MuniWireless

Once foes of municipal wireless, the incumbents are joining the party. Telecom firms led a battle against muni Wi-Fi but they’re finding out that there may be a business in it after all.

By Carol Ellison
This article appears in the Spring 2007 Issue of MuniWireless Magazine.

Once foes of municipal wireless, incumbent carriers are becoming active players

Don’t look now but familiar names are getting into the business of municipal wireless. Telecom companies that once criticized, and even battled, municipalities over their rights to build and operate public wireless networks have begun to court their opponents.

AT&T and Embarq, a spin-out from Sprint-Nextel, have undertaken or are actively involved in negotiating partnerships to build a half-dozen municipal networks. Such partnerships did not appear possible only a few years ago when political tensions plagued the relationship between municipalities and incumbent telco operators.

“I think it would be premature to say that the examples we’ve seen of some of the cooperation today means there has been a shift of the landscape,” says Jim Baller, whose Baller Herbst Law Group represents local governments in broadband and telecommunications issues. “It’s too early to tell. The incumbents have engaged in only a very limited number of projects but I hope there will be more, many more, and not just in the wireless field.”

The possibility of greater involvement by the incumbents is largely being driven by a shift in the business models being considered by cities ‚Äö?Ñ?¨ away from municipal-owned networks and towards public-private partnerships.

“The arguments about municipal entry were always grounded in the assumption that municipal entry meant municipal ownership,” says Greg Richardson, founder and managing partner of Civitium. “In many cases, the models that were actually evolving did not include municipal ownership. I don’t know a single major U.S. city that has adopted a public ownership model for WiFi.”

That was not the atmosphere in 2005, when Pennsylvania’s notorious House Bill 30 became law just as Philadelphia rolled out its high-profile municipal wireless network and the fight reached fever pitch. Similar bills were introduced in 19 other states. Free-market think tanks declared municipal networks anti-competitive and squared off with municipal advocates, issuing a volley of reports and position papers on behalf of the telcos.

But municipalities did not wait for the war to end. Within the year, many‚Äö?Ñ?Æhundreds, in fact‚Äö?Ñ?Æwent steaming ahead to deploy wireless mesh networks. Our 2006 Municipal Wireless State of the Market Report found more than 300 municipalities with deployments underway.

Worse for the telcos, publicity surrounding the legislative battles were taking a toll in customer goodwill and public relations. Despite his company’s successful push to pass House Bill 30, a Verizon executive called it “the Pennsylvania debacle.”

Although anti-muni legislation remained up for grabs‚Äö?Ñ?Æand is still pending in some states, bills were beginning to die in committee. Others that passed, including House Bill 30, allowed more wiggle room for municipalities than either side anticipated.

A Changing Marketplace

Even without House Bill 30, says Richardson, Philadelphia’s consultant on the project, “it’s our opinion that Philadelphia could have proceeded with the ultimate business model it adopted and not broke any of the restrictions in that act.”

Why? The Pennsylvania bill prohibited municipalities from using taxpayers’ money to build and operate a network unless it first notified the incumbent telco and essentially offering it first refusal on the project. Philadelphia chose not to build and operate its network but, instead, to outsource the project to a private company, EarthLink.

Cities had become partners, not competitors, and even the telcos began lining up for their business. In March, 2006, the Wall Street Journal declared “Companies That Fought Cities on WiFi, Now Rush to Join In.”

New partnerships are introducing new competitors into the market. In Philadelphia, EarthLink beat out AT&T among other competitors for the city’s business. In Portland, Ore., the job went to MetroFi, a service provider that also designs and builds metro networks; MetroFi, in turn, partnered with Microsoft to provide a free tier of access with local content supported by advertising, and a paid tier offering high-speed ad-free service. In San Francisco, EarthLink won the city’s business, partnering with Google. And in Riverside, Calif., AT&T was chosen to build the network, partnering with MetroFi on an ad-supported tier of free service. The Riverside deployment gives AT&T ownership of the network with a city agreement not to offer a competing service as long as AT&T performs satisfactorily.

“The marketplace has changed,” says Carl Nerup, executive director of emerging technologies for AT&T’s Business Development Group, which deals with metro deployments. “The cities have realized that to own and operate a wireless high-speed broadband network is not a trivial exercise, both in terms of management complexity and also in cost. So, by finding the right balance between the city and a service provider or private company, there’s become this growth of a public-private partnership.”

The Triple Bottom-line

Finding the right balance in a public-private partnership, however, is not an easy task. City RFPs for municipal wireless deployments are far more complex than those of traditional city utilities. Negotiating the relationship is not merely a matter of striking a lease agreement for city-owned assets. Issues like free access, pricing and community oversight come into play. Reaching an agreement that addresses those issues often comes down to what Richardson calls “the triple bottom-line.”

In the private sector, there’s a single bottom line: Profit. Companies are responsible to their shareholders. Cities, however, have two other bottom lines to deal with‚Äö?Ñ?Æan economic bottom line and a social bottom line‚Äö?Ñ?Æand they are accountable to citizens and taxpayers. The trick is to keep all the accountabilities and responsibilities balanced.

“These things have to be true partnerships and not be both sides just getting all that they can get,” cautions Richardson. “If it’s structured too much in favor of the city, it could create financial risk and jeopardize the sustainability of the network. If it’s struck too far on the other side, you lose the opportunity for a lot of community benefits and you’ll probably have a lot of citizens who are unhappy with your local government.”

