In the past decade Garry Betty has experimented with just about every possible way of connecting his customers to the Internet — and wiped $1 billion of his shareholders' capital off the balance sheet in the process. But now the chief executive of Earthlink says he sees a way to take his revenge on the giant rivals who have long beaten him bloody.
In Anaheim, Calif. Earthlink has attached little white boxes to 1,500 traffic lights. At the end of the month Anaheim Mayor Curt Pringle will cut a ceremonial wire, turning on those boxes and powering up America's first big-city Wi-Fi network, which will offer residents high-speed wireless Web access across Anaheim for $22 per month.
While many cities have fought bitter public battles over building urban Wi-Fi networks — phone and cable companies loathe the idea of the cut-rate competition — Anaheim is about to become the first major-league city to do it.
The 49-year-old Betty hopes to repeat Anaheim across the nation, turning Earthlink into the leader, by far, in building and running urban Wi-Fi networks. He has won contracts to build networks in Philadelphia and New Orleans, both of which will go live in the last quarter of this year. He hopes to finalize similar contracts with Honolulu, Minneapolis, Arlington, Va. and, with help from Google, San Francisco. Dozens more cities are eyeing Anaheim before deciding to sign up.
It's a sweet moment for Betty, who has spent most of the past decade trying to beg, borrow or buy access to the networks owned by big phone and cable companies. His larger rivals had no interest in letting him turn a profit selling dial-up or high-speed access using their wires. Government efforts to force them to share — which Betty lobbied for — did little to create real competition.
"For the first time I don't have to go crawling on my hands and knees asking for a better deal," says Betty.
Anaheim just the beginning
Earthlink, based in Atlanta, has spent $5 million building the Anaheim network and expects that it can earn a decent return on that cash once 15 percent to 20 percent of Anaheim's 100,000 homes sign up. The monthly $22 buys a customer access at 1 megabit per second. That's not as fast as cable or DSL, but it's cheaper and, unlike most Internet connections, is accessible from a car or a park bench as well as home.
That's just the start, says Betty. Last year Earthlink and South Korea's SK Telecom launched their jointly owned high-speed wireless service called Helio. Helio buys minutes on Sprint's broadband cellular network and resells them. Betty plans to offer Helio customers new phones that can sense Earthlink's Wi-Fi networks and shunt calls off the cellular network and onto Wi-Fi. The Wi-Fi option has the potential of offering clearer calls at cheaper rates, by letting callers pay for smaller monthly buckets of cellular minutes. While cell phone companies don't have much incentive to let their own subscribers use such phones, Helio has plenty.
Another potential new market is lower-income Anaheim residents who can't afford broadband or a standard cell phone. Betty expects to offer them unlimited calling from anywhere in Anaheim to anywhere in the U.S. for around $25 per month.
Betty dreams of creating new wireless markets that don't exist: tracking cop cars and fire trucks; reading electricity, parking and gas meters; monitoring inventory and breakdowns in soda- and candy-vending machines. He figures he can make a fine profit charging the likes of Coca-Cola a few pennies a day per machine. "Prior to this they could never afford to connect all those machines, but for a buck a month they will," Betty says.
Betty's initial capital outlay works out to $50 per home within the territory (i.e., $250 per customer, if he achieves that hoped-for 20% market penetration), and he thinks that price will fall to close to $20 per home passed as volumes ramp up. Within the next two to three years Earthlink's antennas could be upgraded at minimal cost to speeds of 5 to 10 megabits a second, says Donald Berryman, the Earthlink executive in charge of building the networks.
Cellular data networks offer vastly greater coverage areas, but installing cellular towers and licensing cellular airwaves cost far more per customer. Last year U.S. carriers spent $23 billion upgrading their networks to "3G." Telcos are spending $1,000 and up per home passed to lay capacious fiber in the ground. Betty is happy to cherry-pick the urban areas that are the cheapest to serve with Wi-Fi.
It is too soon to say how many cities will qualify. Earthlink chose to start in Anaheim because it is blessed with friendly geography. The city is mostly flat (hills block Wi-Fi signals) and studded with slender palm trees (leafier trees damp signals); the tallest building in the center of town happens to be city hall (so the Wi-Fi antennas around town can beam their data back to one central location).
The $1 billion of shareholders' money that Earthlink spent over the last decade has left it with 1.6 million broadband and 3.6 million dial-up Internet subscribers. That customer base produced $188 million in cash last year, but is atrophying as dial-up customers disappear. Revenue fell 7 percent, to $1.4 billion last year, and building out cities with Wi-Fi will eat up a big chunk of the cash flow the remaining subscribers throw off.
Betty had to assiduously cut costs to bring the company to profitability in 2004. It earned $143 million last year. Betty thinks citywide Wi-Fi won't produce meaningful revenue this year or next. "But by 2008 or 2009," he says, "it could be a really big number."