EarthLink scales back, focuses muni Wi-Fi effort

EarthLink Inc. is pulling in the reins on its municipal Wi-Fi business, focusing on existing deals and big cities for the rest of this year, in a move that raises questions about the growing trend of city-wide wireless networks.

The ISP (Internet service provider) will keep working on projects it's already committed to and continue talking to other cities, but will focus on large cities such as Los Angeles and Chicago, Chief Financial Officer Kevin Dotts said on a conference call Thursday following the release of EarthLink's first-quarter earnings. The company lost US$30 million in the quarter, or $0.24 per share, as more subscribers left its traditional dial-up business.

For the rest of the year, EarthLink plans to focus on driving up usage in large cities rather than launching new projects, Dotts said. The company plans to cut in half its capital expenditures on municipal Wi-Fi.

EarthLink has aggressively pursued contracts to build and operate municipal wireless networks, which many cities in the U.S. and elsewhere have built or are planning. Governments hope widespread Wi-Fi will give them a new tool for their own operations, attract business and get underserved consumers and small enterprises online. While many of these projects include a free access option, sometimes advertising-supported, EarthLink aims to make money through paid services such as monthly subscriptions and "anchor tenant" deals with city governments.

Reports of spotty service on some of the networks, along with political spats and doubts about advertising prospects, have taken some of the shine off the municipal Wi-Fi movement. EarthLink's scaling back is likely to raise further questions about the economic viability of the concept, though these projects are still in their infancy.

The Atlanta service provider has won contracts for networks in Houston, Corpus Christi, Texas, and other cities and has been chosen along with Google Inc. for a high-profile proposal in San Francisco that is currently embroiled in political controversy. But so far the company only has about 2,000 monthly consumer subscribers to its municipal Wi-Fi services, which executives estimated on Thursday cost an average of $40 per household to deploy.

The regular price for a monthly plan is $21.95, though many subscribers aren't paying that yet because they are still on discounted introductory plans, the company said. Revenue from occasional users has been stronger than anticipated. EarthLink looks to bring its average revenue per user over $21.95 in time by signing up governments for applications such as wireless parking meters.

EarthLink is focusing its limited resources on its most lucrative prospects because it takes about as much effort to overcome political and service-provider resistance to municipal Wi-Fi in a small city as it does in a large one with more potential customers, said Burton Group analyst Dave Passmore. For consumers outside large cities, this means one less potential supplier for a local network and less hope of one getting established, he said.

Craig Settles, an independent municipal network consultant, lays some of the blame on cities. They could make the business more attractive for EarthLink and other vendors by pooling education grants, contributions from interested local businesses and other funds to get networks off the ground, he said.

"Too many cities have taken the lazy default of letting the vendor pay for it," and vendors don't want to play that game anymore, Settles said.

Municipal Wi-Fi will remain a sideshow for home broadband, used more for access on the run, Passmore believes. But the upcoming auction of 700MHz spectrum in the U.S. offers new hope, he added.

"Whoever gets that spectrum has the potential to perhaps become a much more formidable competitor to the telcos and cable companies," Passmore said.

Copyright © 2007 IDG Communications, Inc.

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