Why Wi-Fi Networks Are Floundering

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Subscribers Are Lured by Rivals

For now, a tiny user base can't even begin to cover an operator's costs. Take Lompoc, Calif., population 42,000. The city deployed its 11.3-square-mile Wi-Fi network last September, at a cost of more than $2 million so far. Today the network brags of just 442 users. Though Mayor Dick DeWees hopes to reach 1,000 users by year-end, the network needs 4,000 paying customers just to cover its annual operating costs. In Lompoc's case, the city is wealthy enough to absorb the expense for several years to fund a project it deems a public good. But companies are bound to be less patient.

Complicating the drive to boost subscription is competition: Wherever muni Wi-Fi networks are announced, phone and cable companies tend to lower their prices for broadband Internet access, says Fleishman. In Lompoc, where muni Wi-Fi access costs $16 per month for a family of three, Comcast (CMCSA) offers high-speed Internet access to new customers for $33 a month. In Beaverton, Ore., where there's no muni Wi-Fi service, the same product sells for $52.95. In addition, though Wi-Fi enables a user to gain access to the Internet as they roam a city's streets, the wireless signal can be weak indoors as compared to DSL service from a phone company or cable broadband.

To make the business more profitable, Wi-Fi service providers are trying to pass more of the cost to the cities. "There's no one that I am aware of right now who'd build a network without the city as a paying customer," says Lou Pelosi, vice-president for marketing at MetroFi, which six months ago stopped bidding for projects unless the city agreed to become the network's anchor tenant.

Cities Need to Cough Up

Cities unwilling to pay up may find their Wi-Fi projects with no takers. Gwinnette County, Ga., had to revise its approach when its first request for proposals in October, 2006, offering no payments from the county, brought no qualified bidders. The second time around, when the county offered a $750,000 grant to help build the network and develop applications for municipal use, only two small companies replied. "Wi-Fi doesn't have a solid enough business model for companies to be interested in this," says Barry Puckett, information technology services manager for the county.

Similarly, cities that have deals that don't currently require a government investment are being asked to renegotiate existing muni Wi-Fi contracts. In Portland, Ore., MetroFi says it is pushing the city for a formal commitment to buy network services. Thus far the network is about 20% complete, and serves the downtown area.

The payments cities face are sizable: The city of Corpus Christi, Tex., pays EarthLink about $200,000 a year to operate its Wi-Fi network, which covers 146 square miles, says City Manager George "Skip" Noe. Corpus Christi also effectively subsidized some of the network's construction: The city built out its initial network for between $6 million and $7 million, then sold it to EarthLink earlier this year for $5.5 million. The city uses the wireless network to collect data on gas and water usage, saving on labor costs.

Municipal uses like these—as well as exploiting a Wi-Fi network for video surveillance and emergency communications—can help justify a government investment. "We did an analysis, and over 20 years, there are multimillions in savings to the city," says Noe.

Either way, "The days of a service provider coming in without a city commitment are over," asserts Pelosi of MetroFi. "It's to help us out, but also to help them out."

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