When it comes to Wi-Fi, where’s the profit?

Plans to blanket Sacramento with free municipal Wi-Fi lack both the funding and technology to succeed, according to two recent articles in the Sacramento Bee. Sacramento’s proposal is based on the same miscalculations that have doomed similar networks nationwide.

The private consortium contracted to build and operate Sacramento’s network has made several promises based on flawed assumptions. The agreement guarantees that 90 percent of the city will have Internet access both indoors and outdoors. But based on lessons learned from similar networks, the 90-percent goal would require nearly tripling the number of Wi-Fi transmitters and doubling the proposed $7-9 million investment.

Costs could rise dramatically to build the faster, fee-based subscription service which project leaders believe will compete with commercial offerings and generate profit. The high-speed Wi-Fi network which serves passengers at Sacramento International Airport cost more than $110,000. At this price, expanding a similar network to blanket Sacramento’s 90-square mile area would cost in excess of $550 million – more than 80 times the proposed investment.

In order to justify the investment, most of these ventures expect that 15-30 percent of the public will use the network. However, recent analysis reveals that participation rarely exceeds a paltry one to two percent. This explains why Sacramento’s previous vendor backed out in June 2006, declaring the project not “financially sustainable.”

In a nationwide survey of 52 municipal Wi-Fi networks published last February, the Pacific Research Institute could not document a single profitable example. Azulstar, the leader of Sacramento’s current coalition, is also no stranger to muni Wi-Fi failure.

Officials in Rio Rancho, New Mexico, terminated their agreement with Azulstar in October, citing a number of problems. Rio Rancho residents complained of poor signal quality, limited coverage, and inadequate customer service. Taxpayers will likely shoulder the burden of unpaid electricity bills, maintenance expenses, and the cost of dismantling the network. Rio Rancho officials concluded that Azulstar “failed to provide a clear business justification, a verifiable consumer demand …  and a clear portrait of its financial capacity.”

Advocates of municipal Wi-Fi are beginning to argue that these networks can be successful if they tailor their services to city governments. Azulstar aims to target city services such as utilities and law enforcement. Forcing essential services to use an unreliable network, however, would risk public safety and create substantial liability for the city.

As long as commercial broadband providers offer competing products, government-subsidized versions will continue to lag in both cost and quality. The strategy employed by Azulstar would be akin to having the city subsidize construction of an automobile factory for the purpose of producing police cruisers.

If Sacramento commits its resources to prop up an inferior product, innovative new technologies will be unable to compete for the city’s business. As a result, new commercial providers will have little incentive to invest in Sacramento. This profit incentive has been essential for the growth of local companies like Roseville-based SureWest Broadband.

When 90-year-old Roseville Telephone became SureWest in 2003, industry giants Comcast and AT&T (formerly SBC) dominated the broadband market in Sacramento. In the last three years, SureWest invested more than $200 million in advanced fiber optic technologies, providing consumers with more choices at lower prices. Today, SureWest captures 30 percent of the region’s market, and offers Sacramento residents the fastest Internet service in the country.

Allowing the municipal Wi-Fi project to proceed could discourage entry of innovative new providers and damage Sacramento’s standing as one of the nation’s broadband leaders. Fortunately, city leaders now enjoy an opportunity to correct their mistake and prevent taxpayers from subsidizing an unnecessary, inadequate, and dangerous project.

Azulstar recently defaulted on its agreed terms for deployment. The city council should immediately inform Azulstar’s coalition that they are in breach of their agreement and terminate the contract. Sacramento can continue to provide affordable broadband by maintaining a thriving marketplace for new commercial technologies.

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