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Incumbents Have Little to Fear
By Eric Griffith

June 13, 2006

Did the incumbent telecoms and cable operators jump the gun trying to stop municipally-backed broadband wireless? Are cities jumping the gun in thinking citywide Wi-Fi networks are a panacea for the digital divide and other Internet access concerns?

Analysts and pundits this week are saying 'yes' to both questions, as research shows muni Wi-Fi networks won't bite into the incumbents' business much. Plus, the truth comes out about a small city deployment, once reported as successful, which may have been far from it.

Strategy Analytics' Vice President of Applied Analytics, Tom Elliott, is the author of a new report called Municipal Broadband in the US: How Real a Threat to Incumbent Operators? The answer is to that question is, not much.

Municipally planned networks (both wired and wireless) in cities and towns in the United States will probably only reach about six million people within the next five years, according to the report. That would hardly put a dent into the markets locked up by most incumbents. Elliott does say, however, of those who will get it, "I think there will be a significant percentage that will have [municipal broadband] as primary Internet access."

Even if that's the case, Elliott believes the incumbents got ahead of themselves arguing against citywide Wi-Fi or, as happened in some cases, getting laws passed to make it difficult or impossible for cities to start a network. That might have been seen (at least by the incumbents) as altruistic when they claimed to fight against use of taxpayer money to build the net, but that's hardly the case now that most citywide networks are farmed out to third parties that pay for the deployment and management.

In fact, today, those cities might just be building the market for the incumbents.

"I would not be surprised, long term, if these networks didn't act to the benefit of the established providers," says Elliott. "You have people get into broadband quicker than they would otherwise. Once they start using it, they see other things they can do with it. Eventually, they'll find their low bandwidth constraining. Telcos and MSOs have said for years their forte is advanced services. They're the upgrade path... they get customers they wouldn't have had as soon, or at all."

The majority of municipal Wi-Fi projects in the works have cities — including the big names like Philadelphia, San Francisco and Chicago — planning to license out the installation and operation of the network. Many call for a tier of service to be offered with free or incredibly cheap access. Not everyone thinks this will work. MobilePro, a provider for networks throughout Arizona, last week pulled out of a contract with Sacramento, California, after the city made such a request for its network. In most cases, 'free' translates to showing advertising to the captive audience of wireless Web surfers.

"I think it'll take some experimenting on the part of Google and EarthLink [partners for the San Francisco network] and others of that ilk to prove the business model for ad-supported free access," Elliott says. "You'll need to have... relevant ads. If it's just making you look at irrelevant, irritating stuff for two minutes before you log on, then even free is pretty expensive."

This echoes the thoughts of analyst Craig Settles of Successful.com, who writes extensively about municipal wireless. He says MobilePro's pull-out wasn't just a petulant operator not wanting to work with a customer. In an e-mail to Wi-Fi Planet, he said, "Setting up an effective ad-sales operation is costly, which requires even more money (a lot of it, actually) and also lots of expertise. Google figures it's going to take at least two years for most cities (or the vendors they select) to make any money on a network."

A lot of the talk about muni Wi-Fi takes on a new context when one considers Chaska, Minnesota. Once touted as the great example of municipal Wi-Fi in small-town America (pop. 23,000 over 14 square miles), a report by the Chicago Tribune this week revealed a lot more problems there than first reported (the network launched two years ago). The city installed equipment from Tropos Networks to the tune of $600,000, and had to make $300,000 worth of upgrades to get enough capacity on the network using fiber links to the Wi-Fi mesh. It also needed newer Tropos equipment (probably supporting 54Mbps 802.11g, which Tropos added in April 2005). Finally, the city gave up running the network itself and contracted Siemens for administration. While 1,100 people signed up for it in the last year, only 300 stayed with it. 2,300 subscribers remain, paying $17 a month, which they say is enough to more than break even.

"There is a credibility gap to address now," says analyst Derek Kerton on the blog at TechDirt. "We were told it was 'great' 18 months ago, but later we're told by the same person, 'It took about a year and a half before we felt we really had a good handle on the network.'" Kerton doesn't think Wi-Fi was ever the right solution for municipal wireless, "because of range (it's a LAN technology) and interference issues."

Is any municipality ready to run a citywide Wi-Fi network? "It's likely to be a different situation when you have a municipal utility in place," says Elliott of Strategy Analytics. "If you do power or cable, you might have expertise there to be an operator. But starting from scratch? It seems in this age of outsourcing, that's a good thing to outsource." Toronto might be such an example, where Toronto Hydro Telecom is deploying a mesh, at least in the downtown.

In the wake of finding out that Chaska wasn't as successful as we were told, it's hard to say if independently-run networks in cities like Tempe, Arizona or Rio Rancho, New Mexico are really working out. Glenn Fleishman of Wi-Fi Networking News said in his comments on the Chaska reveal that "there’s a necessity for independent testing and verification of claims and performance that should be written in to every single RFP that’s being issued, for the benefit of the companies installing the networks, the cities authorized or encouraging them, and the population that will use them."

Don't expect the incumbents to suddenly embrace citywide wireless broadband, either, even if it isn't a big threat. "[Wireless] isn't the first thing incumbents think of when they consider expanding their footprint," says Elliott. "They do cable."

Meanwhile, even with close to 200 metro-scale networks in the U.S., most are in small cities and towns. Not a single big city has deployed a citywide network yet, not even Philadelphia, which has been the poster child for this kind of thing for almost two years. Their mayor only recently signed the contracts with EarthLink, a company that's betting much of the farm on municipal Wi-Fi to stay alive as its dial-up access business dwindles. EarthLink is using Tropos equipment, but many doubt the company's single radio nodes are up to the task.

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