Microsoft's Municipal Wi-Fi Push

With a foothold in Portland, Ore., the software behemoth is looking to citywide Wi-Fi networks as major future sources of Web traffic and ad revenue

Microsoft (MSFT) is gearing up to conquer the wireless fidelity (Wi-Fi) market one city at a time. The software giant's recent deal to provide content and services for a wireless network under construction in Portland, Ore., will intensify the battle between Google, Yahoo! (YHOO), and Microsoft's MSN for online traffic and advertising revenue.

The move by Microsoft to partner with municipal Wi-Fi operator MetroFi is more than just a me-too gesture following Google's (GOOG) decision to build out, together with partner EarthLink (ELNK), a Wi-Fi network in San Francisco. Content providers who capture the growing municipal Wi-Fi market will be in a better position to enjoy higher traffic to their sites and greater customer loyalty—and, as a result, grab a greater share of online advertising dollars, expected to reach $16 billion in the U.S. this year, according to consultancy eMarketer. "It's a battle for eyeballs," says Matt Rosoff, an analyst with consultancy Directions on Microsoft.

Today, most people access the Web via cable or digital subscriber lines (DSL). But in a few years, municipal Wi-Fi (muni Wi-Fi), could emerge as the primary way for many urbanites to access the Internet, believes Craig Mathias, founder of wireless consultancy Farpoint Group. "I think muni Wi-Fi will become enormous," he predicts. While only 68 cities in the U.S. have citywide Wi-Fi networks in operation today, 132 more are planning deployments, according to market researcher

Web Traffic Thins

At the same time, the number of consumer devices with Wi-Fi capability is multiplying (see, 11/7/06, "Sony's Mylo: Mighty Weak"). As consumers move to muni Wi-Fi access, there's an opportunity for disrupting the online status quo: Users might be persuaded to switch not only their broadband providers but also their current home pages and Web search preferences.

While Google and Microsoft have announced their muni Wi-Fi intentions, analysts believe Yahoo won't be far behind. Yahoo could jump into the muni Wi-Fi market by pairing up with AT&T (T). Yahoo already markets a home DSL service with AT&T. Yahoo wouldn't discuss its plans, but a spokesman says the company is "taking a close look at the opportunities in front of us and evaluating those which make the most sense for our business and our partners," according to a statement from Yahoo.

As this battle plays out, Microsoft has the most to lose. For the past year, traffic to its search and other sites has been falling, despite this year's launch of numerous Microsoft Live services. In March, for example, MSN Search grabbed 13.09% of all search traffic. But that figure dropped to 10.55% in October, according to market researcher Hitwise. Rival Google is picking up market share, which has reached 62.36% recently, while No. 2 Yahoo, has held steady at a 22.3% share.

Popularizing Zune

For Microsoft, the dip in traffic has translated into a drop in ad revenue. The company's online services division's sales were down 4.4% in the first fiscal quarter ended in September, compared with a year ago. The division, in the midst of executive and strategy changes, lost $136 million in the quarter, compared with a $68 million profit in the year-ago period. Clearly, extra traffic from a muni Wi-Fi network—or any wireless network, for that matter (on Nov. 15, Microsoft announced it will provide search capabilities to Sprint Nextel (S) regular cellular users)—will be very welcome.

It's not just online advertising that's at stake. Success with muni Wi-Fi could eventually translate into greater demand for Microsoft's new, Wi-Fi-enabled Zune music player (see, 11/10/06, "Zune: Falling Down on Cool"). While the current version of the player only allows users to wirelessly share music with one another, future versions could allow them to download songs and make calls from Microsoft-enabled Wi-Fi hot spots, for example, differentiating Zune from the competition.

The Redmond (Wash.) giant plans to complete its initial pilot program in Portland within just a few months, and then broaden its effort to more cities, according a Microsoft spokesperson.

Partners in Waiting

By yearend, MetroFi's wireless broadband network will only cover two square miles around Portland's Pioneer Courthouse Square, with its bronze sculpture of a man with an umbrella and an ever-present Starbucks. Next year, though, MetroFi will offer a free, ad-supported service, as well as an ad-free, $19.95-a-month service, throughout much of Portland's 134 square miles.

The MetroFi deal is nonexclusive, and if the pilot works out, Microsoft could partner to provide its content to the likes of T-Mobile, already operating at numerous Starbucks cafes. Or, it might pair up with a provider of a different wireless broadband technology called WiMax, say analysts. One potential partner: Clearwire, one of whose investors, Intel (INTC), is a longtime partner of Microsoft's. Another possibility: new search partner Sprint Nextel, which plans to build out a massive, nationwide WiMax network. Microsoft declined to discuss its partner plans.

Indeed, many wireless service providers could be interested in Microsoft's tailored local content, such as maps, restaurant reviews, local weather, and business listings. Eventually, the company might use its mapping technology to offer innovative new services such as locate-me: When you fire up your laptop or Wi-Fi phone, the device will know exactly where you are by your hot-spot location. Then, MSN will provide you with directions to the nearest Starbucks or back to your hotel—or allow you to place a Web call there, right from your laptop. All the while, Microsoft's adCenter technology will serve up contextual ads: If you are looking for a restaurant in Windows Live Search, adCenter might suggest a local burger joint to check out.

How to Sell Free?

To be sure, that vision won't be easy for Microsoft or its rivals to fulfill. Many users like the idea of free Wi-Fi access, but how to make free access pay for itself remains unclear. Different ideas abound: Wi-Fi community access provider FON, whose users share Wi-Fi access with each other for free, is trying to make ends meet by selling wireless access points and charging monthly access fees for nonsharers. FON's investor partners include Google and Web-calling pioneer Skype, a property of eBay (EBAY).

Free, ad-based Wi-Fi networks are another option, also unproven. Research firm JupiterKagan has found that only 27% of free Wi-Fi users would be willing to see ads. "Advertising alone does not pay the bills," says Cole Reinwand, vice-president of product strategy and marketing at EarthLink, which will provide, together with Google, fee-based and ad-free services.

That's not how MetroFi sees it. It's sign-up rates for the free service are "an order of magnitude higher" than for fee-based Wi-Fi, reports Chuck Haas, MetroFi's CEO. "Obviously, free sells."

Microsoft is intent on making its Wi-Fi entry a success. It's a market the company has pursued relentlessly for years. Microsoft even tried to sell access points a few years ago, but Cisco (CSCO) and others came to dominate the market, and Microsoft exited the hardware business. But with its online-search market share sinking and its new music player Zune to support, Gates & Co. need to get it right this time.

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