Too Windy for Wi-Fi

There was quite a rumble in the telecom jungle only a few years back, when the latest threat to incumbent telecom companies -- citywide Wi-Fi networks -- seemed to be gaining momentum. The wireless broadband networks were being spread across dozens of cities, destined to take away coveted broadband subscribers from DSL and cable networks. But the rumble is much quieter these days, allowing incumbent telcos and cable companies to breathe a little easier.

On Tuesday, the city of Chicago scrapped its plans to provide Wi-Fi wireless service throughout the Windy City. City officials made no bones about the reasons for the cancellation -- the service would simply be too costly, and too few residents would use it. The sticking point apparently came down to just who would foot the cost, and risk, of the network -- the City of Chicago, or bidding companies such as EarthLink (Nasdaq: ELNK  ) and AT&T (NYSE: T  ) .

For its part, EarthLink has been rethinking its business strategies lately, and new CEO Rolla Huff has questioned the profitability of the company's current municipal wireless business model. Given that EarthLink just announced a restructuring plan that includes eliminating the executive running the Municipal Networks division, I think it's pretty safe to assume that a decision on profitability has just been made. EarthLink's reversal also calls into question its contract with Google (Nasdaq: GOOG  ) to blanket San Francisco with ubiquitous Wi-Fi, a project that has been repeatedly stalled.

Another factor that likely helped kill the project in Chicago was Sprint Nextel's (NYSE: S  ) plan to bring broadband wireless service to the area with the construction of its WiMax network by the end of the year. WiMax networks' increased range and throughput will provide far more economical coverage.

Other companies affected by the scaling back of metropolitan Wi-Fi initiatives include equipment providers Motorola and Cisco (Nasdaq: CSCO  ) , as well as Tropos Networks and a host of other private companies. Incumbents such as Verizon (NYSE: VZ  ) and Comcast (Nasdaq: CMCSA  ) -- companies that have vocally opposed municipal wireless networks -- are probably doing a little happy dance right now, since the threat to their business has at least temporarily diminished.

While Chicago's decision and EarthLink's troubles don't spell the end of municipal wireless, it is increasingly clear that such networks will face a higher level of scrutiny regarding costs and returns on their investments.

For more Foolish folly:

Fool contributor Dave Mock would wear footy pajamas to keep his little piggies warm, if they only came in his size. He owns shares of Motorola. He is the author ofThe Qualcomm Equation. The Fool's disclosure policy performs reality checks on a daily basis.

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