Finding The Best Business Model

Here’s the challenge. Answer in 25 words or less. Describe the best business model for a municipal wireless network?

Tough, isn’t it? Put the question to those who set strategies for successful deployments and they’re like to answer in one word: None.

This article originally appeared in the June 2007 issue of MuniWireless Magazine.

By Carol E. Ellison

Here’s the challenge. Answer in 25 words or less. Describe the best business model for a municipal wireless network?

Tough, isn’t it? Put the question to those who set strategies for successful deployments and they’re like to answer in one word: None.

The problem is not a shortage of models. They abound.

“The variety of cities is as great as the number of grains of sand on the beach. One of the biggest risks is in extrapolating a lesson from City A to City B, without acknowledging the different factors that impact each city,” says John Cooper, president of MetroNetIQ, a consulting firm currently working with San Marcos, Texas.

As a recent player in the muniwireless space, San Marcos is poised to benefit from what’s been learned from earlier deployments. Officials there plan to engage in a public-private partnership to build a 25-square-mile wireless cloud to enhance public safety services and read meters automatically, as well as extend broadband access and lower rates for the city’s 45,000 residents.

The goals are familiar. In some combination, most to all of them appear in the majority of municipal wireless deployments. But, despite the similarity in goals and objectives, experts agree that no single cookie-cutter model works for all cities.

“Part of the issue is to first define, and get on the same page, about what we mean when we say “business model,’” says Greg Richardson, managing partner at Civitium. “The reality is there are almost as many business models as there are agreements between cities, vendors and operators.”

Early models

Early business models typically focused on finances and governance. With few municipal network deployments to learn from, city officials turned to models used for city utilities and other traditional city services. Often they fell under public versus private ideological lines and, early on, three generic models emerged:

• The publicly owned model, in which the city built and operated the network
• The privately owned model, in which construction and operation was left to a private provider, usually an incumbent provider such as AT&T or Verizon
• Public-private partnerships in which details of the relationship were negotiated

Public-private partnerships in various flavors quickly became the model of choice for most cities. Even those that chose to own their own networks usually turned to the private sector to handle the complexities of customer service and maintenance. CyberSpot in St. Cloud, Fla. outsourced deployment and operations of its network to Hewlett-Packard. Chaska.Net, which was originally launched as a city-owned and -operated network in Chaska, Minn., outside Minneapolis, now outsources operations to Siemens.

Until 2005, negotiating these partnerships was fairly straightforward, generally involving lease agreements between munis and service providers over the rights to use city assets, such as light poles, to mount antennas. But all that changed in 2005 when Philadelphia engaged EarthLink in a comprehensive relationship that pinned the city’s social and economic dreams onto the deal.

In addition to the rights to use city assets, the agreement included a pricing model to address the city’s digital inclusion goals, along with provisions for revenue sharing, community oversight, open access and privacy protections. EarthLink would build, own and operate the network at no cost to the city, but would make wholesale bandwidth available to competing operators to enter the market. A non-profit organization, Wireless Philadelphia, was created to seek grants, oversee the revenue-sharing and manage the city’s digital divide.

Dianah Neff, now with Civitium and then the acting board chair of Wireless Philadelphia, the non-profit corporation that the city created to oversee the deployment, called the deal “unprecedented.” Philadelphia set the tone: A muniwireless network was not just another city utility or license like those that cable TV operators signed.

Muniwireless was now seen as a dynamic asset, one that could drive a municipality’s aspirations for the future. And, because of its revenue potential and ability to run applications that streamlined municipal functions and made them more efficient, it potentially could be built and operated at no, or low, cost to the municipality. Identifying a business model became an exercise in imagination.

Local option

As communities develop their own business models, many factors must be considered: The size of the community, its demographics and, perhaps most important, the interests of all the stakeholders ‚Äö?Ñ?¨ including the taxpayers and user groups, as well as the service providers that will build and operate the network.
“Cities and counties have to understand the service provider’s business model, as well,” says Karl Edwards, president of Excelsio Communications, which advises smaller Tier 2 and 3 communities. “You want to make sure there’s a service provider who’ll partner with you even before the RFP comes out.”

Frequently today, munis build into their deployment schedules the time to produce an RFI, or Request For Information, during which the city notifies vendors of its wishes and allows equipment providers, integrators and service providers to respond with questions. Often, based on the input they receive, city or county officials will revise or produce addendums to the plan before issuing their RFP (Request for Proposal) to attract a greater number of bidders. This can be an important stage that brings munis together with potential partners to better ensure outcomes that will work for both.

