Dollars and sense on muni wireless.

Some 350 cities across the country are in some stage of implementing citywide Wi-Fi (short-range wireless Internet access). Hundreds more are exploring the idea. An important step in the decision-making process falls to the financial officer: calculating the potential risks and rewards.

A complete analysis requires that the city examine different implementation/ownership structures, and it is essential to analyze the financial costs and benefits of a publicly owned system. If the city opts for public ownership, such an analysis would be a deciding factor. If the city opts for private ownership, this analysis would help it negotiate the best contract with a private company

Investing in an information network is similar to investing in traditional infrastructure. Cities commonly own the physical distribution system of roads or water or sewer pipes. A wireless system, which will also have a wired component, is also a physical distribution system and therefore lends itself to a similar approach. One significant difference is that traditional infrastructure investments do not generate revenue directly. An information network can pay for itself, and possibly become a significant net revenue generator.

The potential profitability of these networks has led a number of vendors to offer to build a network at no upfront cost to the city. There often is a substantial public investment as a customer of the network, however. The city agrees to purchase millions of dollars in services over the contract term, and that becomes the key to the private company obtaining debt financing and establishing enough of a guaranteed revenue stream in order to make the project profitable for them to undertake.

A key objective for the prudent financial officer is to evaluate whether an agreement that requires no capital investment by the city will cost the city and its households and businesses more or less in the long run than a direct public investment and public ownership of the physical infrastructure.

CALCULATING RETURN ON INVESTMENT

Capital expenditures. Capital expenditures include wireless hardware and software, backhaul (the connection from wireless access points to the larger local network, which in turn connects to the global Internet network), network engineering, and deployment. It also includes core network equipment (e.g., servers and routers).

Both implementation and operating costs depend on the service model chosen. Wi-Fi hot spots, like those found in cafes or homes, are inexpensive. However, they will probably have to be upgraded every five years or so. And their ongoing costs may be substantial, since each hot spot must be connected to a wired connection in the existing last-mile infrastructure. In Austin, Texas, some hot spots are connected to a city-owned fiber optic network, but most use business connections from the incumbent cable and phone companies. Ongoing fees for the wired connection mean annual operating expenses may be 10 times the capital investment.

More typical is the use of Wi-Fi mesh that reduces the number of wired connections in the network by allowing information to hop from one access point to another before reaching a wired connection.

Wi-Fi mesh networks for municipal use only (public safe-meter reading, mobile municipal workforce) can be deployed for $100,000 or less per square mile. Residential service networks, typically designed to reach 90 to 95 percent of homes and businesses, require a much higher capital expenditure, on the order of $250,000 per square mile. The difference is attributable to the need for more radios and greater backhaul capacity to support more users, as well as bridging devices that are often needed to bring the outdoor signal inside.

Finance officers are not likely to be responsible for conducting an asset inventory;, but the results of such an inventory can affect significantly the cost of a network. For example, does the city own streetlights, electric poles, or other mounting infrastructure that will allow the placement of roughly 30 access points per square mile? If not, negotiating with local utilities or private companies may be difficult and costly, as communities in Oakland County, Michigan, and Southern California have discovered.

Does the city have a fiber I-Net connecting public buildings? If it is city owned, it can be used as backhaul. If it is obtained through the cable franchise agreement, it likely cannot be used. Available, existing fiber may substantially reduce costs. For example, Chaska, Minnesota, had an existing fiber optic network connecting public buildings and major businesses. The cost of adding wireless to that infrastructure was under $100,000 per square mile. Nearby Saint Louis Park would double its fiber network to support a wireless network, for which bidders added $50,000 to $100,000 to the per-square-mile cost.

The capital budget should include funds to cover network operations and, if necessary;, debt service during the network deployment phase (typically 12 to 18 months).

Operating expenditures. For municipal-use-only networks, the rule of thumb is that operating expenditures run around 15 percent of capital expenditure annually. This includes 24-hour network operations, pole attachment fees and electricity, monthly equipment maintenance and software upgrades, and adequate Internet bandwidth.

For combination networks, operating expenditures are about 30 percent of capital expenditure for a retail network, 15 to 20 percent for a wholesale network. The added costs include customer service, billing, and marketing as appropriate for retail or wholesale customers.

More detailed breakdowns vary by location. For example, average pole attachment fees are in the range of $36 annually in California, but $86 annually in Louisiana. Wi-Fi access points with a single radio may draw $20 worth of power annually, while multi-radio deployments combined with high-powered wireless backhaul can draw five times more.

Other costs can be generalized. Wireless hardware maintenance is usually in the range of 7 to 10 percent of equipment costs annually (though this may be higher for some backhaul components). Internet bandwidth consumption will depend on the number of subscribers and the average bandwidth use per subscriber, generally assumed to be 250 kbps to 500 kbps per user on average, and 1 Mbps per business on average. Bandwidth and service cost estimates should account for the growth of this per-user Internet traffic over time.

Networks have economies of scale related both to population density and area. Core network hardware and functions, and the associated salaries, are required regardless of how many customers are reached. Conversely, a minimum customer density is needed to make buying and maintaining individual access points worthwhile. Areas of at least 20 to 30 square miles, and a density of at least 1,500 and not less than 1,000 households per square mile may be optimal from a cost-effective service provision standpoint.

Revenue. Monthly subscriptions are one of two major sources of revenue. Monthly rates depend on whether the network is wholesale only or retail. In a wholesale network, the city would be responsible for maintaining the network (or contracting for management) and relationships with companies that sell retail services. In a retail network, the city would be responsible for retail service and support, as well as all marketing and advertising. Gross wholesale revenue will typically be about one-quarter to one-third of gross retail revenue.

The wholesale rate that can sustain the network will depend on not only capital expenditures and projected subscription rates, but also the division of responsibilities between the wholesaler and retailer(s). Monthly wholesale rates currently vary widely, from $8 to $14 per residential customer, and $70 to $100 per business customer. Monthly residential retail rates range from $16 to $30, with $20 the most commonly cited rate for a standard 1 Mbps connection. Monthly business retail rates vary from $150 to $300, depending on the associated services.

The other major revenue category is municipal use. Many cities currently budget for mobile computing, most often subscribing to cellular data services that are both slow (half the speed of a typical DSL or T-1 connection) and expensive ($60 per month). Within the city, the Wi-Fi network replaces these subscriptions, saving the city hundreds of dollars in direct charges, if not thousands, each month. Other direct savings may come through replacing leased lines to public buildings with fiber or high-speed wireless connections that provide faster speeds at a lower price, or replacing local-use cellular phones with Wi-Fi phones.

Advertising may be a source of revenue, but it would be unwise at this point for a municipality to count on that as anything other than an added benefit of perhaps one or two dollars per user, per month. To put it in context, that might be enough to cover the Internet bandwidth to support a free-to-the-user service, but little more. Corporate or foundation sponsorship is also alternative that cities may want to explore as a supplement to subscription revenues.

The most challenging aspect of the evaluation will be to estimate second-order effects. Some can be evaluated directly For example, if the city has a choice between hiring a new building inspector or using wireless to improve the efficiency with the same number of inspectors, the salary of the inspector not hired can be credited as an avoided cost. But there is also a wide array of machine-to-machine communications (automated meter reading, wireless parking meters, traffic monitoring, etc.) that may improve provision of municipal services but do not directly reduce the city's expenditures.

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