What EarthLink’s muni wi-fi announcement tells us

by on November 19, 2007 · 0 comments

EarthLink appears to be getting out of the muni wi-fi business for good. The company is at least is abandoning the major Philadelphia experiment it was in charge of. According to today’s press release:

“After thorough review and analysis of our municipal wireless business we have decided that making significant further investments in this business could be inconsistent with our objective of maximizing shareholder value,” said Rolla P. Huff, EarthLink president and CEO. “Accordingly, at this time, we are considering our strategic alternatives with respect to this business,” Huff added. EarthLink will seek to work closely with the municipalities in which it has operations as it considers these alternatives. The net book value of the assets attributable to EarthLink’s municipal wireless business is approximately $40 million.

A few years ago, many folks were telling us that muni wi-fi was like manna from heaven; the ultimate free lunch that would give us a broadband nirvana. As some of us predicted–reality often proves more complicated. Indeed, one lesson from this experiment is that demand counts. There was always a bit of “if-you-build-it-they-will-come” reasoning behind the Philly deal and other muni wi-fi proposals. But you can’t build a network without a customer base, and recent news reports indicated that demand was lacking.

A second lesson: Network-building is a tough, time-consuming and expensive task. Networks aren’t like lemonade stands; you can’t just erect an entire network overnight and expect things to be functioning smoothly right away. Almost all networks involve significant upfront investments (sunk costs) that constitute an extraordinarily risky investment given uncertain market demand. And problems always creep up, for both public and private networks alike. The difference is that the private (or unsubsidized) network owners usually have a better incentive to fix whatever ails the network in order to build and retain a customer base and (hopefully) become profitable.

This doesn’t necessary mean that muni wi-fi efforts are dead entirely. Other experiments are still underway and hybrid models are emerging. Civitium, a consulting firm that helped devise the Philadelphia plan, is still bullish on other experiments. Some might work out, but the business models will likely need to change to take into account demand factors and the enormous challenges and expenses associated with network-building. If some companies (think Google, Apple, or even Starbucks) or other institutions (think universities) are willing to generously subsidize money-losing, low-demand muni wi-fi efforts, then they might work. But I remain skeptical that the old models like Philladephia’s have any chance of panning out.

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