Toledo, Ohio, took that cue earlier this year when it added an addendum to its RFP to assure bidders of at least one serious anchor tenant in the community. Toledo’s RFP netted two bidders‚Äö?Ñ?ÆMetroFi of Mountain View, Calif., and Buckeye CableSystem of Toledo. Although neither proposal fully delivered on the city’s original wish list, the process opened a dialogue and negotiations that seem to be headed toward a happy outcome for the city and one of the bidders.

Smaller cities, like those that are Edwards’ clients, face another challenge when they choose to go with a public-private partnership: They often lack the population density to present an attractive market to service providers. Most services providers, when deciding whether it will be profitable to even enter a market, want to see high household densities‚Äö?Ñ?Ærarely less than 1,000 households per square mile and as high as 3,000 for some of the big, national service providers. Anything less does not ensure them of the subscription revenue they estimate they will need to offset the cost of building the network.

“Unless there is sufficient tenancy from the city, local businesses or educational institutions,” says Edwards, “you have to start asking questions: Are there other ways to fund the network? Is it necessary that WiFi be deployed everywhere? You may need to start looking at other ways to design the network. You also start asking, “Does the city need to own this?’”

Smaller communities also lack the economies of scale to make it realistic to believe there will be great savings from buying back services as an anchor tenant on the network. “Quite often smaller communities do not have many leased lines,” notes Edwards, “and many don’t have mobile data plans.”

And, there are other risks when using cost savings as a justification for the network. City efficiencies may mean that city jobs are threatened. If the network is perceived as something that will result in layoffs, it could trigger a whiplash of strong community opposition to the proposal.

Ads and anchors

Models that incorporate some amount of advertising, along with commitments from cities and major employers in the area to become anchor tenants, are gaining in popularity.

Early on, the pure “ad-supported model” was popularly touted as a “win-win-win” for cities, service providers and advertisers. The idea was that, with advertising revenue to support the build-out and operation of the network, Internet access could be provided free to the cities and their residents.

Typically, too, this model involved higher levels of service to which customers could subscribe and receive faster access without the ads.

This model has also evolved, and the focus is increasingly turning to anchor tenancy. In the anchor tenant model, the city commits to being the primary customer, or tenant, on the network. This, in turn, minimizes the financial risk transferred to the service provider by guaranteeing that its investment in the network will generate at least a minimum guaranteed revenue stream.

“This has been an emerging market and even the definition of anchor tenancy has been evolving as the market has matured,” says Chuck Haas, president of MetroFi, one of the companies that pioneered the ad-supported model but is shifting focus to deployments in which there are anchor tenant guarantees.

“With each RFP and each city deployment, we get smarter and smarter about how to really maximize the value of this network,” Haas says. “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. A city typically has thousands of things to manage and monitor‚Äö?Ñ?Æsuch things as water and utility meters, pumping stations, streetlights and intelligent traffic control. 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.”

The ad-support model is still viable, even as it yields to a hybrid version in which anchor tenants play an important role. Because ad revenue can be used to offset the costs of providing free service to residents or, specifically, to low-income residents targeted to receive free or very low-cost service, it still serves to drive business to service providers. Its value is that it solves what Haas calls the “number one and number two problems of the business”‚Äö?Ñ?Æcustomer acquisition costs and customer churn.

Acquisition costs typically run upward from $175 per customer. “When you’re talking about a service that retails for $20 or less,” said Haas, “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 three to four 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.”

The free ad-supported model holds the subscriber, ensures a given audience to the adviser and keeps those advertising dollars coming. As a result, some form of ad/anchor-tenant hybrid can be used to help offer cities a level of free service that will serve their goals for addressing the digital divide while assuring the service provider of a revenue stream provided by advertising and the assurance that there will be an anchor tenant.

Usage models

Switch the model to one that focuses on usage, such as automatic meter reading or public safety, and, again, the arguments change. Usage models facilitate municipal activities by automating services such as reading meters, building inspections and other civic services. The investment in the network is typically justified by analyzing the applications that will run on it, and, often, the value of those applications can be monetized. Cost reductions can be quantified and a city knows what it is getting into when it signs an anchor tenant agreement‚Äö?Ñ?Æoften but not always.

