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Earthlink Sneezes and the Municipal Wireless Market Catches Cold? Not so Fast ....

I felt the need to share my opinion on this one.

Esme Vos wrote a piece on MuniWireless regarding the recent announcement by Earthlink. Titled, "EarthLink to evaluate performance of muni Wi-Fi business," the article carried the shocking news that Earthlink is operating like a well-run publicly traded company. Namely, they intend to pursue business practices that are in their best interest and have no intention of going off willy-nilly, chasing every Tom, Dick, and Harry municipal RFP. This is news?

Here's what Earthlink said, according to the San Jose Mercury News:

EarthLink Inc. said Thursday it will study the performance of its municipal wireless Internet networks in four cities - Philadelphia, New Orleans and California's Anaheim and Milpitas - before deciding how to move forward with similar Wi-Fi networks elsewhere.

While more cities are expressing interest in striking deals with the company, EarthLink is "not yet able to establish that comfort level" that the investments are really profitable, said Kevin Dotts, EarthLink's chief financial officer.

That doesn't mean EarthLink is pulling the plug on cities under contract, like Houston, which would eventually be the nation's largest network at about 600 square miles, Dotts said. Instead, the company wants to review a range of factors to determine where it would be most profitable to invest what Dotts estimates are up to $40 million a year in capital expenditure.

Esme provided good analysis, if I can summarize here: the day of the free lunch is over - Earthlink is not withdrawing from the market, but they will be selective in their market focus, and will show a preference for large, dense, broadband-using cities. No kidding. I'm not suprised - these projects cost money, and Earthlink has access to a lot of money, but there is a bottom to that barrel of cash.

Sadly, Earthlink has provided much of what we would call excitement in the first phase of this new industry. Many times I have thought - "Thank God for Earthlink." So when they announce that they have enough to chew on, thank you, and will be taking a more - shall we say "balanced" view of the market - I'm not surprised. They are hitting limits in their cash, in their strategic focus, and in their ability to staff these engagements. Indeed, there will be some ripples for the cities.

One final paragraph caught my eye in the Mercury story: He added the company will closely study the four designated markets over the next few months before defining its strategy. He said it will probably focus any expansion on large metropolitan areas like Chicago.

Focus on large cities...so, medium-sized cities like those I've been writing about on these pages will not see the Godzilla of Municipal Wireless bidding on their projects...I'm betting that these city officials are not surprised either, although they are probably more than a little disappointed. So, it's not the end of the world, but rather a return to normal business behavior. That's the way I see it, and I believe that the sane city officials out there will see the same picture. The bigger story is that there are so many cities eager for Earthlink to work with them - hello, that's called "market demand." We may need to haggle on price, but its still a sign of demand. Who will step in to fill it? That's what I want to know...

Here are my comments on Esme's article, for the record. My first paragraph addressed an alarmist who commented first, claiming that this announcement is a death knell for the industry. I beg to differ.

First, to address the brief but highly inaccurate note above from RickT - those with closed minds and tightly-held opinions are bound to see any news or setbacks in this industry as confirmation of their opinions. But it's a far stretch to get from the Earthlink announcement to Rick's "muni Wi Fi projects are dying quickly across the country." Give me a break!

What I see is one more sign of an industry that is evolving fairly rapidly. From the surprise offer of Earthlink to fund the Philadelphia network a few short years ago to any number of city projects that sought to negotiate a similar free lunch, we all knew this was a phase in the birth of a new industry, a phase not meant to last for long. How long could one-sided deals last, after all?

A more balanced read of the situation is that these networks are tools that can accomplish a lot, but projects have to be fiscally sound and widely demanded in a community, just like with any other major capital project. They're not for everyone. But for those towns and cities with real interest, and there are a lot of them out there now, wireless mesh networks offer an alternative to speed up deployment of broadband. We're in the middle of a paradigm shift, and we're not sure what it looks like on the other end.

Projects will require more effort but I believe they will continue, because many projects make a lot of sense, and there is definite interest around, which I encounter daily. Earthlink, exciting as it has been and still is, is not the only game in town, and it has its limits. Cities are newly empowered and are open to new possibilities, and there's no putting this toothpaste back in the tube.

Also, I commented on the San Jose article as follows:

EarthLink is to be applauded for stepping out into a new industry and making waves, and now, stepping back to evaluate its first phase of engagement. I call that good business sense.

Thanks in part to the initiative of EarthLink, there are now hundreds of cities engaged in a lively debate about their appropriate role in expanding broadband infrastructure in their cities. Before EarthLink's foray into municipal broadband, cities by and large deferred to their cable and telecom franchisees and hoped to get noticed for broadband expansion. After EarthLink's recent activity, cities have a new perspective and sense of empowerment - the paradigm has shifted.

My question - who will step up next and push the envelope out a little further? EarthLink opened the door onto this new market, but now they need to stop to catch their breath.

But as they paused, they left the door open for another to take some initiative and gain some press in the coming months. Who will it be?

Posted on April 28, 2007 at 05:45 PM

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