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?

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
6 min read
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.

Locating local internet providers

"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.

Locating local internet providers

"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.

Citywide Wi-Fi service also isn't as stable as DSL or cable service and will never be able to offer the same high speeds that those two technologies will offer. Several smaller cities that have already deployed Wi-Fi, such as St. Cloud, Fla.; Tempe, Ariz.; and Chaska, Minn., have experienced coverage issues. And users have complained about not getting access inside their homes.

But EarthLink's Grasso said that all new technologies have their issues and that eventually early Wi-Fi problems will be worked out.

To solve the in-home problem, customers who have trouble getting a signal may have to add a box to their home to boost the signal indoors, he said. EarthLink is offering the wireless signal booster free of charge to existing EarthLink customers who sign up for the Wi-Fi service or to new customers committing to a year of the service.

Grasso also said EarthLink sales representatives will consult with customers before they buy the service to ensure they have appropriate Wi-Fi client hardware and software running on their PCs and laptops and to determine if a signal booster is needed.

While the EarthLink Wi-Fi service may not sell well as a broadband replacement service, it could do well among business travelers once EarthLink has networks up and running in more cities.

According to Jupiter Research, about 20 percent of Internet users said they had accessed either a free or paid public Wi-Fi hot spot in 2005. That figure is up from only 14 percent in 2004. Analysts expect an even greater increase for 2006.

EarthLink already recognizes the potential for the mobile market. And the company has anticipated adding easier access and more mobility features for business travelers. It also sees potential to work with cable operators that may want to use the EarthLink Wi-Fi network to offer mobile services for cable modem customers.

"This is our network, and once we get a larger footprint it will give us a lot more options," Grasso said. "Eventually, we have to get to a point where roaming is a part of the service. The folks in Anaheim should be able to log on and use their service in Philadelphia or San Francisco."