Is the ad-supported business model dead?

No, but it is evolving, says Chuck Haas, CEO of MetroFi, the company who championed it. Recently, he shared his insights on how and why.According to a report in the Beacon News, the Tri-cities of suburban Chicago‚ , Geneva and St. Charles‚ backing away from plans to launch a municipal wireless network because they can’t get the same free deal from MetroFi that nearby Aurora, Ill., got from MetroFi when it launched its network. MetroFi built and operates the ad-supported at no cost and with no commitment from Aurora.

The Tri-cities were looking for the same zero-cost/zero-commitment deal but MetroFi is now insisting that its city clients commit to being anchor tenants on the network as the free ad-supported service is made available to residents. MetroFi remains committed to ad-supported networks to provide free service to residents but has been insisting on city commitments to be anchor tenants since 2005

This makes sense for both cities and their service provider partners. The pure ad-supported model leaves the service provider exposed to the ups and downs of the advertising market, producing often inconsistent revenue streams. Not only does the ads with anchor tenancy fix a minimum revenue expectation for the service provider, it fuses the relaionship between the SP and the city. It helps protect the sizeable up-front investment that the service provider makes in the network by insuring the SP will have at least one large paying customer when the network becomes operational. At the same time, it provides services that can reduce costs, raise efficiencies and the ability of first responders to receive critical information during emergencies.

On the cautious side, cities need to be specific about their expectations in their RFPs and negotiations with the SP to insure that they receive the value they pay for and the performance they need.

I caught up with Chuck this week to talk about how he sees the ad-supported model evolving and what it means to cities and service providers. A two-tiered approach seems to be occurring, offering free ad-supported service to residents while the company contract with the city as anchor tenant to deliver municipal services.

His comments should be of interest to cities officials who are considering the ad-supported model. I’m sure you’ll all have comments and I invite you to post them below. I’d also be curious how readers see other business models evolving.

Here’s what Chuck had to say :

This has been an emerging market and even the definition of anchor tenancy has been evolving as the market has matured. With each RFP and each city deployment, we get smarter and smarter about how to really maximize the value of this network. And we’re also coming to the conclusion that the value to the city probably also exceeds the value to the residents for wireless Internet access.

Typically, the city is one of the largest employers in any given area and their employees spend more and more time outside the office as they’re doing their jobs throughout the city.

MetroFi continues to believe the free advertising supported model is the right one for consumers and that municipal use of the network, especially in conjunction with WiFi plus licensed pub safety spectrum, is the way the value of these networks get maximized by city residents and operators.

A city is much more attractive to MetroFi when the city has thought about how they can provide broadband to both their employees as well as their residents. A city typically has thousands of things to manage and monitor‚Äö?Ñ?Æwater and utility meters, pumping stations, street lights and intelligent traffic control.

Our experience over the last four years has shown the best way to fill these networks and monetize them on the consumer side is ad-supported. You get much higher penetration rates and the value of a network increases with the more people that are on it. And you overcome the No. 1 and No. 2 problems of the business whether you’re a wholesaler or a retailer. That’s customer acquisition cost which is anywhere from $175 and higher up front.

When you’re talking about a service that retails for $20 or less it takes a long time to recoup that marketing investment. The second issue on the economic side for any subscription service, and it’s not just Internet, is churn. The average churn rate for a broadband customer is 3 to 4 percent per month. So even though you make more revenue with a subscription model, by the time that customer is finally producing a profit, they’re churning off and you have to spend that $175 over again.