Service providers try different models to achieve revenue goals and balance needs of community.

The digital divide is partly a money issue, and the growing number of municipal wireless networks created to bridge that gap are facing some tough decisions when it comes to financing their projects.

In most cities, muni wireless initially was envisioned as a way to provide citizens and businesses with low-cost or even free Internet access. That’s still the goal, but the ways of paying for that access have evolved over the past several months. One issue is whether advertising sales can generate enough revenue to support free public access.

“In most of our deployments and those that are planned, we’re talking about a free service at a lower speed that’s ad-supported,” said Susan A. Johnson, senior vice president of business development for AT&T. “That’s not a model that’s proven itself yet, but it is something that the cities are enamored of: free access. We’re trying to bring the advertising piece in to fund it.”

MetroFi believes that advertising can fund a muni network. In fact, more than a year ago, the service provider shifted its business model and market strategy away from subscriptions, although it continues to offer—but doesn’t promote—a $19.95 per month, ad-free service. Like broadcast and much of the Internet, MetroFi’s muni networks use free access to attract users. The more there are, the more attractive MetroFi becomes to advertisers. So far, the first part of that strategy is panning out.

“Some of the adoption rates for our free service are much higher than the paid service,” said Adrian van Haaften, MetroFi’s vice president of marketing. “So we think that maintaining the free service with an ad-supported model is extremely important for our business.”

Regardless of whether it’s produced by ad sales, subscription fees or both, revenue from muni networks almost always stays with the service provider that owns and operates the network rather than being shared with the city. The reason for that arrangement is a belief that if the service provider shoulders all of the cost and risk of building and operating the network, then it should keep the revenue.

“In return for building the network at no expense [to the municipality], 100% of the advertising and subscription fees remain with MetroFi,” said Chuck Haas, MetroFi’s CEO. “That’s consistent with cable and DSL, which don’t pay a percentage of their revenue.”
One exception is the city of Atlanta, which currently is negotiating its muni wireless contract with EarthLink. “We are looking at a combination of monthly leasing [of space on city assets] and revenue sharing,” said Abe Kani, Atlanta’s chief information officer.

Georgia is home to another exception: The city of Decatur received a state grant to pay for the building of a network that covers its 4.2 square miles. The city is small enough that it doubts it can attract a major service provider, so instead it’s looking to partner with a regional ISP.

“Their decision is to own the network but outsource the operations, including sales and marketing, to an ISP,” said Karl Edward, co-founder and president of Excelsio Communications, which advises cities on their wireless options. “There will be revenue share—much higher than your typical cable franchise fee because they own the infrastructure.”

Even without revenue sharing, cities benefit from muni wireless in ways both quantifiable and not. One obvious intangible benefit is that a low-cost or free muni service can help bridge the digital divide—the main reason that many of these networks were created in the first place. One quantifiable benefit is that some muni deployments are actually two parallel networks: one providing public Internet access, and the other supporting city services such as public safety and mobile data access for code enforcement workers. In those cases, the city can save money if piggybacking on the muni network means it can drop commercial services, such as 3G cellular.

That’s the case in Concord, Calif., which plans to transfer some applications to the muni network.

“Our finance department did a pretty rigorous cost-benefit analysis as we were contemplating the arrangements with MetroFi,” said Ron Puccinelli, the city’s IT director. “After paying for all transition costs, we’re looking at ongoing savings of approximately $180,000 per year.”

Increasingly, service providers are requiring cities to serve as anchor tenants as a condition for agreeing to build and operate the network. That gives the service provider a guaranteed revenue stream that then can be supplemented with advertising or user fees. Some cities welcome this requirement because they believe it can determine whether a muni network ever gets built.

“We believe that we needed to make our request for proposal attractive to service providers because RFPs were piling up on their desks, and they had to choose which of the fifty they were going to bid on,” said Sally Wesorick, wireless project manager for the city of Grand Rapids, Mich., whose network is being built by Clearwire.

