Financial Woes Plague Muni Wireless Systems

Financial Woes Plague Muni Wireless Systems
August 1, 2007

Steven Titch

Steven Titch is a policy analyst focusing on telecommunications, Internet and information... (read full bio)

Municipalities across the country may soon reach a crossroads on whether to proceed with plans to build public wireless networks that encompass entire urban areas.

The past several months have brought a spate of reports showing several municipal systems, including vaunted public-private partnerships, have failed to deliver on promises regarding coverage, costs, and subscriber numbers.

The municipal wireless movement suffered twin body blows in April, when MetroFi and EarthLink announced plans to limit municipal partnerships to the country's largest cities. MetroFi went further and said it would no longer offer a free tier of wireless broadband unless municipal partners agree to be principal customers of the wireless system and commit to an agreed-upon level of spending each year.

Fighting for Customers

The announcements point to cracks in the public-private municipal wireless business model, which has been touted for several years as a way for cities to provide inexpensive Internet access to consumers who otherwise could not afford cable modems and DSL.

With competition driving down the cost of wireline broadband, plus the proliferation of wireless hot spots--many free--cities and their industry partners are finding themselves in a tough fight for customers. In communities where city governments have elected to operate systems themselves, many find their lack of technical expertise, marketing know-how, and capitalization have left them far behind the broadband pack.

"The economic reality has come home. People are realizing there's no free lunch," said Ronald Rizzuto, professor of finance at the University of Denver and author of several reports critiquing the financial performance of municipal broadband networks.

Although private partners generally get discounted right-of-way, they are finding such discounts don't offset the cost of providing citywide coverage, which municipalities generally require in return.

Both the industry and city governments, Rizzuto said, are gaining a better understanding of the economics of competitive broadband networking. "They are finding that these systems are not going to be viable," he said.

Limping in Lompoc

Perhaps the most glaring example is Lompoc, California, population 46,000, about 50 miles northwest of Santa Barbara. It spent $3 million on a citywide municipal wireless network and in March reported it has signed up only 281 customers.

Joe Armendariz, executive director of the Santa Barbara County Taxpayers Association, which has opposed the system, estimates current subscriber levels at 400. The city launched the service in September.

Dick DeWees, mayor of Lompoc and a champion of the municipal network, noted the city has not done any promotion, choosing instead to wait until the entire city has coverage before widely marketing the system.

The Lompoc wireless network represents the first phase of a city plan to deliver broadband service via high-speed fiber-optic connections to every home in the city. Work on the fiber phase has yet to begin.

Cutting Prices

Competition from Comcast and Verizon has forced Lompoc to reduce its WiFi rates from a flat $19.95 a month to three plans: a $9.99 per month plan for unlimited Internet access for one user; a family plan of $15.99 per month for unlimited Internet access for up to three users at a time; and a daily plan of $4.99 for 24 hours of Internet access for one user at a time.

The price cut likely pushed back the break-even point of the original business plan, which had estimated 4,000 customers paying an average of $20 to $30 a month would put the system in the black.

Meanwhile, the Lompoc Record reported on April 9 the city is continuing to work on its weak signals, which can make it difficult to connect to the Internet and cause long download times.

Despite the intense competition and technical problems with coverage, DeWees said the city is committed to the project.

Facing Further Problems

Lompoc may soon face something of a reckoning, as an early 2007 study of its public safety infrastructure recommended $2 million in improvements, Armendariz said. The city has formed a new committee to study the feasibility of tax increases.

"The city spent $3 million on a poorly performing wireless system and now finds it doesn't have $2 million to fund a basic service--public safety," said Armendariz.

"At what point are we going to stop spending money on [municipal broadband] and spend it where it's really needed?" Armendariz asked.


Steven Titch (titch@heartland.org) is senior fellow for IT and telecom policy at The Heartland Institute and managing editor of IT&T News.


For more information ...

Neil Nisperos, "WiFi issues plague city," Lompoc Record, April 9, 2007, http://www.lompocrecord.com/articles/2007/04/09/news/featurednews/news01.txt

Steven Titch

Steven Titch is a policy analyst focusing on telecommunications, Internet and information... (read full bio)