Philadelphia broke the camel's back.

When small cities such as Cerritos, Calif., create Wi-Fi networks to provide high-speed Internet access for residents, the contracts get a little press. Outsiders notice, but nobody gets too worked up about it. Usually the city's population is small enough that big-time telecommunications companies don't seem to care.

In July 2004, Philadelphia Mayor John Street announced plans for Philadelphia to play an active role in creating a citywide wireless infrastructure to offer broadband Internet access to residents for roughly $20 per month.

Philadelphia is no Cerritos. Outsiders paid plenty of attention to the mayor's proclamation. It's one thing when a city of 50,000 residents builds and operates a broadband Wi-Fi network. It's entirely different when a city with 1.5 million people declares its interest in a municipal wireless network.

Philadelphia isn't alone. San Francisco issued its own initiative in August to ensure affordable wireless broadband access for all city residents, and other major municipalities are moving in a similar direction.

Big-city projects mark a shift in municipal wireless activity. Originally these initiatives offered a way for small communities to deploy Internet connectivity they couldn't get from private companies. Now large cities promote wireless initiatives as a way to streamline government operations, strengthen public safety and link underserved citizens to the Web.

Established telecommunications companies have opposed these municipal maneuvers, contending that government involvement results in artificially low prices that private industry can't match.

Many state legislatures have already passed laws restricting local governments' ability to act as telecommunication service providers, and a fight that once seemed destined for the halls of small-scale capitols is now heading to Capitol Hill.

Forging Ahead

The fight over whether towns and cities should raise broadband infrastructures on their own isn't new, but the ease with which they can do so is. Refinements in wireless technologies make it easier to blanket cities with wireless access, though it's not necessarily cheap.

Still, the cost hasn't deterred all local governments, many of which aren't afraid to negotiate interesting partnerships with the private sector.

In early news coverage of Philadelphia's plan, the idea that the citywide Wi-Fi network would be city-funded received a lot of play. But that isn't the case, said Philadelphia CIO Dianah Neff, and that is perhaps the most misunderstood aspect of the city's plan.

"It's not city-funded," she said. "The goal Mayor Street gave to the Wireless Philadelphia Executive Committee when we were putting together the business plan, was that the network had to be self-sustaining, cost-neutral to the city and affordable. Everybody assumed the city was financing this through tax-exempt bonds, and that's not the case. We're not using general fund capital or the tax-exempt status of the city to finance this project."

Philadelphia adopted a cooperative wholesale business model, Neff said. Wireless Philadelphia, a nonprofit corporation created by the city, will oversee construction of a wireless infrastructure and let multiple private carriers use that backbone to provide Internet service.

"We'll contract to have the infrastructure built, and then have agreements with ISPs to do the end-user delivery," Neff explained. "The ISPs will pay a wholesale fee back to the nonprofit, which allows us to pay off the debt and fund social programs. We expect to have four to seven ISPs that will give people a choice for Internet access."

Neff said several ISPs signed letters of intent to switch existing dial-up customers to broadband. The plan allows ISPs to charge low fees for high-speed service because the companies will buy access to the city's Wi-Fi backbone at wholesale prices.

A strong customer base is crucial to the Wi-Fi initiative's success, therefore Wireless Philadelphia is backing a program to provide 10,000 PCs to low-income households throughout the city. Neff said grants and contributions from local philanthropic foundations, programs encouraging businesses to recycle older computer equipment, and partnerships with local PC-refurbishing companies and nonprofits will all come together to distribute PCs to households that need them.

"We're running that stream as we're negotiating with the final vendors to build the network," she said. "Our school districts have been working at this for the last two years and have placed about 2,000 computers in homes of families with children. That program continues, and we're networking with other organizations that have similar programs."

Attention-Getter

Big telephone and cable companies across the country speed-dialed their lobbyists after the Philadelphia announcement.

In May 2005, U.S. Rep. Pete Sessions, R-Texas, introduced H.R. 2726, the Preserving Innovation in Telecom Act of 2005. It would prohibit any state, local government or their affiliated entities from providing any "telecommunications, telecommunications service, information service, or cable service in any geographic area within the jurisdiction of such government in which a corporation or other private entity that is not affiliated with any state or local government is offering a substantially similar service."

A couple of months later, Sens. Frank Lautenberg, D-N.J., and John McCain, R-Ariz., counter-legislated with S. 1294, the Community Broadband Act of 2005. Under the bill's provisions, "no state statute, regulation or other state legal requirement may prohibit or have the effect of prohibiting any public provider from providing, to any person or any public or private entity, advanced telecommunications capability or any service that utilizes the advanced telecommunications capability provided by such provider."