Another motivation is staying power: Cities increasingly realize that unless the service provider can make money from the network, it won’t be around for long. That’s why they accept proposals that include advertising, user fees or both.

“We wanted to ensure that we had not only a vendor that came to town and built the network, but remained here and had a sustainable business model,” Wesorick said. “We didn’t see free [public access] as a sustainable business model. We looked at it as a partnership from the very start. This had to be a win for the city and a win for the vendor.”

A few cities are chipping in more when it comes to building the network. One example is Milledgeville, Ga.

“They’re going to contribute about one-third of the cost of the network infrastructure,” said Excelsio’s Edwards, who is advising the city. “In exchange, they want free service for municipal employees.”

One of the more unusual public/private partnerships in muni wireless is in Philadelphia, where EarthLink is building the network. Although cities often create committees and other entities to evaluate RFPs, they typically are disbanded somewhere between the time a contract is signed and when the network goes live.

That’s not the case with Wireless Philadelphia, a non-profit organization that the city created to build and operate a muni network that would be funded by bonds, grants and loans. When EarthLink’s counter proposal to the city’s RFP offered to build and run the network, the city revamped Wireless Philadelphia as a permanent intermediary.

The three-way partnership has three main agreements. The first is between Wireless Philadelphia and EarthLink and covers the network’s construction. The second is between the city and EarthLink via an entity called the Philadelphia Authority for Industrial Development (PAID), which manages city assets such as light poles on which Wi-Fi access points are mounted. The third is between Wireless Philadelphia and the city and establishes Wireless Philadelphia as the intermediary.

“Within the first two years, there’s a million-dollar payoff to Wireless Philadelphia via the city and PAID,” said Varinia Robinson, program manager in the mayor’s office of information services. “Then years three through ten, it’s profit-sharing: five percent net revenue goes back to Wireless Philadelphia.”

That revenue comes from user fees: Consumers will pay $21.95 or less per month to use the network, with a discounted rate of $9.95 per month for low-income citizens.

The profit-sharing that Wireless Philadelphia will receive goes toward subsidizing the discount rate as part of its Digital Inclusion effort, which aims to bridge the city’s digital divide by providing low-cost PCs and Internet access.

“I don’t believe there’s another model exactly like this anywhere,” said Terry Phillis, the city’s chief information officer.

But there is one similarity to other models: The three-way deal ultimately is an acknowledgement that money has to change hands for muni wireless to be successful. The Philadelphia partnership just has more hands.

“We are seeing a significant decline in the number of municipal wireless projects that are using free access/advertising models,” said Cole Reinwand, vice president of product strategy and marketing for EarthLink Municipal Networks. “We believe that it is too challenging to provide robust networks and a good customer experience with revenue only coming from advertising. We are now seeing some of the major proponents of free access starting to pull back on that business model and offering.”

Cities aren’t the only municipalities looking to offer public wireless access. Increasingly, counties are, too. One example is Johnson County, Kan., in suburban Kansas City, Kan. In February, the county issued an RFP in conjunction with the three largest cities within its borders. That project highlights another type of partnership: Counties that want to build muni networks sometimes team with cities, which own light poles and other assets that can be used as sites for wireless infrastructure.

However, county-led projects aren’t necessarily easier to negotiate, depending on how the city/county partnership is structured.

“In most of the cases we have seen, the bidder on the project would still have to negotiate individually with each city within the county,” Reinwand said. “In some other cases, the city and the county are one and the same, as in Philadelphia and San Francisco, for example.”

Despite those types of challenges, some service providers say they expect county-led projects to become increasingly common. “It started out as primarily city efforts,” AT&T’s Johnson said. “Now many counties are saying: ‘This is a good thing. Maybe we should be looking at a broader deployment.’ It’s a shift that’s been happening recently.”

Why are cities receptive to working with counties? One reason is because if adjacent cities don’t also have public wireless, then the utility of the network is diminished somewhat. Another reason is that with RFPs piling up on service providers’ desks, small cities often need to band together or partner with a county to get attention.