Free Wi-Fi—at a Price

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com/ticker/' rel='ticker'>ELNK), which already has four muni Wi-Fi contracts and is negotiating terms with two more cities, including San Francisco, where it's partnered with search giant Google (GOOG). "We are offering a product for $21.95 on a monthly basis citywide," says an EarthLink spokesperson. "[Current hot spot operators] are not citywide."

AD-BASED MODEL.

Another company that could emerge a Wi-Fi heavyweight is Embarq (EQ), the local-phone carrier recently spun off from Sprint Nextel (S). Embarq, which until now has run trials in smaller cities, is ramping up muni Wi-Fi efforts.

Earthlink, Embarq, and others are eager for a slice of what MuniWireless.com says will be some $700 million spent by U.S. cities in the next three years on muni Wi-Fi plans. Some of the companies that help build the networks will also help operate facilities once they're up and running, generating ongoing sales.

Meantime, Wayport, which deploys some 150 new locations every week, is watching the market closely and may eventually join in, says Lowden. For now, the company is waiting as muni Wi-Fi business models get ironed out.

To be certain, making money on muni Wi-Fi won't be easy. Many cities are asking Wi-Fi operators to offer free or subsidized service to residents as well as city employees, making money instead on ads. But an ad-based model is no slam dunk. Consultancy Successful.com's July survey of 176 business owners indicated that 57% of them don't intend to buy ads on such networks at all. Many remaining participants said they would be willing to pay less than $100 a month for ads. That might not be enough to cover operating costs, expected to reach 10% to 20% of initial network build-out costs, which add up to $15 million to $20 million in some cities, estimates Settles.

ISSUES REMAIN.

Achieving seamless coverage with a muni Wi-Fi network could be difficult as well. To date, muni Wi-Fi efforts in cities like St. Cloud, Fla., have been plagued with problems such as poor in-building coverage. Unless new Wi-Fi operators like EarthLink figure out how to overcome those hurdles, muni Wi-Fi won't be able to effectively compete with existing hot spot providers' networks, analysts say (see BusinessWeek.com, 5/2/06, "Wi-Fi Revolution? Not So Fast!").

Rival technologies such as WiMax, pushed by Sprint Nextel and chip giant Intel (INTC) could also render Wi-Fi obsolete in some areas by offering better, more seamless coverage, says Bob Rosenberg, president of consultancy Insight Research. And continued delays in the release of a new Wi-Fi standard, 802.11n, which would allow for zooming-fast transmission of video, could further hamper muni Wi-Fi's potential.

And finally, security and privacy issues remain that muni Wi-Fi, as well as existing hot spot operators, must struggle with (see BusinessWeek.com, 8/3/06, "Warning: Your Wi-Fi Is Vulnerable to Attack").

Still, many residents who stand to save money or get access they wouldn't otherwise have will nevertheless opt for a subsidized Wi-Fi plan—even with the ads and potential glitches.

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Kharif is a reporter for BusinessWeek.com in Portland, Ore.