MUNICIPAL WI-FI TOOK SOME MAJOR HITS last week. Once considered by many cities and towns to be the roadmap to offer high-speed Internet access for all, wide-spread use of the unlicensed technology is now less certain.
In a week that saw Google Inc. boasting about 15,000 unique users each month on a municipal Wi-Fi network that covers 12 square miles in its home base of Mountain View, Calif., one of the frontrunners in the market dramatically downsized its future projects in the space.
EarthLink Inc., which was planning to team up with Google for a muni Wi-Fi network in San Francisco, fired 900 employees last Tuesday, including Don Berryman, the executive who led the company’s municipal Wi-Fi division. It closed offices in Orlando, Fla.; Knoxville, Tenn.; Harrisburg, Pa.; and
San Francisco, and also said it will substantially reduce its presence in Pasadena, Calif., and Atlanta.
“We will not devote any new capital to the old muni Wi-Fi model that has us taking all of the risk by fronting all of the capital, then paying to buy our customers one by one,” President and CEO Rolla Huff said in a conference call with analysts the next morning. “In my judgment, that model is simply unworkable.”
Huff would like to see more interested parties share the costs of municipal Wi-Fi to represent their vested interests. “The municipalities, the chipmakers, the infrastructure vendors, even the WiMAX providers. No one player is going to be willing to front all the capital required to make these networks a reality, but they could all be interested in a broader sharing of the costs.”
Roger Entner, senior VP of the communications sector at IAG Research, added: “If you don’t have the money for a computer . then you’re not going to have a need for municipal Wi-Fi either. The carriers are often criticized for leaving all these poor neighborhoods behind. In the end, these companies are in the business of making money.”
Drag on business
EarthLink’s core business has been “diluted by new business initiatives that were begun with good intentions but morphed into larger commitments,” Huff added. “We are not exiting these growth initiatives; we’re scaling back their cost structures to fit the startups that they in fact are.”
But EarthLink did more than scale back. Later in the day, the company rescinded its proposal to cover the estimated $14 million to $17 million cost of building San Francisco’s Wi-Fi network and cut a $5 million check to Houston for missing a contract deadline on plans for building a Wi-Fi network there.
San Francisco voters still have a chance to vote for free Wi-Fi access in a ballot measure slated for the November election, but the outcome will be unbinding.
“I think it’s a very noble goal,” Entner said. “In the end you have to put your money where your mouth is.”
EarthLink has operations in about a half-dozen cities and contracts for another half-dozen. According to the company’s latest filing with the Securities and Exchange Commission, EarthLink manages 150 square miles of Wi-Fi networks across all of its markets, covering 600,000 households. So far EarthLink has not disclosed usage number for any of its Wi-Fi operations.
The company did not respond to multiple inquiries.
Dominos
EarthLink isn’t the only company rethinking the dollars and sense of its Wi-Fi strategy. After announcing its first such deal just one year ago, AT&T Inc. pulled out of its plans to build a Wi-Fi network in Springfield, Ill., the city announced.
Like dominos, the deals just kept falling through. And it came from all sides too.
Chicago city officials scrapped plans to blanket the city with Wi-Fi coverage there, citing costs and rapidly changing pace of new technologies coming to the scene that have altered the marketplace.
“There’s a fundamental shift in the structure of the industry and that’s what they have to address,” Entner added.
Indeed, Chicago will be among the first cities to gain access to a new nationwide mobile WiMAX network being built by Sprint Nextel Corp. and Clearwire Corp.
“I think reality is taking a hold when it comes to muni Wi-Fi because you have challenges around the business model. It’s questionable that you actually have enough subscribers. And the biggest question mark is ‘is Wi-Fi the right technology?'” Enter said. “They are trying to force a technology into a use it was explicitly not designed for in a segment that doesn’t have the early adopters and people who are willing to spend money for it.”
Impact on EarthLink
EarthLink has billed its shift as a “corporate restructuring.” The company expects to pay out $60 million to $70 million associated with the plan while generating $25 million to $35 million in savings through the end of the year. It expects to see a positive return on the restructuring costs within six months.
EarthLink’s troubles also bring into question the company’s investment in mobile virtual network operator Helio L.L.C. Formed as a joint venture between EarthLink and Korean telecom giant SK Telecom, Helio continues to lose millions of dollars every quarter. (See related story on Page 4.)
“While we see this as an important first step in unlocking the underlying value that we believe is in our company, we are only eight weeks into the process of repositioning EarthLink for the future. These changes get our cost structure in line, but there is much more to do,” Huff, who’s only been in the lead role at EarthLink for two months, said in the announcement. “We expect to announce additional steps as we continue our work over the coming weeks and months.”
As a result of the cuts, EarthLink modified its financial outlook for the remainder of the year. Excluding one-time restructuring charges, the company now expects to record a $33 million to $43 million loss for the third quarter and a net loss of $79 million to $109 million for the year.
The company also announced that Joe Wetzel joined the company as the new COO.
Meanwhile, Wall Street appears happy with all the news; EarthLink’s stock has been up since the announcements were made.
