Why WiFi? City Governments Should Stay Out

Back when Saturday Night Live was still funny, Lily Tomlin’s character Ernestine, the ill-mannered telephone operator, deftly parodied all that was wrong with the old phone system when she proclaimed the phone company’s motto: “We don’t care. We don’t have to. We’re the Phone Company.” Today, Ernestine may seem like a relic from the days of Ma Bell’s monopoly. But if some Wi-Fi companies have their way, they soon won’t care either because they won’t have to.<?xml:namespace prefix = o ns = “urn:schemas-microsoft-com:office:office” />

Consider Google and Earthlink’s plans to create city-wide Wi-Fi for <?xml:namespace prefix = st1 ns = “urn:schemas-microsoft-com:office:smarttags” />San Francisco. As the city prepares to put the issue to a vote in a referendum, Earthlink CEO Rolla Huff is acting as though the future of the project is a foregone conclusion, adopting a new strategy for dealing with critics: the silent treatment. But Huff isn’t just miffed; his company is facing a serious financial meltdown in San Francisco and potentially many other wireless projects. But wasn’t municipal Wi-Fi the wave of the future?

Whatever happened to the dream of editing Wikipedia in the car or live-blogging people watching at the neighborhood park? It turns out that few people actually share those dreams. As Business Week recently pointed out, initial forecasts for municipal Wi-Fi subscriptions were exceedingly high, predicting 15 to 30 percent of the population of cities signing up. Actual subscriber rates are far below this level—a mere one to two percent—making investors interested in ROI sadly SOL.

We’ve gone from the dominance of dial-up to deep market penetration by cable, DSL, wireless, cellular, and satellite.  Does a market as varied and competitive as this really need municipal Wi-Fi?

In an attempt to stave off disaster, Huff has put the heat on cities involved in municipal Wi-Fi rollouts. In a recent interview with Dow Jones, he declared, “We’re going to look for municipal governments to step up and become a meaningful anchor tenant.” Translation: Cities need to sign long-term contracts so that vendors like EarthLink are guaranteed at least a minimum return.

Not all cities are facing difficulties in their municipal Wi-Fi projects—dozens of cities around the country are moving forward with similar partnerships. But even if these ventures are financially viable, are they good for the marketplace?

That’s worth asking because in recent years broadband has spread across America at a rapid pace. A recent Pew Internet & American Life Project study found that DSL rates have dropped by 15 percent in the last two years, while the consultancy JupiterResearch estimates that falling broadband prices will result in 80 percent of the country logging on at high speeds by 2010. In a little less than a decade, we’ve gone from the dominance of dial-up to deep market penetration by cable and DSL carriers, with wireless, cellular, satellite, and even broadband over power line joining the mix. Does a market as rich, varied, and competitive as this really need municipal Wi-Fi?

More competition is generally a good thing for the marketplace. But that doesn’t necessarily apply to hybrid public-private partnerships, since these arrangements tend to take on the anti-competitive traits of government without the dynamism of business. The result can be a poison pill for the connectivity marketplace.

Companies that enter into public-private partnerships enjoy favorable treatment. Special access to city or county rights of way, shelter from liability, and the backing of a public partner with the power to tax makes Wi-Fi firms that enter into municipal deals formidable foes. Potential competitors may find these advantages too much to overcome, thus driving them out of the marketplace. With potential competitive rivals driven out, we are soon left with an ossifying public utility disguised as a private enterprise.

As municipal Wi-Fi companies become entrenched, we can expect them to not only demand that cities be anchor tenants, but that they help make up for the shortfalls that will inevitably result when new technologies supplant Wi-Fi. Worse, seeking to put off that day of reckoning, they may well ask for regulations stacking the deck in their favor, slowing the spread of the latest and greatest tech.

Limited access rules and special privileges are what brought us Ernestine in the first place. Technological solutions have opened up markets to more players recently, but government can truly open the competition floodgates by liberalizing markets, which would help lower prices and bring broadband to the masses. It’s time to stop playing favorites and give Ernestine the pink slip.