Both bills are in committee, but what's happening in the Beltway isn't stopping Philadelphia from forging ahead. In October, the city selected EarthLink to deploy a citywide wireless broadband network covering 135 square miles. The Wi-Fi deployment is expected to be finished by the fourth quarter of 2006, EarthLink said.

Neff estimates the infrastructure will cost between $10 million and $12 million to build, with perhaps another $5 million for maintenance, support and other start-up costs. It's clearly not cheap to build a wireless infrastructure capable of covering a 135-square-mile area.

"We'll finance close to $18 million, maybe $20 million, depending on what the [Board of Directors of Wireless Philadelphia] decides to do," Neff said. "That financing will come through either private investments, leasing infrastructure pieces, and potentially, taxable bonds."

Flash Point

Philadelphia's Wi-Fi plan grabbed national headlines when Pennsylvania Gov. Ed Rendell signed Act 183 in November 2004. The act, known as HB 30 before it was signed, contained a number of amendments to Pennsylvania's Public Utilities Code. One amendment changed the conditions under which political subdivisions in the state could offer broadband telecommunications services to residents.

To Philadelphia, the bill was a midnight-hour attack on municipalities' rights to create their own broadband networks. To Verizon, the dominant wireless carrier in the city, there was nothing untoward about HB 30.

"We opposed the bill, and we tried to get the Governor's Office to veto the bill," said Neff. "That didn't happen. All of this really took place in the dead of night. The bill, which had been dormant for 18 months, passed out of the House to the Senate at 11:00 at night -- 10 days before the end of the legislative session."

Neff said Philadelphia mounted a grass-roots campaign, mobilizing more than 3,000 people, businesses and nonprofit organizations to call, e-mail or write the Governor's Office to express opposition to the bill.

The measure forces any municipality in the state wanting to offer broadband services to residents to offer the incumbent telephone company the right of first refusal. This means any telephone company could effectively kill any municipality's attempt to build its own network by agreeing to provide broadband services -- though the company would have only 14 months to roll the service out.

In a written message to the Pennsylvania House of Representatives, Rendell said HB 30 contained two "problem areas" -- one being the issue of whether municipalities and municipal authorities can own and operate telecommunications systems. He said his administration will work with municipalities to protect wireless projects.

"Early versions of House Bill 30 precluded communities from developing their own networks," Rendell wrote. "The final version of the bill allows existing municipal systems to continue to operate, and provides local governments and authorities a one-year window to develop these networks ... Verizon has already agreed to waive its right of first refusal in regard to Philadelphia's proposed municipal Wi-Fi network guaranteeing that that particular project can proceed. They have done so in a signed agreement with the city. We will work with other municipalities on projects that they have established or propose to establish in order to ensure that, to the extent that they are now viable, they will also have the opportunity to succeed."

Verizon doesn't oppose the Philadelphia Wi-Fi initiative and never did, said Sharon Shaffer, the company's spokeswoman in Pennsylvania. She said the controversy centered on a small portion of the lengthy legislation.

"Wireless Philadelphia had concerns about one paragraph of a 30-page document that dealt with the subject of municipally owned networks," Shaffer said. "The way the legislation read was that any municipality interested in building its own network should offer the local incumbent telephone company -- and in Pennsylvania there are 37 -- the right of first refusal.

"Because we are the primary provider in the Philadelphia area, Wireless Philadelphia misunderstood that to mean Verizon was trying to block their initiative to bring this wireless offering to Philadelphia," Shaffer said.

The company gave up its right to first refusal, she said, because Verizon didn't want to block Philadelphia's wireless initiative in the first place. But Shaffer defended the provision giving incumbent telephone companies the right of first refusal.

"The telephone companies were required to make significant financial commitments to build a broadband infrastructure and provide broadband services throughout each company's respective service territory over a designated period of time," Shaffer said. "It's reasonable that the law gives the companies some assurance that they'd be able to sell the services they were deploying, and not be faced with a government competitor."

The concern of incumbent telephone companies in Pennsylvania, she said, is that municipal governments could use funds from taxes or fees to build and operate their own networks. Because of that, the municipality could sell service much more cheaply than an incumbent company, thereby gaining an unfair competitive advantage.

Penny Wise, Pound Foolish?

In June, JupiterResearch released a report based on its examination of 80 municipal wireless initiatives across the country. In part, the company wanted to study the question of whether municipal governments should take an active role in spurring wireless initiatives.

