Why we will never see municipal WiFi succeed in the US

Hey!  I finally got a signal!

It is sad to see the coincidental announcements and raft of articles over the last month regarding the fate of city WiFi systems that were to be deployed in cities both big (San Francisco, Philadelphia) and small. The storied history of municipal WiFi systems goes back several years, and if there is one takeaway, it is this: this is a dead-end approach to our broadband issues in the US, and deserves a lot less public focus than it has garnered.

Let’s start with some background. The first (and most successful) WiFi-based systems in the US were the numerous WiFi networks built to serve rural and resort communities, who were struggling to find an alternative to either the poor man’s internet (dial-up), or the high priced satellite-based internet connections, who offered “midband” download links, complemented by a dial-up backhaul. Now, there was lots of hard work to bring these satellite solutions to market (we had one at GE Americom that we later sold to Gilat), but the customer premise equipment (CPE) costs were close to a thousand dollars, and the ongoing charges of $80-$120/month made it a really expensive solution to broadband-enable underserved markets. As such, it has remained a niche solution.

Stepping into this void were a number of local entrepreneurs using a combination of homebrewed and commercial gear to establish their own wireless networks, using the unlicensed spectrum that WiFi employs (2.4Ghz), and antenna technology that allowed long distance point-to-point communications. This is a critical design element to highlight: distance was achieved through focused signals, which was possible since the endpoints were well known (e.g., Farmer Smith’s antenna). It was an incredible grass roots success story, with 5,000+ WISPs (Wireless Internet Service Providers) created in a four year timeframe.

Entrepreneurs looked to see if the same leverage of the free 2.4GHz spectrum could be applied in more densely populated suburban and metropolitan locations. A number of companies sprang up. These included hardware companies like Tropos, Strix Systems, and BelAir Networks, as well as larger-scale WISPs like Clearwire Communications (started by Craig McCaw’s team).

Most of the solutions deployed used a technology called mesh networking, which allows for smart routing across a number of nodes to the best “backhaul” node (which was often connected to a high-speed terrestrial link to the WISP’s central node). This mesh technology was attractive on a number of levels. It allowed:

  • Lower costs means for aggregating the traffic from different houses
  • Simpler field installation
  • Simpler topological design (remember, radio is a black art in some ways)
  • Most importantly, ability to use “free” unlicensed spectrum for large portions of the network.

We looked at the technology closely at AOL. Could this allow us to offer cost-competitive broadband service to the US metropolitan markets? We installed test beds from two manufacturers to give us a first-hand view of the promise versus reality of the technology. We found that the performance of the connected homes was really not the right basis for a competitive broadband offering, both in terms of overall throughput (best classified as “midband”) as well as the day-to-day variance of throughput (no-one would want a connection where their performance varied 50+% from best to worst day).

So what are the real killers of municipal WiFi efforts in the US? There are 5 big factors that make these efforts a non-starter:

Rain, Snow, and Leaves

The unlicensed spectrum was a great catalyst for innovation (props to the FCC on that one), but it is innovation best applied to a select class of problems (in-premise communication and point-to-point non-urban communications). The 2.4Ghz spectrum is more prone to signal issues outdoors, where its biggest enemies are foliage, rain, and snow. This may be fine if you live in Vegas, but for all of the other big markets, it creates a service that isn’t competitive to cable or DSL (or even dial-up), from a quality of service perspective.

FYI, one reason the upcoming 700Mhz spectrum auction is so exciting is that because it is lower frequency spectrum, it is a great outdoor-friendly data solution. Best of luck to Google (and maybe Apple ;)) in the upcoming auction – I love to see non-traditional entrants!

Who owns the telephone and light poles?

Mounting example of a mesh node

In planning these efforts, you run into complexity upon complexity. One thing we ran into in pursuing one of these muni WiFi efforts was the issue (and pricetag) of getting access to streetlights and telephone poles to mount and power our mesh transceivers. This was just symptomatic of a larger issue. Everywhere we turned, someone had their hand out, making the costs creep up month after month, and increasing the logistical complexity of a fast rollout.

The cost and hassle of dealing with CPE costs and installation

The in-house equipment requirement included (at a minimum) a more sensitive antenna to be installed in the best location in a house/apartment to “talk” to the nearest mesh node, and, in addition, most vendor solutions also had their own higher-powered access points they required. Now you had the recouping of a material CPE expense to work into the overall economics, as well as the actual installation expense. It was also a real crapshoot in estimating how many actual truckrolls you would require per 100 houses in a large urban deployment, given the issue of getting the most out of the low power transmitters the FCC allowed in the 2.4 Ghz spectrum.

Incumbent pushback

In each major city, the incumbent phone company (ILEC) and cable company (MSO) are usually material local employers. In addition, each spend ungodly sums as part of their annual lobbying efforts. Any new entrant looking to establish an overlay network in their markets using “free” spectrum got these giants’ hackles up in a major way, and the back and forth negotiations with the involved city involved, at a minimum, lots of time, and sometimes, onerous terms and conditions imposed on the winning WISP.

Too little bandwidth, too late to matter

Ultimately, the use of these mesh WiFi solutions was the wrong tool for the job. A midband solution isn’t that compelling an offering, in our YouTube-obsessed world. Couple that with coverage and quality of service issues, and it just isn’t the right thing for cities to focus on as a tool to bridge the digital divide.

With unlimited data plans on 3G networks approaching the $20-30 range, and promotional DSL and cable data plans sub-$20, whatever cost advantage these networks envision just isn’t a reality.

