Public Wi-Fi, Once Dead, Might Come Alive

SAN FRANCISCO (TheStreet) -- For several heady months in 2005, it seemed like every major municipality and its sister had a plan to offer cheap wireless Internet access to the masses.

John Street, the mayor of Philadelphia at the time, gushed that "a digital infrastructure and wireless technology are keys to our future." Houston, New Orleans and San Francisco announced similar plans to spread Wi-Fi technology, which was already the darling of coffee shops and hotel rooms everywhere. Before long, we thought, we would be able to forgo Ethernet connections and surf the Web from any cubicle or park bench in the country.

If you live in any of those cities, it's pretty clear that those plans went awry; hardly any of them offer citywide Wi-Fi. But all is not lost. New business models, technology upgrades and, most importantly, Apple's ( AAPL) beloved iPhone might resurrect the municipal Wi-Fi movement -- or at least make Wi-Fi more readily available outdoors.

Here's what went wrong a few years ago:

When city governments decided to embrace Wi-Fi, most requested bids from service providers and equipment makers. EarthLink ( ELNK) came back with an offer that sounded (and was) too good to be true. The company would pay for the entire network -- the equipment, the development and the operations -- if the city would let the firm keep subscriber revenue. Low-income neighborhoods would receive discounted services to meet city mandates to bridge the digital divide.

Cities, of course, ate this up because it allowed them to provide a public service with little effort. Philly signed up for the EarthLink model, as did Houston, New Orleans and Anaheim, Calif. San Francisco announced a partnership-a-trois with EarthLink and Google ( GOOG).

Verizon Communications ( VZ) was so concerned about losing business that it led a lobbying effort against municipal Wi-Fi networks that prompted Pennsylvania to pass a law prohibiting cities from directly hosting broadband services without the blessing of local phone companies. In other words, if Verizon offers Web access that's as fast as a citywide Wi-Fi network, the city can't host the service.

Philadelphia was exempted from the law, but in the end, EarthLink's efforts imploded anyway. Building a wireless network for an entire city turned out to be too expensive, especially without guaranteed subscriber revenue. In 2007, EarthLink hinted that its municipal Wi-Fi business was in trouble. In February 2008, the company said it was exiting the business and would no longer provide service to cities with which it had been working.

"Companies like EarthLink were clueless," says Esme Vos, co-founder of MuniWireless, a San Francisco-based consultancy that follows municipal broadband efforts.

While EarthLink's model was a flop, the success of some city-run wireless programs suggests public Wi-Fi is still feasible. The Minneapolis government, for example, uses a model called "anchor tenancy," in which the city pays service provider U.S. Internet $1.25 million a year, in addition to the subscription fees the company collects.

Wi-Fi technology has also become more reliable than it was a few years ago. The industry has been addressing tech problems that should make these networks larger and faster. And technologies such as "beam-forming" now make it easier to get a signal inside a building even if the equipment is outside.

The iPhone onslaught has increased demand for outdoor Wi-Fi access. More than 40% of application requests on iPhones are sent via Wi-Fi instead of AT&T's cellular network, according to AdMob, a mobile advertising firm.

"The iPhone legitimized Wi-Fi as a service-provider infrastructure," says Selina Lo, chief executive of Ruckus Wireless, a Sunnyvale, Calif.-based company that makes Wi-Fi equipment for service providers. The company's Wi-Fi unit shipments have tripled while its revenue has grown almost six-fold since the iPhone was introduced.

The municipal wireless effort might also get a boost from perceived the shortcomings of AT&T's network. It's no secret that customers have been complaining that AT&T's 3G network has been loagy lately, especially in data-happy cities like San Francisco.

AT&T ( T) declined to comment on its efforts to mitigate network overload caused by iPhones, but the problem reflects a need that Wi-Fi might be able to meet.

"My prediction is more carriers will set up large-scale outdoor Wi-Fi networks to offload 3G traffic," Vos says.

-- Reported by Carmen Nobel in Boston. Feedback can be sent to carmen.nobel@thestreet.com.

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