While it is not difficult to assess the savings from a network that delivers automatic meter reading or voice-over-IP applications that save on telecom bills, it is difficult‚Äö?Ñ?Æif not impossible‚Äö?Ñ?Æto monetize the value of something like public safety networks, deployed to aid first responders in the field.

“When you talk about public safety,” says Edwards, “the question becomes “what is the value of a human life?’”

In a public safety model, the focus switches from savings to availability and technical issues, such as signal density‚Äö?Ñ?Æhow many access points or nodes will be deployed to ensure a ubiquitous signal that delivers the appropriate speed when needed?

Until recently, first responders and public safety agencies avoided traditional 2.4-Ghz WiFi networks due to concerns over security and signal interference on the unlicensed band. But with the FCC’s move to set aside the 4.9-Ghz band as licensed spectrum for public safety use, the scenario has changed.
Riverside, Calif., which is building a dual 2.4/4.9-Ghz network, will soon take advantage of that move. But, while public safety is a dominant factor, the model there is also a hybrid. The network, which will be built and operated by a partnership between MetroFi and AT&T, includes a significant anchor tenant commitment.

In addition, Riverside will be using the excess capacity on its network to address the digital divide, with low-cost subscriptions for qualified households. Provisions in the digital inclusion program call for distribution of free refurbished computers to qualifying households.

The non-profit mystique

A number of communities, like Philadelphia, have turned to non-profit organizations, established under IRS code 501-C, to spearhead muniwireless initiatives. The advantage of using an outside organization is that the voluminous planning and decision-making necessary in a deployment does not stress everyday municipal operations.

OpenAirBoston.Net, for instance, was created at the request of the mayor. The group was designed to function independently from the city to coordinate and manage the deployment of the network. The chief goal in Boston is to attract a wholesale service provider that, in turn, will sell bandwidth to retail providers to promote competition and reduce Internet access costs in the city. But a key secondary goal‚Äö?Ñ?Æand one that is likely to add yet another genealogical branch to muniwireless hybrids‚Äö?Ñ?Æis to operate the network in such a way to support high-tech research and development in the city.

For its part, the city has agreed to contribute pole attachment rights to the effort. But OpenAirBoston will manage the deployment. A director has been hired and the group has issued a Request for Information (RFI) from interested service providers. It is expected to release its RFP soon.

In January, the Joint Venture: Silicon Valley Network (JVSVN), a group that brings together leaders from various constituencies to address area-wide development, selected a coalition of private companies including IBM, Cisco, Azulstar and SeaKay to develop its regional network. SeaKay, a non-profit, is developing the economic model for the network, spearheading funding and promoting the organization of users groups to extend the value of the network to the community.

SeaKay’s role demonstrates how a non-profit can serve as a liaison to bring together diverse business and groups and identify ways in which they can maximize use of the network. One of the proposed users groups would join engineers from automotive research centers with traffic engineers to explore traffic management applications: Another brings together first responders in an Emergency Response User Group to ensure that the network will meet the needs of public safety organizations.

“Informed local choice”

Turning to a non-profit, or establishing your own, is just one way Dennis Holmes has seen small towns and municipal authorities solve their broadband dilemmas. Holmes is director of wireless services for Outsource Inc., an integrator based in Franklin, Tenn.

“We’ve also seen great success with philanthropic models,” says Holmes. Under the philanthropic model, the municipality finds a philanthropic organization or agency to spearhead the deployment, first to achieve the goals it identifies and second to piggyback community broadband access into the offering.

In Cookeville, Tenn., for instance, the city-owned regional medical center drove construction of a healthcare network that simultaneously provides Internet access to residences within its coverage area. “Although they are using public funds,” explains Holmes, “it does not come at the expense of the local taxpayers. Instead, it is coming through hospital grants.”

Corporations and philanthropies, too, he notes, are making funds available for muniwireless initiatives. Bank of America, for instance, has donated money to digital divide projects in what Holmes characterizes as a long-term win-win for the bank’s goals of reducing the cost of banking as more people transact business over the Internet.

Ultimately, says Holmes, “the model for a successful local deployment comes down to informed local choice.”

Municipalities must be willing to work before making that choice.

“They need to take a look at all the options and see what makes the most sense for them,” says Edwards. “Ultimately, it may come down to issues of political will‚Äö?Ñ?Æthe will to go after financing in a relationship where the city wants to own the network but outsource the operation. Or, because of economic challenges or political dynamics, they may see certain ideas are just not going to fly and they have to look for something else. Every city and county is different.”

And so are their muniwireless business models.