Municipal WiFi in San Francisco and Philly -- What it Means for the Wireless Carriers (ELNK, VZ, S, DT)

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Includes: DTEGY, ELNK, S, VZ
by: Andrew Schmitt

MuniWireless cracks open the terms of the Philadelphia Municipal WiFi contract with Earthlink Inc. (NASDAQ:ELNK). It’s worth a look. The contract outsources virtually all business risk to Earthlink. It seems like a great idea. I thought the San Francisco proposal looked economically solid, but SFO is about as tech-savvy as cities get, and is an ideal environment for MuniFi. I’m not so sure about Philly.

Today I can get Cingular EDGE access nationwide for $40 by connecting my Cingular 8125 to my laptop via Bluetooth. If $20 WiFi turns out to be a rip-roaring success, you can expect that Cingular, Verizon Communications (NYSE:VZ), T-Mobile (DT) and Sprint Nextel Corp. (NYSE:S) will all jump in to sell their 3G wireless services at this lower price point to take advantage of the price elasticity. Perhaps they offer Philly only HSDPA plans for $20. The wireless carriers have a big, sunk, capital expenditure -- securing 3x the users at 1/2 the price is a great business outcome for them.

The Muni networks would then lose their highest revenue customers as they migrate to private wireless data, and are left with the low revenue government users as well as the ‘assisted’ welfare (wifare - there’s a new term) customers paying $10. These Muni plans look a lot better when high revenue customers exist to subsidize the welfare and government subscriptions.

All of this, of course, is before you take into consideration $20 DSL for users who don’t need mobility and want better performance and reliability.

What happens to the economics of MuniFi if the high revenue subscribers are poached? Do city councils then proclaim wireless as a ‘right’ and demand that the city subsidize the municipal operator? People may not be factoring the market reaction to successful WiFi endeavors, and if so at what point to these projects become ‘too big to fail’ and require taxpayer subsidy?

MuniFi is a great way to drive down the market cost for wireless data, which is the primary objective of the cities that spearhead these efforts. However, that doesn’t necessarily mean they will be wildly profitable for the private companies like Earthlink who operate them. Cost Plus is a business model Earthlink and taxpayers may need to acquaint themselves with and it is not a formula for geometric growth.