The research found that low-cost municipal broadband initiatives could struggle to break even financially. However, focusing on profit or loss paints an incomplete picture of the value of these initiatives, because they deliver benefits beyond Internet connectivity, according to the firm.

"There are a lot of crossed lines and highly divergent views of the value of this type of program," said Jay Horwitz, senior analyst for the Access and Technologies Group of JupiterResearch. "Both sides of the debate are framing this at the extremes. The vociferous objectors are looking at this type of network with a very monolithic perspective -- that these things are for the sole purpose of making sure everyone has broadband.

"On the other side, the municipalities that have gone forward with this have been probably less cautious than they should be," Horwitz continued. "They're citing a whole variety of different benefits that may never be realized, and may be difficult to make happen."

The report studied initiatives ranging from grass-roots efforts serving less than 50 people to New York City's proposal to provide wireless services to all fire and police departments in the city's five boroughs.

JupiterResearch found the average cost of building and maintaining a municipal Wi-Fi mesh network is $150,000 per square mile over five years, Horwitz said, and whoever foots the bill would need an average revenue per user (ARPU) of more than $30 per month to break even on its investment.

"Two-thirds of that cost is actually in ongoing expenses, rather than up front," Horwitz said. "We also found a high standard of deviation -- about $40,000 -- from that $150,000 per square mile. That comes from the underlying drivers of costs, which can vary quite substantially depending on the desired performance characteristics that these networks should have, as well as the geography of the place."

The report examined different ARPU amounts, and found that at $25, only half of the 80 initiatives studied would break even. That statistic, though dire sounding, is widely misunderstood, Horowitz said.

"It's important to realize this isn't about direct revenues," he said. "The goals of these initiatives are not simply to decrease the cost of broadband or to make the government a pile of money because it's now able to supply broadband and compete with telcos. It's about other things. It's about improving the efficiency of government and how it does business. It's about improving the outcomes from public safety services by having better communications.

"If this were simply about getting broadband to folks, this doesn't paint a very good picture of it," he continued. "If you're talking about actually being able to execute and realize a variety of other benefit streams, the proposition starts to look a lot better."

Only the Beginning

One observer said the debate in Congress and state legislatures over municipal broadband networks -- wired or wireless -- is just beginning.

Jim Baller, a senior principal of the Baller Herbst Law Group, has fought many courtroom battles in the telecom arena on behalf of municipal governments. He said the entrance of major cities, such as Philadelphia and San Francisco, upped the ante.

"The fact that you have major cities involved changed the dynamic to some extent," Baller said. "It's not merely a question of getting broadband to locations that are not served or underserved in rural areas, but a growing appreciation has emerged that there are pockets and even large cities that are unserved and underserved.

"Larger cities that are exploring municipal wireless are doing so because of concerns about digital equity, enhancing economic development and affordability," Baller continued. "Their view is that broadband is a fundamental building block for everything we will be concerned with in our lives going forward."

Surging interest in municipal wireless broadband networks across the country over the last year surprised incumbent telephone companies, he said, which had directed their energy to fighting small to mid-size municipalities' attempts to build wired networks.

Telephone companies mounted a furious counterattack, taking the fight to many more legislative battlefields than they had in the past, Baller said.

"We now have three bills in Congress," he said. "[U.S. Rep. Pete] Sessions kicked it off by introducing his legislation within days of the failure of SBC to obtain new restrictions in Texas on wireless broadband. Lautenberg and McCain followed with their bill. Most recently, Sen. [John] Ensign, [R-Nev.] as part of his telecom-rewrite legislation, included an anti-municipal measure."

Baller said he expects additional bills to be introduced, though it's not clear whether they'll be omnibus bills introduced in the House and the Senate containing provisions on municipally owned broadband networks, or whether stand-alone bills will be introduced.

"Will this be part of overall telecom rewrite legislation, as distinguished from a single-issue piece of legislation?" Baller said. "Nobody knows for sure, but it's likely we'll see such legislation as part of overall telecom rewrite at the federal level."

At the state level, active bills in 14 legislatures expand existing restrictions on municipally owned broadband networks, though 12 states have completed their respective legislative sessions, he said.

"Of those 12, Nebraska enacted a substantial new barrier, but already had a very significant barrier on the books to begin with," Baller said. "The rest of the states either didn't pass new legislation at all, or passed compromise legislation that were products of negotiations and that all sides thought they could live with.

"This is not to say that everybody was happy with what was enacted, and some people were downright unhappy," he said. "But, on balance, the most active participants thought they could live with the restrictions. We'll see."

Shane Peterson  |  Associate Editor