Do we have a need to form a more competitive broadband strategy for the US? Yes, but it seems like there are much better paths (WiMax, etc.) for us to focus upon. It is time for the major cities to tone down the PR on these dead-end solutions, and work to come up with a new playbook that can bring broadband to the widest segment of their constituency at the right price.

Amp’d short circuits – will any MVNO ever succeed long-term in the US market?

So now we have the second big public service turn-down scheduled for later this week, Amp’d, who mentioned to its customers it might be going off-air Tuesday, 12:01 a.m (Update: they bought another week’s reprieve, and now plan to turn down service on 7/31, hoping to use the week to find a better exit, which looks like a sale of whatever subs remain to another small MVNO called Prexar Mobile).  The company is also now auctioning a number of physical assets as well, but I already have a drawer full of non-functional handsets ;). It looked like it was working hard to get a temporary bridge agreement with Verizon to keep the service alive, but this latest announcement leads to the conclusion that things did not pan out. Unlike the SunRocket business problem, I do think there is room for MVNOs as a business segment. The question is whether or not the US market and its carriers will support development of a wholesale market in the US.

If you look at the MVNO business globally, it is really quite robust. I pulled this writeup listing some of the major European MVNOs, and you can see how that market has grown.

For those not familiar with the term, MVNO stands for Mobile Virtual Network Operator. It is a fancy term for a cellular retail business who buys its bandwidth from wholesale providers (it doesn’t own any spectrum, cell towers, etc.). This sector really grew out of dynamics in the European and Japanese markets. Some of the catalysts that drove cellular companies there to create a wholesale offering were:

  • The fact that that networks in their markets were, for the most part, all using common frequencies and technologies, making for a more efficient market.
  • The economics of being a wholesale provider proved to be attractive, eliminating the impact of ongoing issues of retail customer churn and high customer acquisition costs to the wholesaler.
  • The cellphone infrastructure had a high fixed cost base, and getting more customers (retail and wholesale) to cover that nut made economic sense.
  • A number of carriers had big debt burdens they saddled themselves with through irrational bidding on 3G spectrum a few years ago (they collectively spent something like 260 Billion Euros, which I think is now about 10 Trillion USD ;), and really needed the added economic boost of new lines of business.

So if the MVNO market makes sense, what is up with Amp’d? There were a number of things that made Amp’d a long shot from the beginning.

First, unlike Europe and Asia, the US market is served by different carriers working on different spectrum and different technologies. Much has been written about the US being a third world of cellular technology, all of which point to this carrier technology fragmentation both between each other and the rest of the world as one of the root causes. That means selection of a wholesale provider is much more complex – they are not fungible substitutes. A selection of a carrier has big implications on handset options, etc..

Second, we are in an era, post Judge Green, of consolidation of carriers in the US market. Fewer providers mean a less efficient market, and bad wholesale pricing, if it’s available at all.

Third, the big four carriers have really mixed opinions on whether they will ever support an MVNO industry. Even a carrier like Sprint, who is the provider for Helio, runs hot and cold on the idea of being an MVNO going forward.

We were approached to be an inventor in Amp’d a few years ago. I took a pass, based on a number of considerations:

They were effectively entering the hardware business by focusing on their own custom handsets as a core part of their value proposition. The handset business is brutal – just look at Motorola’s last quarter as evidence. Consumers expect the best. Their cellphone is a personal expression of themselves. That means keeping up with the Joneses and releasing new handsets on a regular basis (every 4-6 months). Amp’s was going to be a long-cycle producer of new devices, which wasn’t a winning play.

They were focusing on a market segment/demographic that hadn’t demonstrated a prior willingness to pay the material handset charges and monthly plan costs that Amp’d had modelled.

The management team, while smart, was selling itself as the Boost team redux. It was long marketing, but not nearly as long technically. There is a great article in Business Week talking about the CEO as product designer, which is well worth a read and expresses my own philosophy in spaces like the consumer electronics industry. Was this core team up to the task of building a better mousetrap?

Their partnership with Verizon, who was to be their wholesale provider, was flat-out a wrong bet. It is not that Verizon didn’t have a good network. It is just that they now were wed to a CDMA network, which would make handset development much more complex (no ability leverage of all the great development from Chinese OEMs like HTC and others).

We passed (did I also mention mega pre-money valuation), and had no regrets.

I guess one question still remains: Will the US ever have a real MVNO market? In my mind, there will be no MVNO market in the 2G/2.5G space. I think only when new fabrics arise (though things like Sprint’s WiMax plans, the upcoming 700 mhz spectrum auction, etc.), and we get some better technology consistency from incumbents as they roll out their 3G offering, will we ever have a shot at an efficient market.

Can anyone succeed here? I do think Helio has a chance, and I hope they prove the case for an MVNO in this market. They have several things in their favor, when compared to Amp’d:

  1. They locked in a 6 year agreement with their wholesale provider
  2. They can leverage all the technology development (software and hardware) of SK Telecom in creating compelling consumer solutions
  3. They are adding feature sets that appeal to the prosumer (really good email integration, etc.) to allow themselves a more upmarket sale
  4. They have a technology visionary at the helm (Sky Dayton).

I don’t see another major MVNO player (other than Virgin in the pre-paid market) making a go of it, and as such, I am not very bullish on the US MVNO space as a whole. Here’s hoping something else happens to serve as a catalyst to get us out of our third-world status sometime soon!