Wireless Philadelphia Moves Forward

Published December 1, 2005

Philadelphia’s selection of EarthLink Inc. to build, operate, and manage a citywide municipal wireless network could mark a subtle yet significant change in the way large cities approach funding the construction and operation of controversial broadband initiatives.

Wireless Philadelphia is the largest municipal wireless project to reach contract stage. Similar networks, using a variety of business models, have been proposed in cities such as Los Angeles, Minneapolis, New York, and San Francisco. In response to a request for initial comments, Google Inc. has offered to build a wireless system in San Francisco at no cost to the city and offer some service for free.

EarthLink to Own, Fund

Under the terms of the proposed deal in Philadelphia, announced in early October, EarthLink will be responsible for financing the construction of the entire 135-square-mile network, expected to cost between $15 and $20 million. No funds will be directly allocated by the city, nor will the city own any part of the network.

Instead, in what resembles more of a franchise agreement than an actual partnership, the city will become a major EarthLink customer and will migrate city telecom services to the Atlanta-based Internet service provider. That will provide necessary upfront cash flow for the network buildout.

Firm Will Have Competition

EarthLink will provide retail wireless Internet services to the city’s residents, businesses, and visitors. Targeted pricing is $20 a month, with a $10-a-month plan for low-income residents. EarthLink will compete with existing broadband services from Cingular, Comcast, Verizon, Verizon Wireless, and a host of other local wireless Internet service providers.

Until now, EarthLink has predominantly sold dial-up and digital subscriber line (DSL) Internet. With the demise of FCC-mandated discounts on wholesale DSL, EarthLink hopes to use Philadelphia as a springboard into facilities-based broadband services.

Although the contract has yet to be finalized in Philadelphia, EarthLink aims to have most of the wireless access network in place by the end of next year. The deal is expected to call for a seven- to 10-year commitment from EarthLink to the project, according to Dianah Neff, chief information officer for the city of Philadelphia and architect of the Philadelphia municipal wireless initiative.

Taxpayer Risk Was Concern

Although the funding issue had been left open from the start, Wireless Philadelphia saw some resistance from city council members and Pennsylvania state legislators who were concerned about the overall cost and the risk to taxpayers. Many pointed to similar municipal broadband systems around the country that had failed, and to independent studies from firms such as JupiterResearch, which advised municipalities against directly investing in wireless infrastructure and service provision.

Amid discussion of the Philadelphia project, Pennsylvania legislators passed a law prohibiting other municipalities from owning and operating competitive broadband networks.

The Wireless Philadelphia revenue plan also is a departure from the original proposal. Under the original plan, Wireless Philadelphia was to own and manage the underlying backbone infrastructure and was to sell access to large users and local Internet service providers using what was known as a “cooperative wholesale” model.

Will Allow ‘Open Access’

Many municipal wireless advocates have said government ownership of the underlying network infrastructure is the only way to create competition with incumbent service providers. Incumbents say network ownership is critical to creating differentiation and gaining full value from the investment.

That Philadelphia allowed EarthLink to retain ownership of end-to-end infrastructure would seem to validate the latter argument. It also might serve to dampen efforts by other cities to create such municipal cooperatives if non-incumbent bidders point to EarthLink in Philadelphia and demand ownership of the wholesale business as a condition of building a municipal wireless system.

With new entrants such as EarthLink and Google pressing forward to take the risk, it might become more difficult for local legislative bodies to justify subsidized, government-owned operations.

Despite the shift in the wholesale approach, Wireless Philadelphia will remain committed to “open access,” said Neff, who calls the deal a “cooperative model.” Any Internet service provider (ISP) will be able to purchase wholesale capacity from EarthLink. “We will be involved in bringing retail ISPs and institutional users, such as universities, to the table,” Neff said.

Steven Titch ([email protected]) is senior fellow for information technology and telecom policy at The Heartland Institute.