Ask any industry watcher or analyst why incumbents have entered the municipal Wi-Fi space and they’ll tell you they’re there to hang onto customers and prevent their markets from eroding. But they’re there for other reasons, as well.

“They are realizing there is significant momentum in this market. Do you fight it or do you join the party?” says Karl Edwards, president and co-founder of wireless broadband consultants Excelsio Communications. Excelsio advised the city of Grand Rapids, Mich., which chose Clearwire as its provider, largely for the company’s ability to deliver mobile data applications in Michigan’s heavily foliaged environment.

Services and Applications

The demand for wireless mobile applications and customer services is a big drawing card. Just how big is illustrated in AT&T’s fourth quarter earnings report where Cingular Wireless, now owned by AT&T, reported 2.4 million new subscribers and net income of $782 million‚Äö?Ñ?Æresults that Cingular CEO Stan Sigman called “our best ever on a variety of fronts.” An array of new consumer products and services drove those services, as did revenue from some 1,000 high-end business and governmental service contracts that include arrangements with the Chicago Public Schools, the U.S. Department of Justice and the Food and Drug Administration.

WiFi is not cellular, and in consumers’ minds, it’s all wireless services. AT&T is rapidly emerging as the highest profile telco in the bid for muni business‚Äö?Ñ?Æand not just because it is out to prevent market erosion.

In addition to the partnership in Riverside, (see related story) AT&T is negotiating to build and operate city networks in St. Louis, Mo., Springfield, Ill. and Napa, Calif. It also was a bidder in Philadelphia, and Grand Rapids and Washtenaw County in Michigan.

“Do we worry about the market? Yes, of course,” says Nerup. “You want to make sure you remain number one to deliver the most value to your customers and your shareholders. You also have to honor new and innovative ways that technology is applied to deliver solutions to customers.

“Our customers look for a constant user experience irrespective of the medium they use to connect to the Internet,” adds Nerup. “Metro WiFi just becomes another one of those vehicles by which you can affordably connect. So you’ve seen us lately saying “Hey, let’s take a look at muni Wi-Fi.’ Is there a business there? Is this something that’s sustainable? And what can we learn from this space so that we can deliver the most value for our customers and shareholders.”

As a fledgling enterprise for AT&T, municipal involvements are negotiated through Nerup’s Emerging Technologies unit within the company’s Business Development Group. Charged with identifying potential new businesses for AT&T, that group is constantly on the lookout for new possibilities that will return profit to the company.

“Muni WiFi, or Metro WiFi as we like to refer to it, is one of those businesses that we think might have legs,” says Nerup. “We’ll incubate it. We’ll run it as a separate but connected business unit. When you look at the host of options that people have to connect to the Internet and you look at AT&T’s vision in this space, which is to enable affordable broadband access for everyone‚Äö?Ñ?Æwhen, where and how they want to connect, muni WiFi just becomes an extension of our over-arching vision.”

Embarq, the local telecommunications spin-out from Sprint-Nextel, is moving less aggressively but with a similar vision. It is operating trials in Henderson, Nev, and another in Hood River, Ore. Both are offering free service to residents during the trials.

“We’re operating under a specific business model as it relates to an anchor tenant,” said Kenny Wyatt, vice president of business marketing at Embarq. “We’re still in the early phases of municipal WiFi.”

While Embarq’s focus is on delivering municipal applications to the cities, the company’s trials are evaluating a range of data points‚Äö?Ñ?Æfrom how to seamlessly integrate IP-based voice communications with CDMA cellular service for city offices, to how WiFi service can factor into a suite of consumer offerings. The trials are also returning valuable information about different technologies and their ability to cover different terrains.

“Municipal wireless started out as a technology trial,” says Wyatt. Henderson with its flat, desert environment, and Hood River with its rugged, mountainous terrain, are “as different as night and day and each poses different technical challenges,” he adds. “We’re still working with new technologies out there.”

The Future

Like AT&T, Embarq is not boldly rushing into municipal market. Instead, it is looking for WiFi to complement its offerings.

“We view this like any other data or voice technology that has to augment our existing set of services,” says Wyatt. “We clearly don’t see WiFi mesh as a mass replacement of data technologies. We see it as a perfect complement to the rest of our portfolio.”

Meanwhile, the fight over municipal broadband access and its impact on competition continues. But, as more private companies enter the fray, the question about competition has turned. While incumbents complain less that municipal networks are anti-competitive, advocates of municipally owned systems complain that public-private partnerships are anti-competitive.

In Minneapolis, Becca Vargo Daggett, a research associate at the Institute for Local Self-Reliance, criticized city plans to court a private provider, saying “the federal government has consistently ruled that having a phone and cable information duopoly is an acceptable level of competition (and its) refusal to enforce laws that would encourage competition at the local level means that city governments have an even greater obligation to do so.”

Debates over the merits of municipally owned-and-operated networks are even more visible in San Francisco, where members of the city Board of Supervisors have challenged the mayor’s plan to contract with EarthLink to build and operate a network. But while the controversies grab the headlines, other cities are proceeding with a variety of plans and business models.

“It’s a little hard to predict this space,” says Civitium’s Richardson. “The public sector, meaning local government, has played a very valuable role. They’ve acted as a catalyst. There’s no way that private-sector companies would have deployed this technology and taken the risks they are taking if cities like Philadelphia and others had not gone out and done what they are doing. The opportunity for the private sector is to embrace the cities and their goals.”