Critics skeptical of city's free Wi-Fi

3/13/2007

For the Brady Bunch generation, it makes perfect sense.

Advertisers pick up the tab for Americans who park themselves in front of screens to be entertained and informed.

But skeptics in the technology world question whether MetroFi Inc., the California company that is seeking a contract to install a wireless Internet system in Toledo, can successfully adapt TV's business model to "muni Wi-Fi."

Absolutely, responds Chuck Haas, the technology industry pioneer who is co-founder and chief executive officer of MetroFi.

"We believe Toledo, Portland, Aurora, Ill., and the cities we are in the process of building out are solid financial endeavors and are immensely fundable," Mr. Haas said in a telephone interview from MetroFi headquarters in the northern California community of Mountain View.

But a leading industry authority calls the firm's plan "smoke and mirrors."

"No matter how you look at the deal, it's a risky adventure for the cities," said Craig Settles, a consultant and author of a leading book on municipal Wi-Fi systems.

Three years ago, MetroFi's CEO told an interviewer that the "economics behind the company" would be proved by 2005. Asked recently if that has happened, Mr. Haas said: "Pieces are being proven. It is still an emerging market. There's not a single market that's mature enough."

And a possibly ominous sign for the firm came when one of its prime backers, Sevin Rosen Funds, an investment firm that provides financing to new enterprises, said it would delay pumping money into additional companies because there are too few promising prospects.

While many people in the tech world interpreted that as a sign that Sevin Rosen is becoming disenchanted with its investments in new wireless technologies, fund officials deny it. MetroFi's CEO said the development will have no impact on his firm, and that officials there anticipate an additional injection of money from the fund this summer.

Wi-Fi systems like the one under discussion for Toledo allow people access to a high-speed Internet link without plugging into a telephone line or high-speed cable or phone connection. Such systems are installed in many public spots across the country, such as municipal buildings.

Now, Toledo and other places around the nation want to go citywide with the systems, which rely on radio transmitters attached to utility and light poles and other towers.

MetroFi, formed just four years ago, said it can fill the bill free of charge to Internet users willing to view banner advertisements on their laptops or desktops and for $19.99 a month for those who prefer commercial-free Web surfing.

Toledo officials are considering the firm's bid along with an option from Buckeye CableSystem of Toledo, which, like The Blade, is owned by Block Communications Inc.

But Mr. Settles, the consultant who is author of Fighting the Good Fight for Municipal Wireless, said MetroFi's business model of offering free service does not make economic sense.

In cities like Toledo and Portland, it will cost $10 million to install each system and $1 million to $2 million a year in upkeep costs, he estimated. In Portland, the firm has completed about 5 percent of a network that will eventually stretch for 134 miles.

And MetroFi is either installing or operating systems in other cities including Aurora, Ill.; Santa Clara, Calif.; Cupertino, Calif.; Foster City, Calif.; Riverside, Calif.; Concord, Calif., and Sunnyvale, Calif.

As a private firm, MetroFi doesn't release revenues. Asked if networks in any cities are profitable, the CEO declined comment.

While the company receives revenues from advertising and other sources in cities where networks are in operation, its main income source is two venture capital firms.

Those funds, August Capital and Sevin Rosen Funds, provided an initial $9 million in 2003 followed last June by an additional $8.5 million, saccording to MetroFi's CEO. In exchange for the money, venture funds receive an ownership interest, which they hope to sell at a profit later.

MetroFi's main backers remain committed to the firm and will likely inject more cash this summer, Mr. Haas said.

The two funds have strong track records.

Twelve-year-old August Capita, of Menlo Park, Calif., has more than $1.3 billion in active investments, focused on technology companies.

Founded in 1981, Sevin Rosen, with offices in Dallas and Palo Alto, Calif., provided seed money to many firms that eventually sold stock to the public including Compaq Computer Corp.

But Sevin Rosen stunned the venture capital world last year when it returned funds to investors, who were ready to pump $250 million to $300 million into a new investment fund managed by the firm.

While the success of tech firms like YouTube and Facebook grab headlines, they are the exception, Sevin Rosen executives later explained.

MetroFi's CEO says the firm is not affected because its funding comes from an established fund known as Sevin Rosen VIII, formed in 2000 with $600 million.

"We still have cash to deploy from that fund," said Jackie Kinzey, a Sevin Rosen partner and MetroFi director. Fund managers are committed to MetroFi and optimistic about its prospects, he said.

MetroFi is headed by technology industry veterans.

Mr. Haas was a founder of Internet phone and data service provider Covad Communications. Pankaj Shah, also a MetroFi co-founder, is also a veteran of Covad.

Despite some reception problems, residents of 55,000-resident Cupertino, Calif., home of Apple Computer, are pleased with MetroFi service, said Rick Kitson, a city spokesman. The service has no shortage of advertisers, but he has never been told if it is profitable.

Mr. Settles, the MetroFi critic, maintained that advertising alone is unlikely to generate enough money to cover the installation and maintenance costs.

In some cities, MetroFi has joined well-heeled firms like AT&T Corp. to build networks.

Communities not only don't pay, but MetroFi often pays rental fees for use of space to install transmitters on municipal light and utility poles.

But in Toledo, MetroFi is seeking $2.2 million to $4.3 million in fees over five years from city government as "anchor tenant" of the system.

"Our business model is changing," said Tim Laehy, MetroFi's chief financial officer.

"To be a viable business, we need some form of stable income. All the responses we're making to cities today are along the same lines as the one we made to Toledo."

But that minor modification to the firm's fee structure is unlikely to ensure its profitability over the long haul, Mr. Settles said.

MetroFi has significantly boosted its staff in recent months, he added. "They're obviously burning through cash," he commented.

"I can't see mathematically how this can survive," he said.

As for MetroFi's competitor for the Toledo WiFi contract, Buckeye CableSystem, spokesman Tom Dawson said: "We are a viable company."

As a private company, Buckeye doesn't release its financial results.

Buckeye, Mr. Dawson added, is the second-oldest continuously owned and operated large-city cable company in the United States.