looks like EarthLink is trying to get out of any deal where it hasn't already begun construction, even if it has a signed contract.
Earlier on Wednesday, the city of Houston announced that EarthLink had agreed to pay a $5 million penalty to the city for not meeting its first deadline for building its wireless network. EarthLink has nine months to start construction or figure out a way to get out of the contract altogether.
And now, the company has also dissolved its contract with San Francisco, which was approved in January but was awaiting final approval from San Francisco's Board of Supervisors.
Under the contract signed in January, EarthLink would have paid the city $2 million for the right to build, install and run a free Wi-Fi network that would be supported through advertising from Google. EarthLink was also going to offer a paid service that offered higher-speed connections for $20 per month.
Earlier this summer the Board of Supervisors tried to tweak the contract, asking for changes in three areas. First, it wanted EarthLink to increase the speed of the free tier of service to 500 kilobits per second. It also asked EarthLink to reduce the length of the contract from 16 years to eight years. And finally, it asked EarthLink to extend privacy provisions it offered for its paid service to the free service.
San Francisco Mayor Gavin Newsom, who had stated publicly that he felt the current contract was sufficient, blamed the Board of Supervisors for dragging its feet and blowing the deal.
He told the San Francisco Chronicle, "I'm disappointed because we had a chance to get it done, and it didn't happen.The board delayed it, and now EarthLink could not be more pleased."
Supervisor Ross Mirkarimi said the mayor was completely wrong in his assignment of blame.
"The mayor wanted us to rush into a deal that was half-baked," he said. "And now he's trying to cover his tracks instead of looking at the real reason this deal fell through which is the fact that EarthLink is having a complete financial meltdown."
Mirkarimi said that it was EarthLink and not the Board of Supervisors that delayed the contract approval. He said that the supervisors were simply trying to get EarthLink to answer questions about the contract.
"They were dragging their feet all summer," he said. "I would expect a company that is trying to do business with the city of San Francisco to really be wooing us. So we knew there was something going on with the company. And it turns out our instincts were right."
EarthLink was expected to appear before the Board of Supervisors on September 12th. And a final vote was expected at that time.
EarthLink declined to comment further on the San Francisco deal. But earlier this week, EarthLink's new CEO, Rolla Huff, told CNET News.com that its citywide Wi-Fi business doesn't make sense for the company right now. He said the company needs to come up with a new business model before it spends anymore money to build these networks.
"We simply have not found a way in the old business model to make a return on our investment," Huff said in the interview. "We need to get our cost structure right, so we aren't burning so much cash that shareholders want to get out of the market altogether. We need to make it a valuable option. We have a real interest in ultimately making municipal Wi-Fi successful."