New business models for citywide Wi-Fi

Minneapolis is about to complete its network and its business model which includes business and residential customers could be the model going forward.

Marguerite Reardon Former senior reporter
Marguerite Reardon started as a CNET News reporter in 2004, covering cellphone services, broadband, citywide Wi-Fi, the Net neutrality debate and the consolidation of the phone companies.
Marguerite Reardon
7 min read

Minneapolis is quickly becoming the new poster child for the municipal Wi-Fi movement.

The city is expected to have the majority of its 59-square-mile network finished by the end of this month, and already experts are pointing to the nearly completed network as a model other cities should follow.

Over the past year, citywide wireless networks have gotten a bum rap. Halfway through 2007, EarthLink, which had been leading the charge with big contract wins to build and run networks in San Francisco, Houston, and Philadelphia, started unraveling its Wi-Fi strategy.

By September, the company had pulled out of proposed networks in San Francisco and Houston. And in early February, EarthLink put its citywide Wi-Fi business up for sale.

The rise and fall of the movement has been well-documented by the press. Many critics have said citywide Wi-Fi is dead. I'm inclined to believe the movement is still alive. But the business models used in future deployments will be very different than those the industry has seen from EarthLink and others that have failed to deploy successful Wi-Fi networks.

Muni Wi-Fi graphic

Currently, Minneapolis' approach seems to have the most legs. In this model, the city government and public-safety agencies act as anchor tenants guaranteeing the service provider, USI Wireless, a contract. In 2006, the city agreed to pay USI Wireless $1.25 million a year for 10 years to build and operate its network.

But USI Wireless is not relying entirely on the city to fund the network. The company is also offering service to residents and small businesses.

Having an anchor tenant, like the city, helps guarantee a hefty stream of revenue, but the residential consumer market also provides USI Wireless with an opportunity to grow its business and increase profits.

"For large to midsize cities, Minneapolis will become the standard model," said Craig Settles, an independent wireless-technology consultant.

Minneapolis city officials recognized the value of having a citywide Wi-Fi network. But during the planning stage, they were unwilling to front the money to build the network. So they looked for a company in the private sector to build and operate the network for them.

"From the beginning, we were focused on the institutional benefits of having a citywide Wi-Fi network," said Lynn Willenbring, CIO for Minneapolis. "But we recognized quickly that we could not create a viable business case for the network operator with just our business. The vendor needs to make a profit. So it's important for them to sell to residential and business users too."

The network asset already proved its worth last year. A portion of the newly constructed network had already been completed on August 1, 2007, when the I-35W Bridge collapsed, allowing the city to use Wi-Fi as part of its emergency response effort.

The network is also getting good response from consumers. So far, more than 8,000 residents have signed up for USI Wireless' service, which is being offered at three different speeds: 1-megabit-per-second downloads for $20 per month, 3 Mbps downloads for $30 per month, and 6 Mbps downloads for $35 per month. The service will compete with DSL service offered from Qwest Communications and cable modem service from Comcast.

How Minneapolis model differs
Minneapolis' model differs from that of other cities, which have been less successful in deploying citywide Wi-Fi. EarthLink, the biggest company in the municipal Wi-Fi market, won several high-profile contracts by focusing exclusively on offering residential service. The company also promised free access or reduced access in certain cities like Philadelphia and San Francisco to help bridge the digital divide.

EarthLink did not require city governments or agencies to become customers of its networks. Instead, EarthLink negotiated deals in which it would actually give away service to city agencies in exchange for using city-owned infrastructure like utility poles.

Tempe, Ariz., is another example of a city that did not buy network services, but instead expected to use the network free of charge in exchange for providing access to utility poles. Less than two years after its Wi-Fi network went live, the project is basically dead. Tempe contracted with a network operator called Kite Networks, a division of Richardson, Texas-based Gobility. At the end of 2007, the company cut off service, because it couldn't make any money.

A ComputerWorld article published last month quoted Dave Heck, CIO for the city of Tempe, blaming the failure of the network on Kite Networks for not marketing the service aggressively enough. At its peak, the company was only able to sign up 800 subscribers to the service in a city with 160,000 residents.

"Their rates have been half the cost of wired Internet services, and they could have gotten subscribers if they marketed it right, but they didn't market it well," he was quoted as saying in the article.

But if Tempe had agreed to become a customer of the network, maybe the service would have survived.

Philadelphia's network is nearly 80 percent built. But with EarthLink now out of the citywide Wi-Fi business, the project's future is uncertain. The city is unlikely to finish building the network with taxpayer dollars and it also won't likely run the network. Terry Phillis, CIO for Philadelphia, told the Associated Press earlier this month that selling the network would be the best thing for everyone. But Phillis acknowledged that finding a buyer wouldn't be easy.

But if Philadelphia revised its Wi-Fi contract and promised to buy a certain amount of services from the network provider, it could make the deal more palatable to potential buyers.

"If they aren't willing to support the network as a customer, then the whole thing falls apart," Settles said. "And they've missed a great opportunity."

The reason cities need to become customers of these networks is simple: Marketing services and selling them to residential customers is expensive. And broadband competition is fierce. Even though many communities would like to have a third provider to help drive down costs, it's difficult for a business to justify the cost of building a new network to be the low-priced competitor.

An anchor tenant, like a city, offers new entrants a guaranteed source of revenue to build their networks without being forced to spend huge amounts of capital right away to acquire residential customers. The more money a city spends with the network operator, the fewer residential customers it needs to make a profit.

DSL provider Covad Communications, which agreed earlier this month to get involved in the stalled Silicon Valley regional Wi-Fi network, sees government customers as important. But it also believes it can make money on Wi-Fi by offering a service it can extend to its existing customer base. The company is building a pilot network in San Carlos, Calif., to see if it could make money with the Wi-Fi service. Initially, it plans to target business customers first, but it sees municipalities and city agencies as potential customers as well.

Tale of a happy customer
"The municipal market is appealing to us," said Alan Howe, vice president of wireless strategy at Covad. "We won't be focusing on that market initially. But the city of San Carlos is already a customer, so it's nice to have one happy customer in the market."

Like other proposed Wi-Fi projects, the Silicon Valley network hit rough times in 2007. A lack of funding forced Azulstar, the start-up that was going to build and operate the network, to bow out of the project before it was even able to build out the two pilot networks.

The grand plan for the regional Wi-Fi network looked dead. But Cisco, which had been involved in the project from its earliest days, approached its customer Covad and persuaded the company to build a test network.

Covad sees citywide as a way to potentially expand its business. Today, the company wholesales DSL service and sells T1 and DSL service to businesses and some government agencies. It also offers fixed wireless broadband service using proprietary pre-WiMax technology that uses a combination of licensed and unlicensed spectrum. Wi-Fi would allow the company to expand its services to small and home-based businesses. It also would allow the company to provide mobile applications for its larger customers.

For now, the San Carlos project is simply a test. Howe wouldn't say whether the company plans to expand the network within San Carlos or to other cities in the region.

"It's really too soon to speculate on what will happen after the trial," Howe said. "There could be an opportunity to expand beyond the test site, assuming it makes sense for us from a business perspective. But we don't know yet what we will do."

Minneapolis and Covad's San Carlos project are still in their early days. So it's hard to say that they have found the secret to success in citywide Wi-Fi. But these projects should be watched closely. And if they do prove successful, I'm sure other cities will copy them.

"We're very proud that people are looking to our network as an example of a success story," Minneapolis' CIO Willenbring said. "When we started looking at this, we looked at what was going on in other cities to learn from their mistakes. And we crafted a business model that we think makes everyone a winner."