Microsoft's Municipal Wi-Fi Push

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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 BusinessWeek.com, 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.